Aren’t both assets and equity increasing by 667. Why isn’t A the correct answer? TIA
GAAP reports funded status in balance sheet, in this case funded status is 1822 for analyst, we should adjust it to IFRS requirement by deducting unrecognized items to get 1155, so we should decrease asset by 667, or increase equity by 667.
That’s what my doubt is…as per balance sheet equation: Asset = Liability + Equity. If equity rises by 667, so does asset… isn’t it? What am I missing here? Thanks
sorry, my bad. didnt read the information completely. this company orignally reported as IFRS required, a 1155 on the net asset: Fair value of plan asset- [PBO adjusted by unrecognized items] Under IFRS it shows as 2097 in assets, 942 in liabilities, 1155 on equity. the analyst wants to compare this company with a GAAP company. GAAP requires the same line item(funded status) for pension, which should be: 1822 in asset (funded status), and 1822 in equity so there is a (1822-1155)=667 increase in equity hope this claifies and I’ll edit the previous…but I cannot
Croshair… I understand that equity goes up by 667… my doubt is… what’s wrong in saying that assets also went up by 667. See Assets = Liability + Equity… if Equity is up 667 and liabilities are unchanged then Asset also go up by 667…
Okay, but are you sure liability is the same? from the quetion statement, unrecognised past service cost 190 is obligation unrecognised actruarial gain 857 is a gain from adjustment right? will it be counted into the increasement in asset, or the reduction in liability? I’m not very sure but you cannot simply think only asset change makes equity change
If you refer Page 90 - 93 of CFAi… they have an example each for Asset and Liability/Equity treatment when we move from IFRS to US GAAP. While explaining Assets - it says that the funded status is reported as plan asset. In our case its 1822… earlier it was 1155 - difference 667… so asset goes up by 667 While explaining Liability/Equity – It says that under US GAAP the Liability = Funded Status… It mean that if funded status is -ve its a liability else an Asset. Now when we move to US GAAP asset gos up and the equity also goes up by the same amt 667… so when the answer choice is what goes up by 667 on balance sheet… I would say both assets and equity… whats wrong in that? My only doubt is that the choice must be Pension Asset … but not sure…
edited
I’m wondering whether IFRS requires to report the one line item for “net pension asset/liability”. IFRS you should see “pension asset” and “pension liability”, and both will change to have net effect of increase in equity.
if you read the table carefully - Assets on the BS are already 667 up.
CP… Do you mean that 2097 in Pension Asset already includes this amount? Can you explain how the Pension Asset is 2097?
I do not know how it is. Problem says they said it should be 2097. It is IFRS accounting. Our Funded Status tells us it should be X (do not have book in front of me), but X should be 2097-667. As a result it is 667 higher. So Equity needs to be adjusted by 667… to reflect the reality.
Funded status = 1822 2097-1822 = 275… Also if you look at the explanations in book page 90… the assets also goes up when reporting under US GAAP… I have asked CFAI to explain, as this is super confusing…
I guess, liability down, equity up.
I did some more research… This is what Schweser CDs says: Under US Gaap we have to get back to funded status i.e. 1822 Now the actuarial gain 857 and prior service cost (-190) need to be added to the balance sheet. This decreases the balance sheet liability by 667$ Now the increase is comprehensive income = 667* (1-Taxrate) The increase in deferred tax asset = 667*Taxrate. This equation makes sense… and this is what is happening… so equity doesn’t go up by 667, it actually goes up by 667*(1-Taxrate)… I think CFAI is wrong here…
I just came across this question again and am also super confused. I am omitting this from my life. Note that now this is Reading 24, Question 22.