CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

The estimated average service period of the active employees for Aztec Company is 10 years. Aztec has a cumulative unrecognized gain of $28,000,000 resulting from actual returns on plan assets exceeding the expected returns. Which of the following situations will require that Aztec Company recognize some or all of this gain?
A. The PBO is $320 million and the fair value of plan assets is $350 million.
B. The PBO is $300 million and the fair value of plan assets is $325 million.
C. The PBO is $225 million and the fair value of plan assets is $240 million.
Explanation: The corridor threshold is 10% of $240 million, or $24 million. The excess of the $28 million unrecognized gain over the $24 million threshold is a $4 million difference, amortized over ten years for a $400,000 recognized gain each year.

User Contributed Comments 7

User Comment
danlan2 Where is $24 million? $24 million is 10% of $240 milllion.
ThePessimist The corridor threshold is 10% of the larger of the PBO or plan assets.
cswin why not amortising 28m but the diff of 28m and 24m?
mbc13 only have to amortize the amount that falls outside the 10% corridor...
dblueroom this applies only to gain, but not to loss? and is it also a condition that Fair value of plan asset exceeds PBO?
Hishy No, corridor is for both G's and L's.
b25331 The trick here is to calculate the threshold amount for each A, B and C, as 10% of the higher of PBO and fair value of plan assets.

The threshold amount which is lower than the cumulative unrecognized gain of 28 million is C, 10% of 240 million. Why?

Because, if the cumulative amount of unrecognized actuarial gains/losses becomes too large (i.e. more than 10%), then the excess is amortized over expected average working lives. The excess is 4 million. Hope this clarifies
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