dirk01

In order to decrease the projected benefit obligation (PBO) of a pension plan, which of the following changes in pension assumptions can be made to yield the desired result?

A) Increase the expected rate of return.

B) Decrease the discount rate.

C) Decrease the rate of compensation growth.

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A decrease in the rate of compensation growth will lower future pension payments and in turn, lower the PBO.

dirk01

Wonderful Manufacturing has implemented a change in its pension plan, that will increase the future benefits for all of its current employees. Which of the following is the most likely effect on the company’s financial statements of this change in promised benefits under current U.S. GAAP standards?

A) The net pension liability will increase immediately by the projected increase in pension benefits due to employees.

B) The pension expense for the next reporting period will increase by the projected increase in pension benefits due to employees.

C) The firm’s prior financial statements will be adjusted to reflect the increase in benefits.

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A plan amendment will result in an immediate increase in the PBO. Under current U.S. accounting standards, an increase in PBO will result in an increase in the net pension liability (decrease in funded status).

dirk01

Wes Livingston is the founder and CEO of Bigwell Corporation. Livingston is interested in Bigwell being acquired by a larger competitor and wants to have his company’s financial statements appear as attractive as possible to a potential suitor. In order to decrease the accumulated benefit obligation (ABO) of the company’s pension plan, which of the following changes in actuarial assumptions could be made?

A) Decrease the rate of compensation growth.

B) Decrease the discount rate.

C) Increase the discount rate.

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Increasing the assumed discount rate of a pension plan will result in lower pension liabilities, thus decreasing both the ABO and the projected benefit obligation (PBO).

dirk01

Peak Productions is a publicly traded company that manufactures consumer electronics products in the U.S. The company has been in operation nearly fifty years, and has a considerable pension plan liability on its financial statements. Peak has a well-deserved reputation among analysts of utilizing aggressive accounting practices with regard to its pension plan. Which of the treatments of the following actuarial assumptions is the best example of aggressive accounting for a pension plan?

A) A high calculated projected benefit obligation (PBO).

B) A high compensation growth rate.

C) A high discount rate.

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The assumption of a high discount rate will result in a lower pension liability and almost always a lower pension expense. The more aggressive the actuarial assumptions for a pension plan are, the lower the quality of earnings for the firm.

dirk01

Roberto Perez, CFA, is the Chief Financial Officer for Home Stores, Inc., a large home improvement retailer with stores located across the United States. Home Stores is preparing for a secondary stock offering to secure the necessary capital to pursue an aggressive expansion campaign. Perez has received a directive from his boss to make every legitimate effort to present Home Stores’ upcoming financial statements in the best possible light. Perez determines that certain assumptions in the pension plan can be changed to fulfill this request. Which of the following pension plan assumptions can be changed by a firm to manipulate its reported results?

Change

Result

A) increased expected rate of return decreased service cost

B) decreased discount rate increased expected return

C) decreased rate of compensation growth decreased service cost

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The rate of compensation growth is the expected average annual increase in employee compensation. If the rate of growth is lowered, reported results will be improved due to a decrease in service cost. A decrease in service cost will result in lower pension expense.

dirk01

The Board of Directors of Prime Bank has asked management to make changes in the accounting of its pension plan obligations in order to decrease the reported service cost. Management determines that there are two changes in actuarial assumptions that will result in a lower service cost. Which of the following pairs of changes in actuarial assumptions will best achieve the desired effect? Prime Bank can either:

A) increase the discount rate or decrease the rate of compensation growth.

B) decrease the rate of compensation growth or increase the expected rate of return.

C) decrease the discount rate or increase the expected rate of return.

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An increase in the discount rate will result in lower service cost. Using a lower rate of compensation growth will yield lower future pension benefits owed, and thus a lower service cost. The expected return has no impact on service cost