Question #23
Reading: Reading 9 Employee Compensation - Post-Employment and Share-Based
PDF File: Reading 9 Employee Compensation - Post-Employment and Share-Based.pdf
Page: 8
Status: Correct
Correct Answer: C
Question
Fly-By-Night Airlines is a U.S. company planning to change its pension plan so that it can reduce its costs. It is considering reducing its defined benefit percentage from 10% to 5% of ending salary, retroactive for 10 years. In addition, since the firm is anticipating substantially reduced salary increases in the future, it is planning to reduce its compensation growth rate assumption. From a pension accounting perspective, the change in the:
Answer Choices:
A. Benefit percentage is a past service cost that will be amortized into and thus increase pension expense over the remaining service lives of its employees
B. Benefit percentage is a change in actuarial assumption that will be recognized in full in current period pension expense
C. Compensation growth rate assumption is a change in actuarial assumption that will reduce the defined benefit obligation and future pension expense
Explanation
The change in the compensation growth rate assumption is a change in actuarial
assumption that will reduce the defined benefit obligation and future pension expense, as
the effect is amortized into pension expense over time. In this question, the change is a
reduction in both the defined benefit obligation and pension expense.
The change in the contribution percentage is not a change in actuarial assumption but a
plan amendment (which would be reflected as negative past service cost and either
amortized under US GAAP or expensed in full under IFRS).
Amortization of negative past service cost (applicable only under US GAAP) would
decrease, not increase, pension expense over the remaining service lives of its employees.