# book2, page 181, problem 8

why the answer is A but the formula is 85-12+27? thank you

because it originally is -85 (says underfunded). so -85 -12 + 27 = -70 or as they say the net pension liability = answer A, 70 mil.

thank you very much, but this part always confuses me. originally it’s underfunded by 85, after acturial gain 12, it should be 85-12=73? right? on page 161, acturaial gain will decrease the benefit obligation. so if the PBO is 185, fair value of asset is 100, it’s underfunded by 85, but because of acturial gain of 12, the PBO should be decreased by 12 to become 173, use 173 minus 100 you have 73 underfunded, right? please teach me here, my brain is in a mess

I was trying to google something useful, but this is so confusing

The reconciliation between FS and NP-L/A is as follows FS + loss - gain + prior service cost + transition liab - transition asset = NP-L/A transition liab & transition asset are usually 0 Now given data FS = -85 loss = 0 gain = 12 prior service cost = 27 NP-L/A = -85+0-12+27+0-0 = -70 means NPL = 70m = Ans A

thank you swaptiongamma, but intuitively how do you understand it? (1) your employees were supposed to live 25 years after retirement, so you have to prepare \$585 (2) you only have \$500, use \$585 minus \$500, so you’re underfunded by 85 (3) now the insurance company said that because of pollution, your employee will live only 20 years after retirement, so your liability become smaller, you can save \$12, which is a gain, which means that you only need to prepare \$573 for their retirement. (4) 573-500=73, you are now only underfunded by \$73 The short cut is simply: -85+12=-73 using your formula (even I know it’s right), you will have to prepare more money, you become even more underfunded: -85-12=-97 Why your employees die earlier and you become more underfunded? Please help me sort out. Thanks. swaptiongamma Wrote: ------------------------------------------------------- > The reconciliation between FS and NP-L/A is as > follows > > FS + loss - gain + prior service cost + transition > liab - transition asset = NP-L/A > transition liab & transition asset are usually 0 > > Now given data > > FS = -85 > loss = 0 > gain = 12 > prior service cost = 27 > > NP-L/A = -85+0-12+27+0-0 = -70 > means NPL = 70m = Ans A

Plan Assets - PBO = Funded Status + Unamortized Losses (-Unamortized gains) + Unamortized Prior Service Cost + Unamortized transition liability (-unamortized transition asset) = Balance Sheet Asset (liability) If your funded status had been a +ve number you would have reduced 12 from a +ve number. But if you look at the situation here - you have a -ve number. If you add something (gain to the negative number) it is going to be higher. but you have a negative status. So you have to look at -1 * the above equation in its entirety. so signs of gains / losses change over… does that make sense? so to a PBO Net liability -85 you would need to add a -12 Unamortized Prior Service Cost was a -27 here you would need to do a +27

or look at it as: Funded Status = -85 subtract gain = -12 add prior service cost = 27 ================ New pension liab = -70 ================= Need to have the Funded status with the proper sign… since it is underfunded start with -85.

another thing to remember: when you do the amortization of gains your funded status should reduce. -73 (closer to 0) > -85 --> if you added the gains like you did, June2010 - your liability is actually increasing. but -85 > -97 (further away from 0) – so your liability is reducing. (which is what is expected). when you do amortization of prior service cost – now your liability should INCREASE. so -97 + 27 = -70 (increased…) The -ve sign because of the UNDERFUNDED status initially - makes a big difference… Also, on a side note - the fact the question actually asked to calculate under IFRS actually means calculate using the Old Pension standard under US GAAP.

yea - IFRS accounting for this section simply means old UD GAAP (pre Dec 06)

cpk123, obviously you know this thoroughly, thank you! I feel you’ll definately pass Level 2