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LOS g: Evalulate the underlying economic liability (or asset) of a company's pension and other post-employment benefits.

Mountain View Inc.’s latest financial statements show the projected benefit obligation (PBO) of their pension plan to be $250 million, while the fair market value of the plan assets is $210 million. The company’s balance sheet reflects a net pension liability of $25 million. In light of this information, which of the following actions is Mountain View required to take in accordance with current U.S. accounting standards? Ignoring income taxes, the company is required to:

A)	record a $40 million “additional pension liability” on its balance sheet.

B)	record a $15 million “additional pension liability” on its balance sheet.

C)	disclose a $15 million “additional pension liability” in the footnotes to its financial statements.

If the PBO exceeds the fair market value of plan assets, GAAP requires that companies disclose the difference on the balance sheet as a liability. The total difference between the PBO and the fair market value of plan assets is $40 million (= $250 million ? 210 million). Since $25 million of net pension liability is already reflected in the financial statements, Mountain View needs to book $15 million in additional pension liability.

When analyzing the disclosures made with regards to pension plan accounting released by a company, which of the following measures most accurately reflects the true economic position of the plan?

A)	The funded status of the plan.

B)	The accumulated benefit obligation (ABO).

C)	The fair value of plan assets.

The funded status of a pension plan is simply the fair market value of the plant assets minus the PBO.

Darla Whitney, CFA, is an investment advisor for a small money management firm in New York. She is considering the purchase of shares in Best Corp., a German company. Whitney is aware that there are differences in the accounting treatment of pension benefits for U.S. companies under GAAP and those companies operating under the International Financial Reporting Standards (IFRS). Which of the following statements most accurately describes the most significant difference between the GAAP and the IFRS rules for the accounting for pension plans?

A)	GAAP recognizes the funded status on the balance sheet, while IFRS reflects the funded status adjusted for unrecognized items.

B)	GAAP requires that actuarial gains and losses be amortized over the employee’s service life, while IFRS requires that they be amortized over a period not to exceed 15 years.

C)	GAAP requires that prior service costs for currently vested employees be expensed in the period incurred, while IFRS requires them to be deferred and amortized.

The major difference between GAAP rules and IFRS rules is the treatment of the funded status. GAAP requires the recognition of the funded status on the balance sheet, while IFRS treatment reflects the funded status adjusted for unrecognized items.

Which of the following measures is least sensitive to changes in pension plan actuarial assumptions?

A)	Reported pension expense.

B)	Funded status.

C)	Projected benefit obligation (PBO).

Reported pension expense is a net (smaller) amount and therefore, is generally quite sensitive to relatively minor changes in actuarial assumptions.

Changing an assumption may have a small effect on the projected benefit obligation (PBO) but may have a much larger effect on the funded status (which is a net pension amount).