Charles Rubin is a 30-year employee of Amalgamated Motors. Charles was pleased with recent negotiations between his employer and the United Auto Workers. Among other favorable provisions of the new agreement, the pact also includes a 14% increase in pension payments for workers under 64 with 30 years of service who retire during the agreement. Although the elimination of a cap on outside income earned by retirees has been generally viewed as an incentive for older workers to retire, Charles sees promise for his dream of becoming a part-time engineering consultant after retirement. What has caught Charles's attention is the following excerpt from an article in the financial press:
Amalgamated Motors Corp. will record a $240 million charge due to increases in retirement benefits for hourly United Auto Workers employees.
The charge stems from AM's new tentative labor contract with the UAW. According to a filing with the Securities and Exchange Commission, the charge amounts to 26 cents a share.
The company warned that its "unfunded pension obligation and pension expense are expected to be unfavorably impacted as a result of the recently completed labor negotiations."
Taking advantage of an employee stock purchase plan, Charles has become an active AM stockholder as well as employee. His stockholder side is moderately concerned by the article's reference to the unfavorable impact of the recently completed labor negotiations.
Required:
1. When a company modifies its pension benefits the way Amalgamated Motors did, what name do we give the added cost? How is it accounted for?
2. What does AM mean when it says its "unfunded pension obligation and pension expense are expected to be unfavorably impacted as a result of the recently completed labor negotiations"?