The company has a defined benefit pension idea covering considerably all of its employees. Pension benefits are based on employee service years and the employee's compensation through the last two years of employment. The company contributes yearly the maximum amount permitted by the federal tax code. Plan contributions give for benefits expected to be earned in the future as well as those earned to date. The given reconciles the plan's funded status and amount recognized in the balance sheet at 31st December, 2012 ($ in 000s).
Actuarial Present Value Benefit Obligations:
Accumulated benefit obligation (including vested benefits of $318) $(1,305)
Projected benefit obligation (1,800)
Plan assets at fair value 1,575
Project benefit obligation in excess of plan assets $ (225)
The Company's relative I/S reported total periodic pension expense of $108,000 in 2012 and $86,520 in 2011. Since employment has remained quite constant in recent years, its management expressed concern over the increase in the pension expense.
Required
1. Explain the differences and similarities between PBO and ABO.
2. Describe how the 'Projected benefit obligation in excess of plan asset' is shown in the financial statement.
3. With a pressure from earnings target from the market and a probability of reduced annual bonuses tied to reported earnings, management of the Company can try to sacrifice the quality of reported earnings for the subsequent fiscal year. Identify & briefly describe the actuarial assumption factors that can reduce the reported periodic pension expense. (For illustration, an increase in discount rate would reduce pension expense, because of lower service cost)