Select Pension Plan Information for Prime Doors (as of 12/31/05) Projected benefit obligation (PBO) $15,500,000 Accumulated benefit obligation (ABO) $13,750,000 Market value of plan assets $11,875,000 Prime Doors has recorded a net pension liability of $1.5 million on its balance sheet. According to current U.S. accounting standards, Prime Doors is required to: A) immediately recognize $2,125,000 as additional pension expense in its income statement. B) record $2,125,000 as additional pension liability on its balance sheet. C) record $375,000 as additional pension expense on its balance sheet. D) disclose a $375,000 minimum liability allowance in the pension footnotes.
B is my answer.
B
Maybe D, although the footnote part confuses me? 13,750,000-11,875,000=1,875,000. 1,500,000-1,875,000=-375,000, i.e. minimum liab. adj. necessary.
yup B was the answer given. I kinda wanted to pick C because I thought that if the ABO is > FMV then as least the difference must be on the BS as a liability, and you adjust to that liability by recording a minimum liability allowance. $11.875 - $13.750 = -1.875 So if you have a net pension liability on the BS 1.5 you need a minimum liability allowance of 375,000. Then I re-read C and said, I must be off because, an additional pension expese on the BS just doesn’t sound right… what did I miss here?
I think you are talking about pre-GAAP rule here. But for new GAAP, we need to have the difference of PBO and the FMVPA to be recorded at the face of BS. Which turned out to be 15,500,000 - 11,875,000 = 3625000 = Liability (as PBO > FMVPA) But they actually showed 1.5m as the NPL, which as per the New-GAAP rules should be ‘upped’ and reconciled to reflect the funded status of 3625000. So the adjustment needed to get to that figure would be 3625000 -1500000 = 2125000 = B
Makes sense, but on schweser book 2 pg 201 it says “both the old and new standards require that if the ABO exceeds FV at least that difference must show on the BS as a liability.” pg 203 talks abot the old vs. new and there is no mention of changes. I just had it in my head that you had to report at least ABO-FV, not at least PBO-FV.
I don’t ever looking at ABO for making adjustments to the B/S. Only the PBO and the MV of the Plan assets. So, it would be B.
Makes sense, but on schweser book 2 pg 201 it says “both the old and new standards require that if the ABO exceeds FV at least that difference must show on the BS as a liability.” pg 203 talks abot the old vs. new and there is no mention of changes. I just had it in my head that you had to report at least ABO-FV, not at least PBO-FV >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>… ABO-FV is supposed to be the minimum liability on the balance sheet.So if ABO >FVPA then LEAST LIABILITY that you can have on the balance sheet will be the ABO-FVPA. Take note of the word least meaning Net Pension Liability must be >= ABO-FVPA IFF the ABO>FVPA. Without any information about the PBO and the FVPA we are mandated to revise the Net Pension liability to meet the minimum pension liability.In effect the $1.5M will be revised to $1.875M and to make the accounting equation balance we will make a $375,000 corresponding entry on the asset side of intangible assets or you will take a contra side on equity account. Feel free to chime any comment.
Is this a Schweser question? I would say that none of the alternatives are right. You should record an additional liability of 375k. I guess that’s what you’re saying too addotwumk?
slouiscar Wrote: ------------------------------------------------------- > I just had it in my head that you had to report at > least ABO-FV, not at least PBO-FV. From what I have understood, I always has ABO-FMVPA as the ML (old GAAP stuff ) and PBO-FMVPA as the FS to be reported ‘ON’ the BS (new GAAP) - sticked onto my head
addotwumk Wrote: ------------------------------------------------------- > ABO-FV is supposed to be the minimum liability on > the balance sheet.So if ABO >FVPA then LEAST > LIABILITY that you can have on the balance sheet > will be the ABO-FVPA. > Take note of the word least meaning Net Pension > Liability must be >= ABO-FVPA IFF the ABO>FVPA. > Without any information about the PBO and the FVPA > we are mandated to revise the Net Pension > liability to meet the minimum pension liability.In > effect the $1.5M will be revised to $1.875M and to > make the accounting equation balance we will make > a $375,000 corresponding entry on the asset side > of intangible assets or you will take a contra > side on equity account. > > Feel free to chime any comment. OK, thank you, I’ve had a beer, maybe two, ok, but I think what you are saying is that if we know the PBO then there is no need to worry about the min / the FVPA-ABO we just report FVPA-PBO on the BS. So that makes it a question about expected salary increases? I mean if we know the ABO but have no clue about PBO then the required min liab is then FVPB-ABO? dinesh.sundrani Wrote: ------------------------------------------------------- > From what I have understood, I always has > ABO-FMVPA as the ML (old GAAP stuff ) and > PBO-FMVPA as the FS to be reported ‘ON’ the BS > (new GAAP) - sticked onto my head Could be, but I flipped to the page again in the study guides and it cleary noted FV-ABO was the min in both the old and the new.
CFAI says that AT LEAST the difference between BS ABO and fair value of plan assets must be recognized. It also says that the “corridor” amount is 10% of the greater of PBO or market-related plan asset at beginning of the year. BS - ABO = 1,875,000 10% of PBO = 1,550,000 I don’t think you missed anything here. I think that Schweser once again proved themselves to be incorrect.
slouiscar - if you look at pg-203 at the table provided. It shouls that FS = -1150 calculated, but the NPL reported on BS was -70 and then this sentence “Under the old standard, this company would have reported a new pension liability of only $70. However, under the new standard, the company is required to report a new pension liability of 1150” … so that means we need to reconcile and ‘up’ the liabilty to the Funded Status levels. And look at how FS is calculated, it’s the PBO in action there (forget about ABO in new GAAP)
Shit, thanks for bringing this up slouiscar. And thanks dinesh for making this clear! I just checked out the CFAI reading and yes, let’s totally forget about the freakin Minimum Liability Adjustment for new GAAP. Schweser, cooooooooooooooome on! No more now, please, I’m going nuts
When applying new pension standard, do we need to consider the date? It says as of 12/31/05. But new pension standard are in effect in 2006.
(CFAI vol 2 pg. 135) The section on Min Liability Adjustment is clearly in section 4.1) U. S. Standards for years ending before 15 December 2006. blah blah blah “the extent of the unfunded pension liability that is omitted from the balance sheet is limited. In particular, if the ABO exceeds the fair value of the plan asset at the balance sheet date, then at least the amount of the difference must be reflected.” Section 4.2) U.S Standards for Years Ending after 15 December 2006 (pg. 137) As stated… "the funded status is measured as the diference between the FVPA and the PBO. Sorry to take up space on this I was confused w/ schweser. Thank you dinesh for clearing it up via the actual text! disptra Wrote: ------------------------------------------------------- > When applying new pension standard, do we need to > consider the date? It says as of 12/31/05. But > new pension standard are in effect in 2006. “Section 4.2) U.S Standards for Years Ending after 15 December 2006” If a question is that evil, I submit.
Forget about Schweser and its treatment of various topics. I’m serious. It’s creating tons of confusion. Pick up the CFAI text book.
slouiscar…thanks for posting this Q. Going back to your earlier thread “Then I re-read C and said, I must be off because, an additional pension expese on the BS just doesn’t sound right…” agree with you Pension expense should always be on IS and net pension liability or asset on BS. There is one small doubt as regards minimum liability allowance (MLA), assuming ABO more than PBO ( practically not possible bcos ABO ignores future salary rise and ) what should we be showing on BS under new std: ABO- FVPA ( MLA) or PBO - FVPA ( Funded status)…here MLA will be more than funded status and cant recollect that anywhere it is spcifically mentioned that ignore MLA under new std. Can anyone pls clear my doubt.
> disptra Wrote: > -------------------------------------------------- > ----- > > When applying new pension standard, do we need > to > > consider the date? It says as of 12/31/05. But > > new pension standard are in effect in 2006. > > “Section 4.2) U.S Standards for Years Ending after > 15 December 2006” > If a question is that evil, I submit. I agree that C and D are not right because of its wording. So B is probably best answer here. But why do we need to learn old standard then, if only new standard needs to be applied regardless of date. I have this general question when to apply old and new standard.