Deck 16: Pensions and Other Postretirement Benefits

Question 1

In a defined contribution plan, benefits are defined either as a specific dollar amount or by a general formula based on salary.

Answer 1

False

Question 2

Actuaries are often consulted to determine annual contribution levels for a defined contribution plan.

Answer 2

False

Question 3

SFAS No. 87 was the first accounting standard to argue that the cost of providing pension benefits should be spread over the remaining service life of employees.

Answer 3

False

Question 4

Benefits in a defined benefit plan may be based on either career average or final average salary.

Question 5

Vesting refers to a qualifying period of pension plan membership that must be met before contributions are made by the employer.

Question 6

Actuarial funding methods related to pensions are identical to pension expense recognition methods.

Question 7

Accounting for postretirement benefits is very different from pension accounting.

Question 8

ARB 36 reduced flexibility in how the cost relating to unfunded accumulated benefits was dealt with in the income statement.

Question 9

Benefits in a defined benefit plan may be paid either as a single lump sum amount at retirement or as a life annuity.

Question 10

SFAS No. 87 was the first pension accounting standard to segregate accumulated benefits into vested and unvested benefits.

Question 11

For all defined contribution plans, funding is shared by the employer and employee.

Question 12

SFAS No. 35 is considered a landmark standard because it set accounting and reporting standards for a new entity, the pension plan, as separate and distinct from the sponsoring company.

Question 13

FASB Interpretation 3 was issued in response to the passage of ERISA.

Question 14

ABP Opinion No. 8 was consistent with the revenue-expense approach.

Question 15

Accounting for defined contribution plans is more complex than accounting for defined benefit plans.

Question 16

The fact that service giving rise to pension benefits occurred in the past was the main concern of ARB 36.

Question 17

There is a more even distribution of contribution levels when the projected benefit method is used rather than the accumulated benefit method.

Question 18

Previous accounting standards have used a revenue-expense approach to pension accounting, which emphasizes the recognition and measurement of annual pension cost.

Question 19

In SFAS No. 87, the asset-liability orientation is evident in both expense measurement and the balance sheet recognition of unfunded pension benefits.

Question 20

Prior to the existence of an accounting standard that addressed pensions, pension expense was equated with cash contributions to pension funds.

Question 21

SFAS No. 112 requires that postemployment costs be handled on an actuarial basis.

Question 22

SFAS No. 87 achieved greater uniformity in measuring accrued pension expense by mandating use of one actuarial method, the accumulated benefit method.

Question 23

Legal services and day care benefits are not included in OPEBs.

Question 24

The disclosure requirements of SFAS No. 132 pertain to both pensions and OPEBs where applicable.

Question 25

SFAS No. 87 presumes an explicit contract in calculating accrued pension expense.

Question 26

SFAS No. 87 is no longer in effect, having been replaced by SFAS 132.

Question 27

Prior research studies have provided evidence that a firm's unfunded pension benefits are interpreted as if they are liabilities.

Question 28

The FASB took an enormous step in SFAS No. 106 by requiring the recognition and measurement of OPEB costs and obligations.

Question 29

The assumption that OPEBs are part of the total compensation package for covered employees clearly stamps them as being attributable to past transactions or events.

Question 30

In calculating the service cost portion of pension expense, future salaries need not be estimated.

Question 31

With an accumulated benefit approach, the discount rate includes a general inflation factor.

Question 32

Financial statement preparers strongly opposed OPEB recognition.

Question 33

Currently, pension funds can be diverted from older employees toward younger employees through cash balance plans.

Question 34

SFAS No. 106 requires a liability be recognized related to OPEB only if a legal obligation exists.

Question 35

Prior to SFAS No. 106, OPEB had been handled on a cash basis of accounting.

Question 36

The core of SFAS No. 106 is the need to predict future health care costs.

Question 37

A shift toward the asset-liability orientation is evident in pension reporting requirements, with both expense measurement and the requirement to recognize a minimum balance sheet liability for unfunded pension benefits.

Question 38

The main change brought about by SFAS No. 158 was to bring the overfunded or underfunded status of a defined benefit plan to the footnotes of the balance sheet.

Question 39

SFAS No. 112 applies to both inactive and active employees who have not yet retired.

Question 40

If OPEB levels are based on wages, they should reflect those in effect at the current time rather than an estimate of expected future wage levels.

Question 41

Which of the following was not an objective of ERISA?

A) To improve access to pension benefits for employees
B) To extend vesting periods
C) To override discretionary funding clauses in pension plans
D) To improve the security of pension benefits for employees

Question 42

Which of the following statements applies to an involuntary termination?

A) The sponsor has a legal liability under ERISA for all accrued benefits.
B) The sponsor has a legal liability under ERISA for all vested benefits but not for unvested benefits.
C) The sponsor has a legal liability under ERISA only for PBGC guaranteed benefits.
D) None of the above statements apply to an involuntary termination.

Question 43

What of the following is not a true statement regarding the Pension Benefit Guaranty Corporation (PBGC)?

A) The PBGC has a statutory lien against the sponsor for 100 percent of shortfalls in vested benefits.
B) The PBGC was created by ERISA as a national insurer of pension plans.
C) Vested benefits of participants are partially guaranteed by the PBGC if a plan is terminated.
D) The PBGC is empowered to collect premiums from plans to pay for guaranteed termination benefits.

Question 44

What was the first pension accounting standard?

A) FASB Interpretation 3
B) ARB 36
C) SFAS No. 87
D) ERISA

Question 45

Which one of the following statements does not apply to ERISA?

A) It was a landmark piece of social legislation.
B) It allowed the "rule of 45" be used as an alternative vesting formula.
C) It required unfunded accumulated benefits to be funded over a maximum of fifteen years.
D) It contained requirements related to investment diversification.

Question 46

Benefit improvements give rise to:

A) Prior service costs.
B) Past service costs.
C) Actuarial service costs.
D) Benefit improvement costs.

Question 47

What was the main argument of ARB 36?

A) ERISA did not create a pension liability except in the likelihood of plan termination.
B) The cost of providing pension benefits should be spread over the remaining service life of employees.
C) Pension expense should be computed using any one of five acceptable accumulated benefit methods, regardless of cash contributions.
D) The balance sheet should report unfunded vested benefits.

Question 48

Membership in defined benefit plans is declining relative to membership in defined contribution plans.

Question 49

Which one of the following would not be a party to a defined benefit plan?

A) The sponsoring employer
B) A pension fund
C) The employee
D) The actuary

Question 50

When a pension plan commences, credit is often granted to employees for past years of service, giving rise to what is called:

A) Unfunded past service cost.
B) Unfunded benefits.
C) Unfunded actuarial liability.
D) All of the above

Question 51

In applying actuarial funding methods, actuaries make assumptions about all but which of the following?

A) Future withdrawals from the plan
B) Acceptable levels of actuarial gains or losses
C) The effects of future salary levels on the value of expected retirement benefits
D) The rate of interest to be earned on pension fund investments

Question 52

Which of the following is not a characteristic of a defined contribution plan?

A) The exact value is unknown prior to retirement.
B) Mandatory contributions must be made to a pension fund.
C) Contribution rates are normally stated as a percentage of wages or salaries.
D) Actuaries are consulted to determine annual contribution levels.

Question 53

Which of the following statements applies to a voluntary termination?

A) The sponsor has a legal liability under ERISA for all accrued benefits.
B) The sponsor has a legal liability under ERISA for all vested benefits but not for unvested benefits.
C) The sponsor has a legal liability under ERISA only for PBGC guaranteed benefits.
D) None of the above statements apply to a voluntary termination.

Question 54

Which of the following is not a characteristic of a defined benefit plan?

A) The employee makes all contributions to the plan.
B) Benefits may be paid as a single lump sum amount at retirement date.
C) Benefits can be based on career average salary.
D) In all cases, the value of pension benefits is directly related to the employee's years of service.

Question 55

Vesting refers to:

A) A qualifying period of pension plan membership that must be met before contributions are made by the employer.
B) A qualifying period of pension plan membership that must be met before pension benefits legally exist.
C) A qualifying period of pension plan membership after which benefits are received.
D) A qualifying period of pension plan membership after which contributions may cease.

Question 56

Which of the following is not a currently allowed practice related to pensions?

A) The use of cash balance plans
B) Redistributing benefits away from older employees and shifting them to younger employees
C) The raiding of overfunded pension plans by acquiring corporations
D) Discretionary funding of defined benefit plans

Question 57

Which of the following is a true statement regarding actuarial funding?

A) Actuarial funding applies to both defined benefit and defined contribution plans.
B) Given the same set of plan conditions and actuarial assumptions, each different actuarial funding model derives the same funding pattern over time.
C) Given the same set of plan conditions and actuarial assumptions, each different actuarial funding model builds up a pension fund to the same future balance.
D) Actuarial funding is synonymous with terminal funding.

Question 58

Which of the following is not one of the three possible methods that could be used to account for unfunded accumulated benefits under ARB 36?

A) A prior period adjustment
B) A component of operating income
C) An extraordinary item of income
D) Allocation over current and future periods

Question 59

Which of the following statements does not apply to a multiemployer pension plan.

A) It is subject to collective bargaining agreements.
B) Two are more employers are plan sponsors.
C) There are no regulatory differences between these plans and single-employer plans.
D) One employer can contribute no more than 50 percent of initial contributions.

Question 60

What was the main argument of FASB Interpretation 3?

A) ERISA did not create a pension liability except in the likelihood of plan termination.
B) The cost of providing pension benefits should be spread over the remaining service life of employees.
C) Pension expense should be computed using any one of five acceptable accumulated benefit methods, regardless of cash contributions.
D) The balance sheet should report unfunded vested benefits.

Question 61

Identify the four major provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

Question 62

Respond to the following:
a.
What are the two major accounting issues related to a defined benefit plan?
b.
Why do pension expense and pension liability recognition problems not arise with defined contribution plans?

Question 63

Which of the following brought accrual accounting to post retirement benefits other than pensions (OPEB)?

A) SFAS No. 87
B) SFAS No. 106
C) SFAS No. 132
D) ERISA

Question 64

What were the major effects of SFAS No. 106 on reporting for post-retirement benefits other than pensions?

Question 65

What was the main argument of ARB 47?

A) ERISA did not create a pension liability except in the likelihood of plan termination.
B) The cost of providing pension benefits should be spread over the remaining service life of employees.
C) Pension expense should be computed using any one of five acceptable accumulated benefit methods, regardless of cash contributions.
D) The balance sheet should report unfunded vested benefits.

Question 66

Which of the following is not true related to OPEBs?

A) Explicit health care trending makes OPEB accounting somewhat similar to the projected benefit obligation approach to pensions.
B) Housing subsidies may be included in OPEBs.
C) SFAS No. 106 requires recognition of OPEB costs and obligations.
D) Prior to SFAS No.106, OPEBs were handled on an accrual basis of accounting.

Question 67

What are the possible economic consequences of OPEB recognition?

Question 68

Explain in general terms how defined benefit pension plans are funded.

Question 69

Which of the following is not a true statement regarding SFAS No. 35?

A) It established accounting standards for the measurement and reporting of plan assets and plan obligation.
B) It was a landmark standard because it defined the pension plan as a new entity, separate and distinct from the sponsoring company.
C) It defined plan obligations as accumulated benefits, both vested and unvested.
D) It required information about the sponsor's obligations to be reported as a note in the sponsor's financial statements.

Question 70

How is pension expense calculated under SFAS No. 87, and when is pension liability recognized?

Question 71

Which of the following is not true regarding SFAS 158?

A) It brought the overfunded and underfunded status of defined benefit plan to the footnotes of the balance sheet.
B) It required certain costs be charged to other comprehensive income.
C) It requires a credit to other pension income for amortized prior service costs.
D) An overfunded or underfunded amount for OPEBs must be shown as an asset or liability on the balance sheet.

Question 72

Describe the two broad types of pension plans and identify how they differ from one another.

Question 73

What have research studies indicated about whether a firm's unfunded pension benefits are interpreted as liabilities?

Question 74

What was the main argument of APB Opinion 8?

A) ERISA did not create a pension liability except in the likelihood of plan termination.
B) The cost of providing pension benefits should be spread over the remaining service life of employees.
C) Pension expense should be computed using any one of five acceptable accumulated benefit methods, regardless of cash contributions.
D) The balance sheet should report unfunded vested benefits.

Question 75

Which of the following is a true statement regarding the pension liability and pension expense recognition requirements of SFAS No. 87?

A) SFAS No. 87 presumes an explicit contract in calculating accrued pension expense.
B) SFAS No. 87 uses an explicit contract view in requiring the recognition of a minimum pension liability.
C) SFAS No. 87 may overestimate the pension liability by including future salary projections in the liability computation.
D) SFAS No. 87 does not include future salary projections in the pension expense calculation.

Question 76

Which of the following is not a true statement regarding SFAS No. 87?

A) It requires the recognition of a minimum pension liability when accumulated benefit obligations exceed the fair value of plan assets.
B) It has achieved greater uniformity in measuring accrued pension expense.
C) It mandates the use of the accumulated benefit method.
D) It uses service cost rather than normal cost.

Question 77

Which of the following accounting standards began a shift toward an asset-liability orientation in pension reporting?

A) APB Opinion 8
B) SFAS No. 87
C) SFAS No. 106
D) SFAS No. 132