Reading 24- LOS d ～ Q1－5

1．In U.S. GAAP, the assets and liabilities of a defined benefit pension plan are:

A)   reported in the appropriate section of the balance sheet, with pension obligations shown under liabilities and plan assets shown under assets.

B)   subject to the discretion of management whether they are reported on the balance sheet as a net asset/liability or separately under assets and liabilities.

C)   netted against each other, and only the net asset or liability amount is reported on the company’s balance sheet.

D)   off balance sheet items which are shown only in the footnotes.

The correct answer was C)

Companies are required under U.S. GAAP to report only the net asset or liability amount. They may not show assets and liabilities separately. Although some types of pension liabilities are disclosed in the footnotes and amortized, pension assets and liabilities must generally be shown on the balance sheet.

2．Pension benefit consultant Stuart Tyson is discussing the pension obligations of Andergyne Guitars with Joshua Andersen, President and CEO. Tyson and Andersen are assessing how the pension liability reported on the balance sheet relates to the figures which Andergyne has calculated internally. Tyson explains:

Tyson is:

A)   correct regarding Statement 2 but incorrect regarding Statement 1.

B)   correct regarding Statement 1 but incorrect regarding Statement 2.

C)   correct regarding both statements.

D)   incorrect regarding both statements.

Tyson is correct about Statement 1. An example is the treatment of prior service costs resulting from plan amendments. Tyson is incorrect about Statement 2 because the effects of such events on the company’s pension plan do become off balance sheet but are amortized over time into the reported financial statements.

3．Jon Horton, CFA, is the Chief Financial Officer (CFO) for Springtown Corporation, a manufacturer of windows for residential and commercial applications. As part of an ongoing diversification strategy, Springtown Corp. has recently entered into a preliminary agreement to purchase all of the assets of Prime Doors, a manufacturer and distributor of doors to the same residential and commercial market in which Springtown sells its windows. Horton is head of the due diligence team that will fully evaluate Prime Doors’ financial statements prior to the proposed acquisition.

Prime Doors has been in operation for thirty years, and currently has approximately 800 employees at two operating facilities. Horton observes in the notes to the financial statements that Prime Doors has a defined benefit pension plan, for which all employees are eligible. Employees are vested at the rate of 20 percent per year of employment, and are fully vested upon completion of five years of employment. Springtown does not offer a pension plan to its employees, but encourages employees to contribute to Individual Retirement Accounts (IRAs) and offers a 401(k) program.

Horton wants to fully evaluate the financial implications of Springtown’s assumption of Prime Doors’ pension assets and the associated future liabilities and expenses. Like most companies, the pension plan for Springtown’s employees is not fully funded, but Horton wants to review all assumptions used by Springtown’s accountants in the valuation of the plan’s current liabilities. The most current information regarding the pension plans is as follows:

Horton notices a paragraph in the pension plan footnotes that the original pension plan was amended last year, effectively increasing the level of benefits to be paid to employees with more than ten years of service. However, he is not able to detect what effect, if any, this change in projected benefits has had on Prime Doors’ financial statements or is expected to have in the future.

Horton is aware that a commonly used method can be used to adjust the income statement and provide a better measure of Prime Doors’ economic pension cost than reported pension expense. He is not quite sure which components of the financial statements are utilized to derive an adjusted pension expense, but intends to investigate what analysis he can perform to gain more insight into the company’s position with regards to its pension plan.

When accounting for pension liabilities in the U.S., a company must make fundamental assumptions to estimate the future liability and expense for each employee. How are the following assumptions required to be treated in the pension footnotes?

A)       Discount rate                             Expected return on plan assets

B)       Discount rate                             Rate of compensation increase

C)  Rate of compensation increase       Expected length of employment

D)  Expected return on plan assets         Discount rate

The correct answer was C)

A company must disclose the discount rate, the expected return on plan assets, and the rate of compensation increase. The expected length of employment is not a required disclosure.

4．at effect will an increased discount rate and increased expected rate of return have on a company’s projected benefit obligation (PBO) and accumulated benefit obligation (ABO) as reflected in the financial statements?

A)                                        Increase
   Increase

B)                                        Decrease      Decrease

C)                                        Decrease      Increase

D)                                        Increase
   Decrease

The correct answer was B)

The use of a higher discount rate will decrease a company’s PBO and ABO because it will result in a lower present value of future pension liability.

5．cording to U.S. GAAP, companies must account for pension assets and the associated pension obligation in their financial statements. These could be reported in two ways. Method 1 is to report the values of the pension fund assets and liability separately on the balance sheet. Method 2 is to report a net amount for the difference between the value of the fund assets and the fund liabilities. Which of the following statements most accurately describes the requirements of U.S. GAAP?

A)   Companies are required to use Method 2.

B)   Companies are required to use Method 1.

C)   Companies may choose to use either method.

D)   Companies are required to use Method 1 for defined benefit plans and Method 2 for defined contribution plans.

The correct answer was A)

GAAP requires that companies use the “net” method, which decreases a firm’s total assets and total liability. Netting also affects certain financial ratios, such as return on assets and leverage ratios.

[此贴子已经被作者于2008-4-18 19:15:32编辑过]