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 net gain and losses and related amortization when computing pension obligations?

I. Any changes in the actuarial assumptions which will increase the Projected Benefit Obligation (PBO), will lead to reduced pension expenses.
II. Unlike investment gains and losses which can be deferred, actuarial gains and losses must be recognized immediately.
III. The portion of deferred gains and losses that must be amortized is equal to the difference between the total deferred amount and 25% of the larger of either the PBO or the plan assets.
IV. The portion of deferred gains or losses that are subject to amortization, must be amortized on a straight line basis over the average remaining service life of the workers.
A. I and IV
B. II and IV
C. IV only
Explanation: I is incorrect because any time there is an increase the level of Projected Benefit Obligation (PBO), the firm will incur higher pension expenses.

II is incorrect because the gains and losses arising from both plan asset performance and from changes in actuarial assumptions may be deferred.

III is incorrect because the portion of deferred gains and losses that must be amortized is equal to the difference between the total deferred amount and 10% of the larger of either the PBO or the plan assets.

User Contributed Comments 2

User Comment
Greatrussian The explanation for part I is incorrect. There are situations where higher PBO is associated with lower pension expense. For example, if a plan has duration of 10, then a 1% decline in discount rate will increase PBO by 10%. If the discount rate declines from 5% to 4%, then the interest cost will decline to 4.4% of the original liability from 5%.
CharlieDBA You are thinking too much. You should keep other factors stable when changing the value of PBO, otherwise nothing is certain.
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