why might fitzer s managers have wanted to lump both changes in the same year 613809

Change in Accounting Principles

Fitzer, Inc. reported the following data in its 1999 income statement (dollars in millions):

Fitzer’s notes include the following explanations:

In the fourth quarter of 1999, the Company adopted the provisions of SFAS No. 106, Employer’s Accounting for Postretirement Benefits Other Than Pensions. This statement requires the accrual of the projected future cost of providing postretirement benefits during the period that employees render the services necessary to be eligible for such benefits. In prior years, the expenses were recognized when claims were paid.

The Company elected to immediately recognize the accumulated benefit bligation, measured as of January 1, 1999, and recorded a one-time pretax charge of $520.5 million ($312.6 million after taxes, or $0.93 per share) as the cumulative effect of this accounting change.

The Company adopted SFAS No. 109. The cumulative effect of the change increased net income by $30.0 million ($0.09 per share) and is reported separately in the 1999 Consolidated Statement of Income.

Required

a. Describe, in your own words, the accounting changes Fitzer included in 1999’s net income.

b. Since these changes were all adopted in fiscal 1999, what is the effect of these changes on prior years?

c. Recalculate the effect on Fitzer’s net income, assuming that neither change had been reported in 1999.

d. Why might Fitzer’s managers have wanted to lump both changes in the same year? Why might they have wanted to recognize the postretirement change in 1999, rather than waiting until 2000?

e. Suppose Fitzer recorded a charge of $55,000,000 for restructuring the materials group in fiscal 1999. Why would managers want to lump several such changes into net income for the same year?

f. Write a short statement describing your view of management’s motivations about recognizing accounting changes. Why is the timing associated with recognizing such changes so important to managers?