CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the amortization of prior service costs when computing pension obligations?

I. Prior service costs increase every time the pension obligation's built in discount rate is increased.
II. The greater the increase in the Projected Benefit Obligation (PBO) as a result of an amendment to the plan, the greater will be the annual prior service cost.
III. Any prior service liabilities that arise as a result of an amendment in the pension plan must be expensed immediately.
IV. The further back in time the current pension terms are applied retroactively, the higher will be the resulting prior service costs.
A. I and IV
B. II and IV
C. II and III
Explanation: I is incorrect because prior service costs arise only when a pension plan is newly implemented or there is an improvement (from the employee's perspective) of an existing pension plan. These costs are intended to translate a current pension plan as if it had existed from a date prior to its inception or amendment.

III is incorrect because any prior service liabilities that arise as a result of an amendment in the pension plan must be amortized over the estimated average number of years of service expected from the work force.

User Contributed Comments 1

User Comment
REITboy What if current terms were less favorable than prior terms? Wouldn't IV result in lower prior service costs?
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