Consider a manufacturing company, XYZ Corp, which has a defined benefit pension plan for its employees. The plan specifies that employees are entitled to receive 2% of their final average salary for each year of service upon retirement. As of the most recent reporting date, the following information was available: Pension Benefit Obligation (PBO): $10 million Plan Assets at Fair Value: $7 million Service Cost for the Year: $500,000 Annual Interest Cost: $400,000 Contributions Made to the Plan for the Year: $300,000 Pension Expense for the Year: $650,000 Given this information, which of the following statements regarding the defined benefit plan and its impact on XYZ Corp’s financial statements is NOT correct?

Exam

CFA Level 2

Section

Difficulty

Financial Reporting and Analysis

Defined Benefit Plans - Pension Liability Analysis

Very Hard Employee Compensation Defined Benefit Plans

Consider a manufacturing company, XYZ Corp, which has a defined benefit pension plan for its employees. The plan specifies that employees are entitled to receive 2% of their final average salary for each year of service upon retirement. As of the most recent reporting date, the following information was available:

Pension Benefit Obligation (PBO): $10 million
Plan Assets at Fair Value: $7 million
Service Cost for the Year: $500,000
Annual Interest Cost: $400,000
Contributions Made to the Plan for the Year: $300,000
Pension Expense for the Year: $650,000

Given this information, which of the following statements regarding the defined benefit plan and its impact on XYZ Corp’s financial statements is NOT correct?

The company will recognize an additional pension liability of $3 million on its balance sheet.

The funding status of the plan indicates a net pension liability of $3 million.

The total pension expense impacts the operating income reported on the income statement.

Hint

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