CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Dividends from the stock investments of a pension plan are reported by the employer as ______.

A. investment revenue on an accrual basis
B. a reduction of the periodic pension expense
C. a reduction of the projected benefit obligation (PBO)
Correct Answer: B

User Contributed Comments 11

User Comment
jkc2007 could anyone elaborate on the answer?
thekapila Pension expense =
service cost +
interest cost +
return on plan assets (gain/loss)
So dividend recieved is gain which will be reduced from expense.
Nightsurfer Bu pension expense uses "expected return" on assets not actual return. Should be no effect.
HenryQ Only goes into fair value of plan assets (cash based). Anyone can confirm?

Asset increase, but expense should not change as it is actual return.
hhard as thekapila pointed out, net pension cost(expense) consists of five components: 1. service cost, 2. interest cost on the projected benefit obligation, 3. Actual return on plan assets, 4. Amortization of prior service cost (PSC), if any, and 5 Amortization of actuarial gains and losses and asset gains and losses, if any.
dblueroom HenryQ, I personally agree, but I do not have the authority to confirm. However, I am certain that the EXPECTED return is included as a component of pension expense. This is an interesting question. If the dividends only (and definitely) affects fair value of plan assets, then it will bypass income statement and will only be reflected in funded status, which is recognized on B.S.
VenkatB Dividends from stock investments - Probably they can be expected with some certainty. May be we need to assume expected and actual returns are same here (dividends from stock investments).
joywind actual return is included in the expected return... because that is the expected return w/ complete certainty.
quanttrader dividend income offsets pension expense, does not contribute to reduction in PBO
farhan92 How i saw this

divs provide the employer money to pay for their contribution so would reduce the amount the employer would have to pay from his/her own pocket (reduce expense)
davidt876 doesn't this contradict the early question that actual return on pension assets does not increase pension expense? because what if the actual return was negative?
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