Penny Pincher Company has a defined benefit pension plan for its emploees. The f

Question

Penny Pincher Company has a defined benefit pension plan for its emploees. The following pension data avialable at year-end(in millions)

Accumulated benefit obligation $ 142

Projected benefit obligation $ 205

Fair Value of plan assets $ 175

a.Calculate the status of the plan(see SFAS No. 158 for a definition of funded status) Is the plan overfunded or underfunded?

b. If the projected benefit obligation provides the appropriate measure of the company`s obligation for pension benefits and the assets in the fund are viewed as satisfying all or part of that obligation, what is Penny Pincher`s liability, if any, for the pension plan at year end? Explain, citing the Conceptual Framework`s definition of liabilites in your explanation.

c. What amount will Penny Pincher have to reportin its balanca sheet? Is it an asset or a liability?

Explanation / Answer

Ans a The difference between projected benefit obligation and the fair value of plan assets at the end of the period, this gives rise to overfunded or underfunded.So it is underfunded by $205-$175= $30

Ans b His unsatisfied obligation is $30.As per SFAS no.6 this amount is consistent with the definition of liabilities mentioned in SFAS. As per SGAS 6 liabilities is the probable future sacrifice of the economic benefit which arises from the present obligation of a particular entity to provide services/transfer assets to other entities in the future as a result of past events.As per the definition obligations are contractual and accrues as and when the employees perform their services.The employees have earned the future benefit which will be paid to them at the time of retirement.Now the employee work and they earn future benefits which results is expected future cash outflows for the entity which results from prior events.From the total obligation the part which has already been paid(satisfied) by placing assets into the pension fund and also foregoing the return on these assets. The obligation which is remaining is the liability to the entity.

Ans c According to FASB ASC 175 the recognition of underfunded or overfunded as liability or asset in the company Balance Sheet. The change in funded asset is recognized in comprehensive income in the year in which the change occured. So Penny should report the funded status as Underfunded $30 in Balance Sheet.

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