Pension Principles, Reporting Flashcards
Pension Principles, Reporting
Multiple components comprise Net Periodic Pension Cost. The component reported as part of compensation expense and included in the subtotal for income from operations is
Interest cost
Amortization of prior service cost
Corridor amortization
Service cost
The correct answer is: Service cost
Service cost is included in compensation expense reported for the employees with whom the pension benefits are associated. Because the service cost component is included in the compensation expense line item, the subtotal for income from operations includes its effect.
What is the present value of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date only?
Service cost.
Interest cost.
Projected benefit obligation.
Accumulated benefit obligation.
The correct answer is: Accumulated benefit obligation.
Accumulated benefit obligation is the present value of all unpaid future retirement benefits as of the balance sheet date based on (1) service rendered to that date, and (2) current salary levels.
Even if the pension benefit formula incorporates future salaries, accumulated benefit obligation uses current salary levels only to provide a more current measure of the pension liability.
A defined benefit plan’s projected benefit obligation totaled $20mn at the end of the current year. Plan assets at market value totaled $23mn. Choose the correct statement concerning balance sheet reporting for this plan.
$3mn pension asset.
$3mn pension liability.
A pension asset of $23mn, and a $20mn pension liability.
no pension-related value is reported in the balance sheet; all relevant amounts are reported in the footnotes.
The correct answer is: $3mn pension asset
PBO and assets are netted for balance sheet reporting purposes. The firm has an overfunded plan and reports a $3mn asset ($23mn assets − $20mn PBO).
Data for a defined benefit pension plan for the current year are as follows:
PBO, January 1, $200mn
Assets, January 1, $160mn
Pension expense, $60mn
Funding contribution, $50mn
The ending pension liability balance is
$40mn
$10mn
$50mn
$200mn
The correct answer is: $50mn
The beginning pension liability balance was $40mn ($200mn PBO − $160mn assets). With pension expense of $60mn and funding of $50mn, the pension liability increased an additional $10mn, yielding an ending pension-liability balance of $50mn ($40mn + $10mn). There is no information about amortization of PSC or net gain or loss, or difference between expected and actual return, or gain, loss or PSC during the period.
A company has a defined benefit pension plan for its employees. On December 31, year one, the accumulated benefit obligation is $45,900, the projected benefit obligation is $68,100, and the fair value of the plan assets is $62,000. What amount, if any, related to the defined benefit plan should be recognized in the balance sheet at December 31, year one?
An asset of $16,100.
A liability of $6,100.
Nothing, as the fair value of the plan assets exceeds the accumulated benefit obligation.
An unrealized loss of $6,100.
The correct answer is: A liability of $6,100
The reported pension liability for a defined benefit pension plan is the difference between projected benefit obligation ($68,100) and the fair value of plan assets ($62,000), or $6,100. The two underlying amounts are reported in the footnotes, but are not recognized in the balance sheet. Only their difference, which is also the underfunded amount, is reported in the balance sheet as a liability.
How should plan investments be reported in a defined benefit plan’s financial statements?
At actuarial present value.
At cost.
At net realizable value.
At fair value.
The correct answer is: At fair value.
Fair value represents the most representationally faithful amount to be applied to pension obligation. Fair value is the current amount available for payment of pension benefits.
The funded status of a defined benefit pension plan for a company should be reported in
The income statement.
The statement of cash flows.
The statement of financial position.
The notes to the financial statements only.
The correct answer is:
The statement of financial position.
Funded status is the difference between projected benefit obligation and plan assets at fair value. Neither of these amounts is reported in the balance sheet (they appear in the notes only), but their difference is reported in the balance sheet as the reported pension liability for defined benefit plans. It is the amount the plan is “behind” in terms of having assets available for payment of benefits.
A company sponsors two defined benefit pension plans. The following information relates to the plans at year end:
Plan A Plan B
Fair value of plan assets $ 800,000 $1,000,000
Projected benefit obligation 1,000,000 700,000
What amount(s) should the company report in its balance sheet related to the plans?
Liability of $200,000; asset of $300,000.
Asset of $100,000.
Asset of $1,800,000; liability of $1,700,000.
Liability of $100,000.
The correct answer is:
Liability of $200,000; asset of $300,000.
Within the same firm, overfunded plans are not offset with underfunded plans because a plan’s funds can be used only for the benefits payable under that plan. Plan A is underfunded $200,000 because its assets are less than its PBO—resulting in a pension liability. For plan B, the opposite occurs resulting in a pension asset of $300,000 ($1,000,000 plan assets − $700,000 PBO). Both amounts are reported separately.
At December 31, 2005, the following information was provided by the Kerr Corp. pension plan administrator:
Fair value of plan assets $3.45mn
Accumulated benefit obligation $4.3mn
Projected benefit obligation $5.7mn
What is the amount of the pension liability that should be shown on Kerr’s December 31, 2005 balance sheet?
$5.7mn
$2.25mn
$1.4mn
$850,000
The correct answer is: $2.25mn
This answer is the underfunded projected benefit obligation—the plan’s funded status and most critical number for the pension plan. This is the amount shown in the balance sheet. It can also be an asset, if plan assets exceed projected benefit obligation.
The following information relates to a company’s defined benefit pension plan at December 31:
Accumulated benefit obligation $1,035,000
Projected benefit obligation 1,250,000
Prior service cost 113,000
Net gain on plan assets 167,000
Plan assets (fair value) 737,000
What amount should the company report as its pension liability at December 31?
$567,000
$513,000
$400,000
$352,000
The correct answer is: $513,000
Reported pension liability is the difference between the projected benefit obligation (PBO) ($1,250,000) and the pension plan assets at fair value ($737,000). The difference is $513,000 and reflects the amount by which the pension plan is underfunded. This is shortfall of assets accumulated to pay benefits compared with the present value of those benefits or PBO, the main measure of the pension obligation. Only $737,000 of PBO is covered as of the balance sheet date.
