- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 12. Employee Compensation: Post-Employment and Share-Based
- Subject 3. Analysis of Pension Plan Disclosures
CFA Practice Question
Van Nuen Inc. began a defined-benefit pension plan for its employees on January 1, 2011. The following data are provided for 2011, as of December 31, 2011:
Accumulated benefit obligation: 740,000.
Plan assets at fair value: 655,000.
Pension expense: 715,000.
Employer's cash contribution (end of year): 655,000.
Projected benefit obligation: $785,000.
Accumulated benefit obligation: 740,000.
Plan assets at fair value: 655,000.
Pension expense: 715,000.
Employer's cash contribution (end of year): 655,000.
What amount should Van Nuen record as additional minimum pension liability at December 31, 2011?
A. $85,000
B. $60,000
C. $25,000
Explanation: The minimum liability is $85,000 ($740,000 - 655,000), and the accrued pension cost is $60,000 (Dr: $715,000 - Cr: 655,000).
User Contributed Comments 7
User | Comment |
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sireklove | Does anyone have a more complete explanation for why C or $25,000 is the answer? Why isn't it B or $60,000? Thanks for any tips. |
wollogo | Not 100% sure but my take on it is that the accruded pension costs are included in the ABO so if these are recognised in the income statement then they shouldn't be recognised as a liability as well. The liabiltiy represents an obligation in future periods while the the current costs have been applied to the current period. |
anricus28 | To calculate minimum liability we always start off by obtaining the difference between ABO and value of assets. This gives 85,000 (which is the minimum liability), however the question provides us with details on what the expense was during the year and what was actually paid during the year. Therefore there will already be an accrual for the underpaid. The ADDITIONAL MINIMUM LIABILITY is therefore the difference between the Miniimum liability of 85K and the 60K already recognised. |
allanzhu | accrued pension cost =Pension expense: 715,000. -Employer's cash contribution (end of year): 655,000. |
dblueroom | Is this pension expense different from the one expensed on income statement? |
yxten1 | 1. find if there's any min pension liability (when ABO > plan asset fair value) 2. calculate the min pension liability (diff btw ABO and fair value of plan asset) 3. calculate accrued pension liability (in this case, 715k - 655k) 4. additional pension liability = minimum pension liability - accrued pension liability (85k - 60k) |
Greatrussian | Since SFAS158 (effective essentially since 2007), the net funded status (PBO - fair value of assets) is always included on the balance sheet. |