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 actual and expected return on plan assets associated in pension computations?

I. The higher the expected return on plan assets, the greater will be the pension expense for the year.
II. In general, the expected rate of return on plan assets is based on long term trends and is seldom changed on a year-to-year basis.
III. In computing pension costs for the period, it is the actual rate of return of the plan assets that must be used rather than the expected rate of return.
IV. Any differences arising between the expected rate of return and the actual rate of return on plan assets may be deferred unto future years.
A. I and IV
B. I and II
C. II and IV
Explanation: I is incorrect because the higher the expected return on plan assets, the less the employer will have to contribute into the plan, and hence, the pension expense for the year will become lower.

III is incorrect because FASB 87 permits that the expected rate of return on plan assets be used rather than the actual rate of return when computing pension costs. Otherwise, if actual returns were used, annual pension expenses would be highly volatile, thus causing the same to occur for earnings.

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