PBO Question

CFA Level II
#1

ABC is a public U.S. company with an employee pension plan The PBO is 320 million. Unrecognized prior service cost were 35 million. Fair Value of plan assets = 316 million unrecognized actuarial gain = 34 million The amounts that should be recorded on ABC’s Balance sheet as a net pension liability or asset are: A) Liability = 3m; Asset = None B) Liability = None; Asset = 3 m C) Liability = 5m; Asset = None D) Liability = None; Asset = 5m

#2

A. This is assuming it is pre-2006 GAAP.

#3

pre-GAAP 316 - 320 + 35 - 34 = -5 C?

#4

c

#5

dinesh.sundrani Wrote: ------------------------------------------------------- > pre-GAAP > > 316 - 320 + 35 - 34 = -5 > > C? Check your math dinesh.

#6

mwvt9 Wrote: ------------------------------------------------------- > dinesh.sundrani Wrote: > -------------------------------------------------- > ----- > > pre-GAAP > > > > 316 - 320 + 35 - 34 = -5 > > > > C? > > > Check your math dinesh. ooooops… It should be -3 = Answer is A, 100%. Am going mad are these normal symptoms of failing the exam :frowning:

#7

A is correct. But can someone tell me why I keep getting C. My Logic: PBO + Prior Service cost (b/c it will increase PBO) - PV of Plan Assets - Unrecognized actuarial gains (because it will reduce PBO) 320m + 35m - 316m - 34m = 5 million (net liability)??? What is wrong with my reasoning?

#8
  1. Your PBO formular is wrong. 2. use funded status instead of PBO on balance sheet.
#9

FS = FMVPA - PBO FS = 316 - 320 FS = -4 Then we reconcile… NPA/NPL = FS + addback PSC - subtOut AG NPA/NPL = -4 + 35 -34 = -3

#10

how come Unrecognized prior service cost would actually reduce PBO? i thought it would actually increase the PBO.

#11

Because it is UNrecognized.

#12

thanks, mwvt9

#13

Sure. Seems backwards at first.

#14

Hey bro, I know what your problem is: When you did your basic calculation that plan liabilities were: 316m - 320m = 4m pension liabilities, YOU ARE SEMI-CORRECT. However, this value INCLUDES 2 ITEMS ALREADY WHICH SHOULD HAVE *NOT* BEEN INCLUDED! The 4m liability includes “UPS”, BUT IT SHOULD NOT INCLUDE THIS. ***WARNING*** THE TERM “UNRECOGNIZED” IS MISLEADING! This 35m UPS has been included, even though it’s called “UNRECOGNIZED”. Therefore, NULLIFY the inclusion of this by (think REALLY HARD) INCREASING the plan assets by 35m. The UAG has actually been INCLUDED, EVEN THOUGH IT’S CALLED “UNRECOGNIZED”. This is to purposely mislead you. If I were to call Einstein as “Dimwit Einstein,” does this make Albert Einstein a dimwit? NO! this was to mislead you my friend. Anyways, UAG has already been included in the 316m figure, so we must NULLIFY ITS EXISTENCE BY subtracting it out!!! OK, now get some rest you smart Einstein you. ABC is a public U.S. company with an employee pension plan The PBO is 320 million. Unrecognized prior service cost were 35 million. Fair Value of plan assets = 316 million unrecognized actuarial gain = 34 million The amounts that should be recorded on ABC’s Balance sheet as a net pension liability or asset are: A) Liability = 3m; Asset = None B) Liability = None; Asset = 3 m C) Liability = 5m; Asset = None D) Liability = None; Asset = 5m

#15

Thanks, the explanation is quite clear and helpful.

#16

MaoSong: who were you addressing your post to? Re: PBO Question Posted by: maosong (IP Logged) [hide posts from this user] Date: May 13, 2008 12:57AM Thanks, the explanation is quite clear and helpful.