CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Which of the following best describes an underfunded pension plan?
A. The PBO exceeds the value of pension plan assets.
B. The ABO exceeds the value of pension plan assets.
C. The VBO exceeds the value of pension plan assets.
Explanation: The ABO exceeds the value of pension plan assets in an underfunded pension plan.

User Contributed Comments 11

User Comment
PedroEdmundo the answer is A not B since fund status= pension assets-PBO
joseahernandez I agree, I am reviewing notes and they say that "The funded status of a plan, or the difference between the PBO and the fair value of a plan assets, is the plan's economic position (...) Underfunded plans have a net liability position with respect to the pension plan.
Tobi3 A is correct because the question is about a "pension plan."

SFAS 158: The statement requires sponsor to recognize the funded status of a benefit plan, measured as the difference between plan assets at fair value and the benefit obligation... For a pension plan, the benefit obligation is the projected benefit obligation; for any other post-retirement benefit plan ... the benefit obligation is the accumulated post-retirement benefit obligation.
volkovv No, B is correct. You need to read this question very carefully, its says "which of the following best describes". Even though A by itself is a correct statement, meaning when PBO exceeds fair value of plan assets, pension plan is underfunded. However, B is a more correct statement when ABO exceeds fair value of plan assets, that results in minimum liability that has to be recognized immediatelly on the balance sheet. In other words acknowledging that plan is underfunded and reflecting it on the financial statements.

Also, since ABO<=PBO, when ABO exceeds fair value of plan assets, PBO will also exceed fair value of plan assets, thus B is not contradicting to A.
dblueroom interesting. tricky question.
tabulator as straightforward as could be
malawyer not sure if this is a "special" definition, but in the cfa book + schweser: Funded Status = Plan Assets - PBO
malawyer from a bit googling - my understanding is that the ABO-answer is the OLD rule and PBO the newer one (which is still under discussion).
tijelo Answer A is definitely the right one. PBO should be used as opposed to ABO for calculating funding status.
NickPash Answer B is best description. I chose A as well because it is text book definition when it coms ot DBO and PBO. However, PBO is Projected Benefit obligation which is subject to Compensation growth rate manipulation where ABO is not as it is based on the actual salaries rather than Projected. In other words, Company could be underfunded when Fair value of Plan assets falls below PBO but PBO cna be manipulated by lowering or increasing the Compensation growth rate.
somk i miss my engineering studies. didnt know what "ambiguity" means until i entered the financial world. i miss my innocence
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