Harms Inc. reported in its 2006 annual report the following information:
$$\begin{array}{l}
\text { Plan Status: December 31, } 2006\
\begin{array} { | l | r | }
\hline \text { Accumulated Benefit Obligation (ABO) } & \$ 90 \text { Million } \
\hline \text { Projected Benefit Obligation (PBO) } & \$ 95 \text { Million } \
\hline \text { Plan Assets (at fair value) } & \$ 80 \text { Million } \
\hline \text { Unrecognized transition asset } & \$ 11 \text { Million } \
\hline \text { Unrecognized actuarial losses } & \$ 1 \text { Million } \
\hline & \
\hline \text { Assumptions: } & \
\hline \text { discount rate } & 8 \% \
\hline \text { return on assets } & 9 \% \
\hline \text { compensation growth } &5\% \
\hline
\end{array}
\end{array}$$
-Funded status at the end of 2006 was:
A) $15M.
B) $12M.
C) $10M.
D) $0M.

Question

Harms Inc. reported in its 2006 annual report the following information:
 $$\begin{array}{l}
\text { Plan Status: December 31, } 2006\
\begin{array} { | l | r | } 
\hline \text { Accumulated Benefit Obligation (ABO) } & \$ 90 \text { Million } \
\hline \text { Projected Benefit Obligation (PBO) } & \$ 95 \text { Million } \
\hline \text { Plan Assets (at fair value) } & \$ 80 \text { Million } \
\hline \text { Unrecognized transition asset } & \$ 11 \text { Million } \
\hline \text { Unrecognized actuarial losses } & \$ 1 \text { Million } \
\hline & \
\hline \text { Assumptions: } & \
\hline \text { discount rate } & 8 \% \
\hline \text { return on assets } & 9 \% \
\hline \text { compensation growth } &5\% \
\hline
\end{array}
\end{array}$$
-Funded status at the end of 2006 was:
A) $15M.
B) $12M.
C) $10M.
D) $0M.

Quizplus · Accepted Answer

The funded status is the difference between the plan assets and the PBO. In this case, the plan assets are $80 million and the PBO is $95 million, so the funded status is $80 million - $95 million = -$15 million. However, the unrecognized transition asset of $11 million reduces the funded status to -$15 million + $11 million = -$4 million. The unrecognized actuarial losses of $1 million further reduce the funded status to -$4 million - $1 million = -$5 million. Therefore, the funded status at the end of 2006 is -$5 million, or $5 million in deficit.

Harms Inc Reported in Its 2006 Annual Report the Following Information