CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

On January 1, 2011, Microbrew Corporation had a cumulative net loss in its pension plan (the expected return on plan assets was less than the actual return). During 2011, the plan experienced an additional net loss and, at year-end, the cumulative net loss was within the 10% corridor. How is the plan's economic status affected by 2011 net loss?

A. Pension expense is increased.
B. The projected benefit obligation is decreased.
C. The projected benefit obligation is increased.
Correct Answer: C

A cumulative net loss within the 10% corridor is unrecognized, and thus increases the projected benefit obligation, or PBO.

User Contributed Comments 10

User Comment
bmeisner As long as the net loss is within 10% of the previous year's PBO then there is no amortization of the losses. Once it crosses the 10% threshold then the difference would be amortized over the average remaining employee service life. This would increase pension expense going forward but it caps the change from year to year in the PBO. It makes sense too because since the PBO is a present value of a really far in the future liability it is easily affected by actuarial assumptions and so could be quite volatile. Market returns can also be very volatile, especially for mainly equity portfolios.
ilzina If the net loss is unrecognized, why PBO is increased? Shouldn't PBO be decreased by the expected return?
MasterD ilzina: PBO is decreased by an return, increased by a loss
HenryQ If the loss is small and not amortized, that means it should be recognized as obligation immediately, so the PBO increases.
HenryQ The whole purpose of amortization is just to make sure the pension obligation/asset do not get distorted due to the actuarial changes (as said by bmeisner). Is the change is small, there is not need to amortize so just book them under the right account (obligation/asset).
kodali PBO increases due to interest and service costs which is normal. I guess the question tries to highlight the 10% limit at which the un-realized losses doesn't have to be amortized
vi2009 PBO = a liability ... so if net loss, then PBO increases (i.e. liability increases!)
dblueroom The accumulated loss is recognized in full as reflected in funded status on the B.S. The corridor approach is really about amortiztion, meaning expensing the loss on income statement to prevent this loss getting bigger on the balance sheet. And if this loss exceeds 10% of larger of PBO or FV of plan assets, then we need to start expensing this loss, adding to periodic pension expense.
Teeto Plan funded status shall be affected by reduction in plan assets, not by increase in obligation, isn't it?
davidt876 if the expected return was less than the actual return isn't there a gain? im so f*cked for pensions...
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