CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingMedium
A publicly traded company, Global Corp., has a defined benefit pension plan. At the end of the current year, the following information is available: - Projected Benefit Obligation (PBO): $2,000,000 - Fair Value of Plan Assets: $1,800,000 - Prior Service Cost (unrecognized, net of tax): $100,000 (debit balance) - Actuarial Gain (unrecognized, net of tax): $50,000 (credit balance) What is the funded status of Global Corp.'s pension plan that should be reported on its balance sheet?
- ANet pension liability of $250,000
- BNet pension liability of $200,000
- CNet pension asset of $200,000
- DNet pension asset of $150,000
Show answer & explanationAnswer & explanation
Correct answer: B. Net pension liability of $200,000
The funded status of a defined benefit pension plan is the difference between the fair value of plan assets and the projected benefit obligation (PBO). If the PBO exceeds the plan assets, it results in a net pension liability. Unrecognized prior service costs and actuarial gains/losses are components of Accumulated Other Comprehensive Income (AOCI) and do not directly affect the balance sheet funded status.
Why the other options are wrong
- A. This incorrectly includes the unrecognized prior service cost or actuarial gain in the funded status calculation.
- C. This incorrectly reverses the calculation, implying assets exceed PBO.
- D. This incorrectly includes the unrecognized prior service cost or actuarial gain in the funded status calculation.
Defined Benefit Pension Funded Status
The difference between the fair value of a defined benefit plan's assets and its projected benefit obligation (PBO), reported as a net asset or liability on the balance sheet.
- Calculated as Fair Value of Plan Assets - PBO.
- A positive result is a net pension asset; a negative result is a net pension liability.
- Unrecognized OCI items (prior service cost, actuarial gains/losses) do not affect the balance sheet funded status directly.
Memory trick: Funded Status: Assets Minus Obligation, What's Left Is It.