CFA® Level 2 Progress Test Time: 6 x 18 minutes = 1 hour and 48 minutes
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IMPORTANT INSTRUCTIONS TO CANDIDATES 1. Use the answer sheet to record your answers 2. Only complete the answer sheet using an HB or 2H pencil 3. You may make marks on the question booklet, but no marks will be awarded 4. Use only the Texas Instruments BAII Plus or the Hewlett Packard 12C calculator 5. You must stop writing immediately when instructed to do so at the conclusion of the examination 6. At the back of the paper there is space for rough working DO NOT OPEN THIS EXAMINATION BOOK UNTIL INSTRUCTED TO DO SO BY THE PROCTOR
Question
Topic
Recommended time allocation
Question 1 Question 2 Question 3 Question 4 Question 5 Question 6
Fixed Income Equity valuation Equity valuation Quantitative techniques Financial statement analysis Financial statement analysis
18 minutes 18 minutes 18 minutes 18 minutes 18 minutes 18 minutes
Please mark and record your score.
QUESTION 1 HAS SIX PARTS FOR A TOTAL OF 18 MINUTES FIXED INCOME Jones is planning to buy a house using a mortgage loan. He is looking at a property with a gross value of $110,000. The down payment required is 1/11 of the value of the property and Jones plans to put up the down payment himself. He is looking to borrow the difference between the value of the property and the down payment from either of the following two competing financial institutions that offer different terms: Lake View Housing Finance Company: Offers a level paying, fully amortizing 25year, monthly paying mortgage loan with an interest rate of 8%. Rick’s Housing Finance Company: Offers a monthly level paying, fully amortizing 30year mortgage loan with an interest rate of 8.53%. Requirements: 1.1. Compute the equal monthly instalment for Rick’s Housing mortgage. Rick’s Housing $733.76 $9,331 $771.04
A B C
1.2. For the Lake View Housing Finance Company mortgage, what are the correct values for I and II in the partially completed repayments schedule below? Payment Number
Initial Principal
1
A B C
100,000.00 I $771.82 $719.58 $771.82
II $105.15 $119.58 $119.58
Monthly Payment I
Interest Component
Reduction of Principal II
Outstanding Principal
1.3. For the Lake View Housing Finance Company mortgage, assume we have moved on 2 years (24 months) and are now analysing month 25. What are the correct values for I,II and III in the partially completed repayments schedule below? In calculating, please assume a monthly prepayment rate consistent with PSA 400 and please show your answers to two decimal places. Payment Number 25
A B C
Pool factor 0.7849248
I 623.59 622.80 771.82
II 100.31 99.52 248.54
Monthly Payment
Interest Component
Scheduled Principal
Prepayment Principal
I
523.28
II
III
III 1447.34 1444.27 1396.41
1.4. Which of the following statements is/are most likely to be true? I II III IV
A B C
A PAC bond with prepayment rates which remain inside its effective collar and do not change will have a constant average life, and zero contraction or extension A sequential CMO, class 1 bond will have a high average life (relative to the other tranches), low contraction risk and high extension risk If prepayment speeds of a PAC bond are higher than the upper limit of the collar, the bond’s average life will increase, contraction risk will be zero and extension risk will rise If prepayment speeds are at the high end of a PAC collar the companion bond will have a falling average life, increasing contraction risk and declining extension risk Statements III and IV Statements I and IV Statements II and III
1.5. Which of the following is the best explanation of the difference between a mortgage pass through security and a mortgage loan? A
B
C
Mortgages are loans that are collateralized by real estate property The lenders or mortgage owners pool together the mortgages to form a pool. The pool is then ‘sold’ to investors through issue of shares or participating certificates, which are the mortgage pass through certificates A mortgage pass through therefore represents a claim against a pool of mortgages The collateral in case of mortgages is a real estate asset, while with mortgage pass through certificates the collateral is an individual mortgage Mortgages are loans that are collateralized by fixed assets. The lenders or mortgage owners pool together the mortgages to form a pool. The pool is then ‘sold’ to investors through issue of shares or participating certificates, which are the mortgage pass through certificates A mortgage pass through therefore represents a claim against an individual mortgage So the collateral in case of mortgages is a real estate asset, while with mortgage pass through certificates the collateral is the individual mortgage Mortgages are loans that are collateralized by real estate property The lenders or mortgage owners pool together the mortgages to form a pool. The pool is then ‘sold’ to investors through issue of shares or participating certificates, which are the mortgage pass through certificates A mortgage pass through therefore represents a claim against a pool of mortgages So the collateral in case of mortgages is a real estate asset, while with mortgage pass through certificates the collateral is the pool of mortgages
1.6. Compute the Single Monthly Mortality Rate and the prepayment amount from the following information. You can assume the MBS was issued 40 months ago.
PSA Remaining Mortgage Balance Scheduled current principal Payment
A B C
SMM Rate 0.692% 0.514% 0.874%
100 $300 Million $5 Million
Prepayment Amount $2,042,693 $1,517,189 $2,622,000
QUESTION 2 HAS SIX PARTS FOR A TOTAL OF 18 MINUTES EQUITY Megan, an investment analyst with a large asset management company, is analyzing the latest brokerage report on a large beverage company, Koka Kola International. Koka Kola International is a Chicago; USA based multinational company, which has operations around the world with over 40% of sales from international markets. The report includes a strong ‘buy’ recommendation on the stock with a target price of $55. Megan is however sceptical and wants to arrive at an independent valuation before recommending the stock to her clients. To arrive at the valuation, Megan collects the following information: 1. Latest financial accounts of the beverage company (see financial reports below) 2. Supplementary information to carry out the valuation as follows: Beta of Company .95 .90
Beta of Beverage Industry .85 .80
Index against which beta computed S&P 500 FTSE 100
Yield on a 3 Month T-Bill 6.5%
Historical yield of 10 year Treasury Bond 9%
Risk Premium of Market 12.50% 9.50%
Index against which computed S&P 500 FTSE 100
Note: The shares of Koka Kola International are primarily traded in the USA.
KOKA KOLA Consolidated balance sheets December 31, (In millions except per share data) ASSETS CURRENT Cash and cash equivalents Marketable securities Trade accounts receivable, less allowances of $59 in X001 and $62 in X000 Inventories Prepaid expenses and other assets TOTAL CURRENT ASSETS INVESTMENTS AND OTHER ASSETS Equity method investments Koka Kola Enterprises Inc. Koka Kola Amatil Limited Koka Kola HBC S.A. Other, principally bottling companies Cost method investments, principally bottling companies Other assets PROPERTY, PLANT AND EQUIPMENT Land Buildings and improvements Machinery and equipment Containers Less allowances for depreciation TRADEMARKS AND OTHER INTANGIBLE ASSETS
X002
X001
1,866 68 1,934 1,882
1,819 73 1,892 1,757
1,055 2,300 7,171
1,066 1,905 6,620
788 432 791 3,117 294 2,792 8,214
707 617 758 3,164 519 2,364 8,129
217 1,812 4,881 195 7,105 2,652 4,453 2,579 22,417
225 1,642 4,547 200 6,614 2,446 4,168 1,917 20,834
December 31, (In millions except per share data) LIABILITIES AND SHARE-OWNERS’ EQUITY CURRENT Accounts payable and accrued expenses Loans and notes payable Current maturities of long-term debt Accrued income taxes TOTAL CURRENT LIABILITIES
X002
X001
3,679 3,743 156 851 8,429
3,905 4,795 21 600 9,321
LONG-TERM DEBT
1,219
835
OTHER LIABILITIES
961
1,004
DEFERRED INCOME TAXES SHARE-OWNERS’ EQUITY Common stock, $.25 par value Authorized: 5,600,000,000 shares Issued: 3,491,465,016 shares in X002; 3,481,882,834 shares in X001 Capital surplus Reinvested earnings Accumulated other comprehensive income and unearned compensation on restricted stock Less treasury stock, at cost (1,005,237,693 shares in X002; 997,121,427 shares in X001)
X002 442
X001 358
873 870 3,520 3,196 23,443 21,265 -2,788 -2,722 25,048 22,609 13,682 13,293 11,366 9,316 22,417 20,834
Consolidated statements of income Year Ended December 31, (In millions except per share data) Net operating revenues Cost of goods sold GROSS PROFIT Selling, administrative and general expenses Other operating charges OPERATING INCOME Interest income Interest expense Equity income (loss) Other income-net Gains on issuances of stock by equity investees INCOME BEFORE INCOME TAXES AND ACCOUNTING CHANGE Koka Kola Enterprises Inc. INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE Cumulative effect of accounting change, net of income taxes NET INCOME BASIC NET INCOME PER SHARE Before accounting change Cumulative effect of accounting change DILUTED NET INCOME PER SHARE Before accounting change Cumulative effect of accounting change AVERAGE SHARES OUTSTANDING Dilutive effect of stock options AVERAGE SHARES OUTSTANDING ASSUMING DILUTION
X002
X001
20,092 19,889 6,044 6,204 14,048 13,685 8,696 8,551 — 1,443 5,352 3,691 325 345 -289 -447 152 -289 39 99 91 — 5,670 3,399 1,691 1,222 3,979 2,177 -10 — 3,969 1.6 — 1.6 1.6 — 1.6 2,487 — 2,487
2,177 0.88 — 0.88 0.88 — 0.88 2,477 10 2,487
Consolidated statements of cash flows Year Ended December 31, (In millions) OPERATING ACTIVITIES Net income Depreciation and amortization Net change in operating assets and liabilities (working capital) Net cash provided by operating activities
X002
X001
3,969 2,177 803 773 -662 635 4,110 3,585
INVESTING ACTIVITIES Acquisitions and investments, principally trademarks and bottling companies Purchases of property, plant and equipment Net cash used in investing activities
-537 -768 -1,188 -1,165
FINANCING ACTIVITIES Issuances of debt Payments of debt Issuances of stock Purchases of stock for treasury Dividends Net cash used in financing activities
3,011 -3,937 164 -277 -1,791 -2,830
3,671 -4,256 331 -133 -1,685 -2,072
-45
-140
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS Net increase (decrease) during the year Balance at beginning of year Balance at end of year
-651
-397
47 208 1,819 1,611 1,866 1,819
Requirements: 2.1. What are the net profit margin, asset turnover and equity multiplier respectively for X002? (Use end of period data for balance sheet numbers)
A B C
Net profit margin
Asset turnover
19.75% 19.75% 18.65%
0.785 0.896 0.896
Equity multiplier 1.874 1.972 2.675
2.2. What is the ROE for X002? (Use end of period data for balance sheet numbers) A B C
16.5% 32.8% 34.9%
The following information relates to the next four questions: After a detailed analysis of the company, Megan finds that the company has an erratic dividend payment history. Also, she finds that the high growth rates that the company is experiencing are not reflective of the industry. She feels that the company is likely to see a decline in growth rate of earnings that will be reflected in free cash flows to equity of the firm. Further, she believes that the growth rate will stabilize in X006 at 8%, which is the last 10-year industry average growth rate. Working capital and borrowing will change in line with these growth rates. In a related development, during a recent investor meeting that was attended by Megan, the company indicated that the high capital expenditure made in the last few years was unlikely in the future as Koka Kola was going into an consolidation phase from an expansionary phase. Based on this statement and detailed analysis, Megan believes that X003 onwards capital expenditure will stabilize at $1,000 million. In line with the lower capital expenditure, the depreciation expense will stabilize at $900 million. To assist her in valuation, Megan develops a template shown below. NOTE 1: The required rate of return has been taken at 10.5% and the discount factors are supplied in the template itself. NOTE 2: The template instructs you as to where you should extract the relevant information from: I/S is income statement, C/F is cash flow statement
Free Cash Flow Model
Growth Rate Net Income
Actual X002 19.16%
Forecast X003 20%
Forecast X004 20%
Forecast X005 20%
Net Income (I/S) Depreciation (C/F) Capital Expenditure (C/F) Add/Less: Working Capital (C/F) Net Borrowings (C/F)
7407.11 803
900
900
900
900
1000
1000
1000
1000
-662 -926
FCF Equity 1996.00 No of Shares 2,487 FCF Equity / No. of Shares Required Return (10.50%) (Note1) Discounted FCF Equity
Forecast X006 8%
2,487
2,487
2,487
2,487
0.9050
0.8190
0.7412
0.6707
Requirements: 2.3. Which of the following is closest to the Free Cash Flow to Equity forecast for X004? A
3,330
B
3,100
C
3,750
2.4. Which of the following is closest to the working capital adjustment in X003? A
600
B
700
C
800
2.5. Which of the following is closest to the calculated share price? In answering this you can assume the sum of the present values of the FCFE for the years X003 through to X005 is 3.30 A
$40
B
$45
C
$55
2.6. Megan is concerned that her Free Cash Flow to equity model may not be appropriate. In which of the following combinations of circumstances is FCFE the best model to use (versus FCFF or a dividend valuation model)? I
The company has an unstable dividend policy
II
Capital structure has fluctuated over time
III
FCFE can be forecasted for a reasonable period and is positive
IV
Attempting to value a minority interest
A
I and III
B
II and IV
C
I, II and III
QUESTION 3 HAS 6 PARTS FOR A TOTAL OF 18 MINUTES EQUITY Terry Choker CFA is analysing the valuation of Chelsea Blues, a high-end interior design company with offices in London, Paris and Moscow. The company is relatively young and currently does not pay a dividend, nor does Choker believe they will in the foreseeable future. Their primary market is continental Europe and consequently they report in €. The company has 20m ordinary shares in issue. Choker has made the following notes: Sales will be €5.5m next year and are expected to rise by 30%pa for next four years thereafter Net profit margin is expected to remain constant at 35% Capex is expected to be 40% of sales Depreciation is expected to be 10% of sales The investment in working capital is expected to be 6% of sales The target debt to total assets ratio is 20%. The tax rate is 15% and the investors’ required return is 15% At the end of the forecast horizon Choker estimates that Chelsea Blues will be trading at a trailing P/E of 20. There are templates at the end of the questions that might be of assistance. Requirements: 3.1
Calculate the Free Cash for Equity for year 3
A B C
0.58 0.38 0.44
3.2
Calculate the value of the equity on a per share basis.
A B C
56.6 2.83 2.7
3.3 Calculate the FCFE for year 2 assuming a debt to equity ratio of 0.667. Assume everything else is unchanged. A B C
0.96 0.44 1.25
3.4
Assuming a FCFF figure for year 1 is €0.5m, for the items below calculate how a €200,000 increase in the item would impact on FCFF. Assume where relevant a tax rate of 20%
1.
Depreciation
2. 3.
Accounts receivables Interest expense
A B C
+40,000; -200,000; No impact +40,000; -200,000; -80,000 +200,000; -200,000; No impact
3.5
Which of the following is an advantage to using Residual Income valuation approach rather than FCF to value a share?
A B C
Useful when looking from a controlling perspective Useful when dividends are variable Useful if the company has very large capital expenditure.
3.6
When adjusting net income for non-cash items which of the following would not be a subtraction from net income when calculating FCFF?
A B
Gains from disposals of assets The tax benefit from offering stock options to employees that is not expected to be an ongoing event. Amortization of a bond premium.
C
The templates below might assist you in your calculations
Questions 3.1 and 3.2 Workings
€m
Yr1
Yr2
SALES
5.50
7.15
Yr3
NET INCOME 3.72
DEPRECIATION
0.72
WORKING CAPITAL INVESTMENT
FCFE PV OF FCFE (at 15%) TERMINAL VALUE (P/E = 20) PV OF TERMINAL VALUE VALUE OF FIRM’S EQUITY
Yr5
4.23
CAPEX
NEW DEBT
Yr4
0.56 0.4
1.13
Question 3.3 workings €m
Yr1
SALES
5.50
NET INCOME CAPEX DEPRECIATION WORKING CAPITAL INVESTMENT NEW DEBT FCFE
Yr2
QUESTION 4 HAS 6 PARTS FOR A TOTAL OF 18 MINUTES QUANTITATIVE METHODS Jonathan Board is a research analyst within the retail section at Jasons Investment House. He is evaluating the performance of Shrew & company, a large discount retail chain. He divides the company performance by regions and picks up one of the regions for detailed analysis. Here he finds that some stores seem to perform much better than others. Jonathan feels that three factors are related to sales: the number of competitors in the region, the population in the surrounding areas, and the amount spent on advertising. He gathers the following information for each store: Y = total sales last year ($ thousands) A = number of competitors in the region B = population around the store vicinity (in millions) C = advertising expense ($ thousands) Based upon the collected data, Jonathan uses a statistical package to generate the following result: Y = 14 – 1A + 30B + 0.20C Analysis of Variance (ANOVA) Table Source DF SS MS Regression 2287 762.5 Error 2200 Total 29 4487
Standard Predictor Coefficient Error Constant 14.00 7.00 A -1.00 0.70 B 30.00 5.20 C 0.20 0.08
t-ratio 2.00
Based upon the above information answer the following questions: The data for two stores is as follows:
Number of competitors Population Advertising
Store 1 4 0.4 (i.e. 400,000) 30 (US $ 30,000)
Store 2 0 0.1 (i.e. 100,000) 0
Requirements: 4.1
A B C
What is the Coefficient of Determination and the Standard Error of the Estimate (SEE)? Coefficient of Determination 0.51 0.51 0.49
SEE 9.2 46.9 27.6
4.2
A B C
4.3
Jonathan wants to find out if the independent variables as a whole have an explanatory power in relation to sales. Determine the appropriate test statistic and the correct interpretation. Assume a 5% level of significance. Please assume that using a 5% F table the critical stat is 7.98, and using a 2.5% table the critical stat is 9.68 Interpretation Do not reject null Do not reject null Reject the null
Value of test statistic 1.38 9.01 9.01
Jonathan wants to determine if he can eliminate any of the independent variables from his equation by a t test. Which of the statements below is closest to the correct conclusions Jonathan should reach?
(You can assume a critical t stat of 2) A B C
4.4
A B C
All of the gradient coefficients are significant Advertising coefficient is 0.2. Given the closeness to zero it is likely that this coefficient is not significant The coefficient for variable A is likely to not be significant
Jonathan uses out of sample data for two years to determine if his model is robust or not. Based upon the results he is concerned with the fact that the error terms (i.e. difference between the predicted sales values and the actual sales value) seem to be correlated. Identify the problem that is caused by correlation between error terms and the consequences of such a problem. Problem Multicollinearity Serial Correlation Serial Correlation
Consequences Incorrect standard errors Incorrect standard errors High R2 and low t statistics
4.5
A B C
Which of the following tests is appropriate to assist Jonathan in deciding whether there is conditional heteroskedasticity and multicollinearity present in his test? Conditional heteroskedasticity Durbin Watson statistic Breusch-Pagen test Breusch-Pagen test
Multicollinearity Breusch-Pagen test High R^2 with low t statistics Durbin Watson statistic
4.6. Jonathan is considering running a new regression, this time regressing sales against previous sales figures using a one lag period. He asks some of his colleagues for advice in forming this new model. Below are some of their replies. Which one is most likely to be true? A
B
C
Using an AR(1) model is likely to be covariance stationary unless you have a unit root problem. For the model to work you need the lag coefficient to be statistically significantly less than one. You can test for this using the Dickey Fuller test Using an AR(1) model is likely to be covariance stationary unless you have a unit root problem. For the model to work you need the lag coefficient to be statistically significantly different from one. You can test for this using the EngelGranger test When using an AR model you would expect the t stats for the autocorrelations to be significant and then to suddenly drop – this is how you know how many lags you need in your model.
QUESTION 5 HAS 6 PARTS FOR A TOTAL OF 18 MINUTES FINANCIAL STATEMENT ANALYSIS On 1st January Oak Inc acquired 80% of Elm Inc. The consideration was $440,000 and was funded $128,000 in cash and the balance by the issuance of new Oak shares. These shares had a market value of $5.20 when issued to fund the acquisition but have since fallen in value and 1 year later trade at $4.80 per share. Unless otherwise told, please use US GAAP. Details of the two companies’ balance sheets at 1st January are shown below.
Oak Inc
Elm Inc
$ (000’s)
$ (000’s)
Cash Receivables Inventory Total Current assets Land Plant and Equipment (net) Total assets
400 260 220 880 1250 850 2980
220 180 110 510 150 380 1040
Current Liabilities Non Current Liabilities Total Liabilities Common Stock Additional Paid in Capital Retained earnings Total Liabilities and Equity
300 780 1080 800 200 900 2980
240 500 740 60 240 1040
Points to note: 1) No adjustments have for the acquisition. 2) The fair value of Elm’s land, on the open market is $180,000. Neither Elm nor Oak currently depreciate land as they view it as an asset with a perpetual value. 3) Elm’s non current liabilities are overstated by $25,000. 4) Elm’s depreciable plant and equipment has a fair value that exceeds its book value by $40,000. This plant has a remaining useful life of ten years and will be depreciated on a straight line basis. 5) Oak will treat any excess consideration, after taking the above points into account, as goodwill arising on acquisition. 6) Both Oak’s and Elm’s shares have a nominal value of $1.
Abbreviated income statements for the year following the acquisition are shown below.
Revenue COGS Gross Profit Expenses Depreciation Net Income
Oak Inc
Elm Inc
$ (000’s) 80 (35) 45 (15) (10) 20
$ (000’s) 33 (12) 21 (8) (3) 10
Points to note i) These are before any consolidation adjustments. ii) All revenues, COGS and expenses were received/paid for in cash. iii) Neither company bought or sold any fixed assets during the year. iv) Neither company paid a dividend.
Requirements: 5.1
A B C
What is the value of Plant and Equipment and Minority Interest in the consolidated balance sheet immediately following the acquisition if it is accounted for using the Acquisition method? PPE
Minority Interest
1270 1230 1330
110 88 97
5.2
Which of the following is the best estimate for the consolidated Net Income for the year immediately following the acquisition under the Acquisition and the Pooling methods of consolidation Acquisition Method
A B C
Pooling Method
24 24.8 24
26 30 30
5.3
If, despite owning 80%, it was determined that Oak did not have control and that the investment in Elm should be accounted for along joint venture lines, which of the following is closest to the total asset figure upon acquisition of the stake. Answers are in $000s.
A B C
3,812 3.420 3,292
5.4
Assume the investment in Elm was accounted for under the proportional consolidation method. What would be the Gross Profit and Net Income for the year immediately following the acquisition? Net Income
A B C
$24,800 $24,000 $24,800
Gross Profit $45,000 $45,000 $61,800
5.5
If the investment was accounted for under the equity method, what is closest to the value for the investment at the end of the first year?
A B C
$448,000 $440,000 $444,800
5.6
Which of the following statements is most likely to be accurate when considering the net profit margin under full consolidation, proportionate consolidation and equity method of accounting for investments? Highest
A B C
Equity Full Full
Median
Lowest
Prop Prop Equity
Full Equity Prop
QUESTION 6 HAS 6 PARTS FOR A TOTAL OF 18 MINUTES FINANCIAL STATEMENT ANALYSIS Kipper Ties is a small US clothing manufacturer specialising is producing ‘retro’ garments, aimed mainly at the younger market. They currently offer their workforce (which has an average age of 37) a defined benefit pension, based on their expected final salary. The financial statements are complied under US GAAP. Below are key extracts concerning its defined benefit retirement plans. All figures are in USD, thousands. Please note, the information below is not complete but there is sufficient information to answer the questions below. PBO at start of the year Service cost Actuarial gain/(loss) Prior service cost
4,156 312 (42) 623
The discount rate used by the actuaries is 6% Plan assets at start of the year Actual return on assets Expected return on assets Benefits paid Employer contributions
4,100 289 245 215 755
Amortization of net actuarial losses
195
Actuarial assumptions have recently changed. The discount rate has been increased; the expected future pay rises for the staff have been reduced and the long-run expected investment returns have been reduced due to several recent years of significantly low returns. The company’s effective tax rate is 25%. In calculation questions you may round any calculations to the nearest whole number. Requirements: 6.1
Calculate the closing PBO for the year
A B C
5167 5382 4607
6.2
Calculate the pension expense for the year.
A B C
390 511 981
6.3
Which of the following statements is correct regarding the amortization of net actuarial losses?
A
Both US and IFRS require this amount to be amortized over the remaining service life of the workforce if the cumulative amount of actuarial losses exceeds 10% of the higher of the PBO or the plan assets Under US GAAP amounts not immediately recognised as an expense are included in other comprehensive income The vested portion is recognised immediately with the remainder expensed over the service life of employees
B C
6.4
Which of the following would not typically increase the economic expense? Assume all else remains unchanged
A B C
Increase in benefits paid Increase in assumed rate of remuneration Improving the terms of the pension in favour of the employee.
6.5
Taking the assumption changes which of the following would be closest to the typical impact from these changes on the accounts
A B
The pension expense will fall as a result of these changes PBO will be lower in all future time periods. Pension expense might be lower, higher or unchanged. The lower expected returns will reduce the asset value and also the economic expense. The other two changes will reduce the PBO.
C
6.6
Kipper Ties is considering adopting IFRS and wants to know how their accounts would look had they already adopted IFRS. Which of the following is closest to the best description of the differences between IFRS and US GAAP in the context of Kipper Ties? In answering ignore the impact of the recent actuarial changes.
A B
IFRS is likely to show a smaller pension expense than under USGAAP Given the current funded status being negative IFRS will require an additional minimum pension liability to be shown on the balance sheet It is likely the pension position on the balance sheet will be more positive (less negative) under IFRS
C
SPACE FOR ROUGH WORKING
