Question

Amortization of any net gain or loss is included in pension expense of a given year if at the

A. end of the year, the cumulative net gain or loss exceeds 10% of the greater of the actual projected benefit obligation or the fair value of the plan assets
B. beginning of the year, the cumulative net gain or loss exceeds 10% of the greater of the actual accumulated benefit obligation or the fair value of the plan assets
C. end of the year, the cumulative gain or loss exceeds 10% of the greater of the actual accumulated benefit obligation or the fair value of the plan assets
D. beginning of the year, the cumulative gain or loss exceeds 10% of the greater of the actual projected benefit obligation or the fair value of the plan assets

Answer 1

The correct answer to when pension gains or losses are amortized is at the beginning of the year when the cumulative net gain or loss exceeds 10% of the greater of the projected benefit obligation or the fair value of plan assets, which corresponds to option D.

Step-by-step explanation:

The question pertains to the amortization of gains or losses in pension funds, as it relates to pension expense in a given financial year. According to pension accounting standards, the corridor approach is used to determine when these gains or losses should be amortized. In this context, amortization occurs if, at the beginning of the year, the cumulative net gain or loss exceeds 10% of the greater of the projected benefit obligation (PBO) or the fair value of plan assets. Therefore, the correct option is D. This method acts as a mechanism to smooth out the impact of actuarial gains or losses over time and prevent significant volatility in pension expense reporting from one year to the next.