Question

Stereo Warehouse is a US retailer that offers employees a defined benefit pension plan as part of its compensation package. Stereo Warehouse prepares its financial statements in accordance with US GAAP. The following information is extracted from the company’s regulatory filings regarding the pension plan assumptions.

Assumptions used for Stereo Warehouse’s Defined Benefit Plan
	2016	2015	2014
Expected long-term rate of return on plan assets	6.06%	6.14%	6.79%
Discount rate	4.85%	4.94%	5.38%

Compared to the actual 2016 reported financial statements, if Stereo Warehouse had used the same expected long-term rate of return on plan assets assumption in 2016 as it used in 2014, its projected pension benefit obligations at the end of 2016 would most likely have been:

A. lower.

B. higher.

C. the same.

Answer 1

Answer is A. lower

In the given case rate of return is higher in 2014 vs 2016 ( 6.79% vs 6.06%)

The higher rate of return on plan assets would have reduced the pension expense for the year. Reduced pension expense will lead to lower Projected pension benefit obligation.Hence answer is projected pension benefit obligation would have been lower.