SS6, R24 - change in pension plan benefits

Wonderful Manufacturing has implemented a change in its pension plan, effective January 1, 2007. The change will increase the future benefits for all of its current employees. Which of the following is the most likely effect on the company’s financial statements of this change in promised benefits under U.S. GAAP standards? A) An unrecognized prior service cost does not appear immediately in the financial statements but is amortized over the expected remaining service life of the affected employees. B) The net pension liability will increase immediately by the projected increase in pension benefits due to employees. C) The pension expense for the next reporting period will increase by the projected increase in pension benefits due to employees. D) There will be no impact on the company’s financial statements until the first eligible employee actually retires and begins receiving the increased benefits. Again, I’ll let anyone who wants a crack at it have a go!

It was more than two days ago that I covered this topic (saving face), so I will guess “B”.

A ?

I’d say B b/c with the new standard you record the funded status, which is plan assets - PBO. up the benefits, up the PBO, and since it’s under the new standard. if it were under the old standard, the answer would’ve been A, no? pensions might be the most brutal thing in this whole test.

I’m gonna go with A…

#50301 Your answer: B was incorrect. The correct answer was A) An unrecognized prior service cost does not appear immediately in the financial statements but is amortized over the expected remaining service life of the affected employees. In accordance with U.S. GAAP standards, a plan amendment that results in an increase in the projected benefit obligation (PBO) creates an unrecognized service cost that is amortized over time as an increase in pension expense. ____________ I was with bannisja - and schweser seems very confused on this issue. It says “under the OLD US GAAP pension acc standards, the net pension liability and pension expense don’t immediately increase from … a plan amendment” But it also says under difference between US GAAP and IFRS “IFRS requires that prior service costs … be expensed … rather than deferred and amortised”. So how is it possible that, under the new US GAAP, you must report the funded status (so excluding made up deferred assets), but you can still create the made up deferred assets? Is this what it was talking about with contra entries in shareholders’ equity and tax liabilities?

In fact, this explanation is definitely wrong, as PBO increases and so funded status changes. Funded status is on the balance sheet so it IS reflected on the financial statements - even if there are corresponding contra entries…

old standard applied to publicly traded firms whose year end was on or before dec 15, 2006. this q says Jan 1, 2007… which i thought was the “trick” of the question- the date. that answer definitely is following the old rules, not new rules. is that answer not wrong then? did you write schweser? anyone else have thoughts? i’m quitting studying and changing gears to drinking mode soon, so i won’t let this one sit in my brain for too long.

I saw a few other questions in the Q Bank from Schweser that were ambiguous or wrong given the new standard. However, this question actually has the date (2007) right in the question!! My guess is that the question was actually written more than a few years ago before the new standard stuff came about. Definitely worth an email to Schweser!

I don’t think CFAI explains this one either. According to the text, all amortized prior service costs are removed from the funded status. There is no mention of immediate expensing, which implies overstated funded status.

I’m completely confused now. I think I need a table like: Effect of change in plan terms: Income Statement effect Balance Sheet effect Old US GAAP New US GAAP IFRS to soothe me…

guys. i’m looking at john harris’ notes… one of the 6 things he lists that affects pension expense: amortization of prior service cost: when a firm adopts or amends its pension plan… instead of expensing the cost immediately, it is amortized over the remaining service life of the affect employees. He has it under los 24b. (schweser p 192, just checked it) i only got this correct because i took the course yesterday, but still… i don’t think the new us gaap standard changes this.

ok, so it’s the morning now, i’ve lost an hour of sleep, and my body is crying out WHY DID YOU TAKE SHOTS OF PATRON LAST NIGHT? time to push through and get a little studying in. so per post above, if this is true under new rules also, that would affect the income statement- you’re smoothing out this number. ok, cool, it smoothes somehow i guess. but answer A said in “financial statements”, not income statement. so with the new rules, what about the balance sheet? i’m under the impression (and correct me where i’m wrong here because i am half awake and not exactly in great study shape on my couch) that just as i said above, you’d recogonize this new liability immediately on the balance sheet under new rules (pg 203 schweser), you record the funded status on the balance sheet, plan assets - PBO. by upping future benefits, it’s obviously going to increase the liability, and i’m pretty sure that on the balance sheet you’d have to now show it immediately. this is why i still am liking B better than A here as an answer… b/c in A if you consider the balance sheet a financial statment, isn’t that answer wrong? and if it had said income statment instead, i want to say either answer would work, no? i need to procrastinate. think i’m going to walk my dog now.

That’s what would have happened before SFAS 158 was implemented. After the adoption of SFAS 158, the correct answer is B Your QBank may be outdated (if not, and if I were you, I would request a refund) chrismaths Wrote: ------------------------------------------------------- > #50301 > > Your answer: B was incorrect. The correct answer > was A) An unrecognized prior service cost does not > appear immediately in the financial statements but > is amortized over the expected remaining service > life of the affected employees. > > In accordance with U.S. GAAP standards, a plan > amendment that results in an increase in the > projected benefit obligation (PBO) creates an > unrecognized service cost that is amortized over > time as an increase in pension expense. > ____________ > I was with bannisja - and schweser seems very > confused on this issue. > > It says “under the OLD US GAAP pension acc > standards, the net pension liability and pension > expense don’t immediately increase from … a > plan amendment” > > But it also says under difference between US GAAP > and IFRS “IFRS requires that prior service costs > … be expensed … rather than deferred and > amortised”. > > So how is it possible that, under the new US GAAP, > you must report the funded status (so excluding > made up deferred assets), but you can still create > the made up deferred assets? Is this what it was > talking about with contra entries in shareholders’ > equity and tax liabilities?

yeah, i hear what you are saying. i read the question as “income statement”. so i guess i would have been wrong. and i chose a because that seemed like the “most right” answer, which really doesn’t exist, because i knew i read that exact sentence somewhere before and thought that is what they wanted to hear. back to the books, i guess.

My reasoning focused on the balance sheet (which is where the cumulative impact would show up)

So basically, they need to ask if it is regarding to income statement or balance sheet. New standard require funded status to be reported on balance sheet while income statement remains same as old standard. Can we summarize this as: Under old GAAP standard, answer is A. Under new GAAP standard or IAS standard, answer is B.

Is there anything in the CFA text that says PBO immediately increases? I’m still under the impression that PBO is left untouched in determining the funded status, but that the deferred items are still amortized through the income statement.

Dear Candidate: Thank you for using Schweser products for your studies. We recently sent all the pension questions out for updating and are in the process of updating the database. That question should read, Question ID# 50301 Wonderful Manufacturing has implemented a change in its pension plan, effective January 1, 2008. The change will increase the future benefits for all of its current employees. Which of the following is the most likely effect on the company’s financial statements of this change in promised benefits under current U.S. GAAP standards? A) The net pension liability will increase immediately by the projected increase in pension benefits due to employees. B) The firm’s prior financial statements will be adjusted to reflect the increase in benefits. C) The pension expense for the next reporting period will increase by the projected increase in pension benefits due to employees. D) There will be no impact on the company’s financial statements until the first eligible employee actually retires and begins receiving the increased benefits. Answer is: A) A plan amendment will result in an immediate increase in the PBO. Under current U.S. accounting standards, an increase in PBO will result in an increase in the net pension liability (decrease in funded status). Best wishes for your studies, Jodi

that’s not the same question, is it? seems like the answers are different or am i on somthing?