Hi, Can someone please give me the correct way to adjust for a pension plan underfunding? On schweser exam 2 AM it is said that you need to: 1. decrease Liability by the difference between the underfunding and the pension asset (called prepaid benefit cost) 2. Decrease deferred tax liability by that same difference times the tax rate 3. Decrease equity by the rest. So far, I understand that my B&S is equilibrated but on a question that appeared on the question bank they said that you need to decrease your assets <=> decrease your equity by the amount shown on asset side on B&S and then increase liability and decrease equity by the amount of underfunding. As far as I understood the two ways do not give the same results… Thanks for helping on that
shouldn’t it be increase in pension liab–decrease DTL by liab*T–decrease shareholder’s equity by liab*(1-T)?
Well… I’m lost!