CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsMedium
A company determines that its defined benefit pension plan has a projected benefit obligation (PBO) of $1,500,000 and plan assets with a fair value of $1,200,000. Additionally, the company has unrecognized prior service cost of $100,000 and an unrecognized net actuarial loss of $50,000. What is the amount of the net pension liability or asset that should be reported on the balance sheet?
- ANet Pension Asset of $300,000
- BNet Pension Liability of $300,000
- CNet Pension Asset of $450,000
- DNet Pension Liability of $450,000
Show answer & explanationAnswer & explanation
Correct answer: B. Net Pension Liability of $300,000
Under current accounting standards (ASC 715), the net pension liability or asset reported on the balance sheet is simply the difference between the Projected Benefit Obligation (PBO) and the fair value of plan assets.
Why the other options are wrong
- A. Incorrect, this would imply plan assets exceed PBO.
- C. Incorrect, this would imply plan assets exceed PBO and includes unrecognized components.
- D. Incorrect, this includes unrecognized components which are not directly reported on the balance sheet as part of the net liability/asset.
Net Pension Liability/Asset
The difference between the Projected Benefit Obligation (PBO) and the fair value of plan assets, reported on the balance sheet.
- PBO represents the present value of future benefits earned by employees.
- Plan assets are funds set aside to pay benefits.
- If PBO > Plan Assets, it's a net liability; if PBO < Plan Assets, it's a net asset.
Memory trick: PBO Minus Assets: The Balance Sheet's Net.