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Basic Question 9 of 24
Dividends from stock investments by a pension plan are reported by the employer as:
B. A reduction of the periodic pension expense.
C. A reduction of the projected benefit obligation (PBO).
A. Investment revenue on an accrual basis.
B. A reduction of the periodic pension expense.
C. A reduction of the projected benefit obligation (PBO).
User Contributed Comments 11
| User | Comment |
|---|---|
| jkc2007 | could anyone elaborate on the answer? |
| thekapila | Pension expense = service cost + interest cost + return on plan assets (gain/loss) So dividend recieved is gain which will be reduced from expense. |
| Nightsurfer | Bu pension expense uses "expected return" on assets not actual return. Should be no effect. |
| HenryQ | Only goes into fair value of plan assets (cash based). Anyone can confirm? Asset increase, but expense should not change as it is actual return. |
| hhard | as thekapila pointed out, net pension cost(expense) consists of five components: 1. service cost, 2. interest cost on the projected benefit obligation, 3. Actual return on plan assets, 4. Amortization of prior service cost (PSC), if any, and 5 Amortization of actuarial gains and losses and asset gains and losses, if any. |
| dblueroom | HenryQ, I personally agree, but I do not have the authority to confirm. However, I am certain that the EXPECTED return is included as a component of pension expense. This is an interesting question. If the dividends only (and definitely) affects fair value of plan assets, then it will bypass income statement and will only be reflected in funded status, which is recognized on B.S. |
| VenkatB | Dividends from stock investments - Probably they can be expected with some certainty. May be we need to assume expected and actual returns are same here (dividends from stock investments). |
| joywind | actual return is included in the expected return... because that is the expected return w/ complete certainty. |
| quanttrader | dividend income offsets pension expense, does not contribute to reduction in PBO |
| farhan92 | How i saw this divs provide the employer money to pay for their contribution so would reduce the amount the employer would have to pay from his/her own pocket (reduce expense) |
| davidt876 | doesn't this contradict the early question that actual return on pension assets does not increase pension expense? because what if the actual return was negative? |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
explain and calculate measures of a defined benefit pension obligation (i.e., present value of the defined benefit obligation and projected benefit obligation) and net pension liability (or asset);
describe the components of a company's defined benefit pension costs;
explain and calculate the effect of a defined benefit plan's assumptions on the defined benefit obligation and periodic pension cost;
CFA® 2025 Level II Curriculum, Volume 2, Module 11.