I have this q that doesnt make sense, could somebody help, ABO 5.5 PBO 6.4 FV Plan assets 4.3 In relation to the data above which of the statements are correct 1 the defined benefit plan is underfunded by 2.1 2 a minimum liability of 2.1 must be recorded. a 1 only b 2 only c both d neither my questions is -arent we always putting the funded status on the balace sheet? What does the minimum liability actually tell us?
Ans. should be A Min. Liability should be 1.2… ABO - Plan assets = 1.2 Liability It tells us are plan assets are short what we already owe our employees
1 IS CORRECT. 2 IS WRONG. So A
A too easy, even I knew this one…
The new rule that began in june 2006(i think) is that you have to put funded status on the balance sheet. Before that, companies were allowed to estimate their pension liabilities/assets with included unrecognized adjustments. These estimated liabilities aren’t always equal to the funded status, which was ok back then, however there is a minimum amount of liability that you have to record which is ABO-value of plan assets. This is the amount you have to fork out if you were to fire all your employees today and liqudate all the plan assets. If your pension liability on the balance sheet was less than this amount…then there is a separate record for minimum liability allowance that needs to be added to the balance sheet so that total pension liabilities is at least ABO-value of plan assets. At least this is my understanding…if that made any sense.
My instict was neither because it says FV of plan assets. Shouldn’t it be the PV of plan assets for the question to be answerable?
FV= Fair value in this question.
thanks longOnCFA that was spot on what i was questioning, yes A was right i cant see why we should have to think about PV as instead of FV as the asses sits on the BS today
two things they could ask that are pre-FAS 158. Minimum Liability and Net Asset (Liability) Recognized Funded Status (FV of Plan assets less PBO at year end) +/- Unrecognized net (gain)/loss +/- Unrecognized prior service cost +/- Unrecognized transition amount this was reported on the balance sheet.
4Gem…as posted up top FV is referring to fair value here, not future value