CFA Level II ExamFinancial Statement AnalysisEasy
An analyst is evaluating a company's defined benefit pension plan. The company reports the following information at year-end: Projected Benefit Obligation (PBO) = $500 million, Fair Value of Plan Assets (FVPA) = $450 million, and unrecognized prior service costs = $20 million. Using U.S. GAAP, what is the pension liability or asset that should be reported on the balance sheet?
- A$30 million asset
- B$50 million asset
- C$30 million liability
- D$50 million liability
Show answer & explanationAnswer & explanation
Correct answer: D. $50 million liability
Under U.S. GAAP, the pension liability (or asset) reported on the balance sheet is simply the funded status of the plan, which is the fair value of plan assets minus the projected benefit obligation (FVPA - PBO). Therefore, $450 million - $500 million = -$50 million, representing a $50 million liability.
Why the other options are wrong
- A. Incorrect calculation; a surplus would be an asset.
- B. Incorrect calculation; a surplus would be an asset.
- C. Incorrect calculation; does not reflect the direct funded status.
U.S. GAAP Pension Balance Sheet Reporting
Under U.S. GAAP, the balance sheet reports a net pension asset or liability equal to the funded status of the plan (Fair Value of Plan Assets - Projected Benefit Obligation).
- Funded status = FVPA - PBO.
- If FVPA > PBO, it's a net pension asset.
- If FVPA < PBO, it's a net pension liability.
- Unrecognized components (like prior service costs) are not directly on the balance sheet but affect OCI.
Memory trick: PBO and FVPA set the funded 'STATUS' on the balance sheet.