1. What situation could lead to a bigger difference in the expected return on plan assets vs. the actual return on plan assets - in any given year? a. Young workforce, employees far from retirement b. Assets invested in a blind trust c. IFRS-reporting company

2. Company X has $100 million in plan assets set aside for a projected benefit obligation of $1 million. Can Company X automatically show a $99 million pension surplus on the balance sheet? a. Yes, but only if the company can actually recover that surplus. Otherwise a ceiling calculation should be used on the balance sheet. b. No, the company cannot show a funded status in excess of the PBO. c. Yes, the surplus = [ plan assets plan liabilities ], assuming the resulting number is positive, as is the case here.

3. GE gives all employees a certain level of compensation after they retire, called their Personal Pension Promise (PPP). The PPP is regulated by the Federal Pension Guaranty Corp. In addition, GE promises to pay for personal dental care (PDC) for their retired employees. PPP and PDC are both contractual obligations of GE - equal in stature under the eyes of the law. GE has significant plan assets built up for the PPP and none whatsoever for the PDC. Why? a. Retirees like to control their own dental expenditures and dental care is a small expense for retirees. b. Government pension regulators will make GE pay more pension insurance penalties on an underfunded pension plan than on a small, underfunded dental plan. c. Not all employees participate in PDC so separate plan assets are not necessary.

4. Canon has one type of employee the Japanese salaryman. They all get paid the same way. Could a freshly hired Japanese salaryman figure out how much he will make in the future by looking at the calculations for the PBO? a. No b. yes, he should look at the calculations for current service cost for estimates on compensation increases that are modeled into the PBO. c. yes, he should look at the calculations for actuarial gains and losses.

5. What mechanism does U.S. GAAP employ such that the effects of a bull market in risky assets doesnt distort the P&L for a non-financial company that holds mostly risky assets in their defined benefit plan? a. U.S. GAAP allows the difference between the actual return and the expected return of plan assets to completely bypass the P&L statement. b. U.S. GAAP allows companies to spread out the gains or losses over time using the corridor approach instead of taking them in 1 accounting period. c. U.S. GAAP allows companies to exclude pension related amortization if the funded status is in surplus.

6. A U.S. GAAP company with a defined contribution benefit plan changes the mandatory retirement age. What costs will be impacted? a. Prior period service costs b. Actuarial gains and losses c. Nothing

7. Wearing a seatbelt increases your chance of surviving a serious motor vehicle accident by 50%. Each year, 1 out of 940 people will be in a serious motor vehicle accident. JCPenny has more pensioners (defined benefit) than current employees. JCPenny implements a seatbelt awareness campaign for employees - past and present. The campaign is 100% successful. What will this do for the owners of JCPenny stock? a. Pensioners will live longer than expected. It will improve solvency for JCPenny allowing them to increase dividends. b. Pensioners will live longer than expected. It will worsen solvency for JCPenny preventing them from increasing share buybacks. c. Pensioners will live longer and theyll be happy their company cares enough to engage in awareness campaigns - encouraging current employees to work harder.

8. If a company contributes more to plan assets than the total periodic pension cost, what is the company really doing? How could the analyst adjust the CFO? a. The company is effectively repaying debt or prepaying. The associated cashflow was not an operating cash outflow, but a financing outflow, thus adjusted CFO will be higher than reported. b. The company is effectively borrowing from employees, and there are no adjustments to be made to CFO. c. The company is improving the solvency of the company because it is improving the funded status of the balance sheet.

9. Which of the following is NOT considered an advantage of share-based compensation? a. Lower tax for employee b. Alignment of interest with owners and employees c. Low cash cost for company

10. Why might owners object to stock grants as part of a compensation package? a. Employees will avoid risk. b. Employees will sell the stock and push the share price down. c. Employees will have a vote and can influence BOD.

11. What would overstate earnings? a. Over-estimate the life of stock options b. Under-estimate the life of stock options c. Over-estimate the volatility of the companys stock.

12. Here is defined benefit pension data for 3 different companies. More information about the pensions would be great, but this is all we have. Which company will have the least ugly balance sheet entry? Despite this advantageous factor of being the least ugly, why might it actually be the most problematic? Company XYZ - Plan Assets $325, PBO $950, Average age of workforce 45 Company ABC - Plan Assets $105, PBO $750, Average age of workforce 25 Company QQF - Plan Assets $650, PBO $705, Average age of workforce 65 a. least ugly: XYZ most problematic: QQF b. least ugly: QQF most problematic: ABC c. least ugly: QQF, most problematic: QQF

13. What could managers do to immediately improve the funded status of their defined benefit pension plan? a. Increase the plan assets exposure to emerging market equities such that the expected return of the portfolio increases from 7.4% to 8.1%. b. Contribute cash to plan trust and push back the retirement age. c. Accept gay marriage and extend pension benefits to their domestic partners.

14. Why is analyzing a defined contribution plan under IFRS easier than analyzing a defined benefit plan under U.S. GAAP? a. U.S. GAAP uses a corridor approach to allocating components of the total periodic pension cost to the income statement whereas IFRS simply shows these components as OCI. b. Because employees take on the longevity and investment risk. c. The expected return on plan assets under IFRS is usually the same as the discount rate and doesnt lead to as many actuarial adjustments like U.S. GAAP.

15. When analyzing the funded status of a company with a defined benefit pension plan, analysts would be most concerned with: a. Liquidity b. Solvency c. Profitability (historical return on plan assets in this case)

16. After adjusting the balance sheet of a company with a defined contribution pension plan the ROA of the company is likely to change in what way? A. higher ROA B. same ROA C. lower ROA

17. The plan manager used the historical return for investing in long-dated government bonds (7%) as the expected return for fixed-income component of plan assets in his U.S. GAAPreporting defined benefit pension plan. The current yield to maturity for 30-year government bonds is only 3.2%, and corporate bonds arent much better. You decide to adjust this. What is the most likely effect on plan assets, true expected rate of return and your overall opinion of situation related to pension expense: Plan assets: Expected rate: likely opinion: a. no effect lower current net income overstated b. increased higher current net income understated c. decreased lower current net income fairly stated

18. Defined benefit pensions are an exception to traditional accounting rules. Accountants are allowed to offset the assets and liabilities of a pension plan and disclose only the net amount on the balance sheet. You discover a company that reports both a defined benefit pension surplus (Asset) AND a defined benefit shortfall (Liability). Why didnt the 2 offset each other? a. Two separate pension plans. One is over-funded, the other is under-funded. b. They are being conservative in their reporting and following the accounting principle of conservatism. c. Theyve made a typical analyst adjustment for you in order to improve reporting quality.

19. The following costs are broken out in the footnotes to partially explain why the funded status changes from one accounting period to the next. Which cost is described incorrectly according to U.S. GAAP but technically not incorrect for IFRS GAAP (even though the description is ~wrong)? A. Current Service Cost present value of benefits earned during current period including an estimate of future compensation growth if benefits are based on future compensation levels B. Past Service Costs retroactive benefits awarded or taken away during the current period. C. Interest Cost the increase in the liability using the expected return as the discount rate.

20. You are examining a company with a defined benefit pension plan. You know they have one because you see a large pension surplus as an asset on their balance sheet. When you examine their income statement you see no pension expense line item. Why? a. Because they are over-funded. There is likely an immaterial negative expense that does not need to be reported. b. Because the pension expense is a component of COGS and/or SG&A expense. c. Because the pension expense is being capitalized as R&D.