International Financial Statement Analysis Workbook, 3rd Edition

CHAPTER 14 EMPLOYEE COMPENSATION: POST-EMPLOYMENT AND SHARE-BASED

SOLUTIONS

1. B is correct. The £28,879 million year-end benefit obligation represents the defined benefit obligation.
2. C is correct. The net interest expense of £273 million represents the interest cost on the beginning net pension obligation (beginning funded status) using the discount rate that the company uses in estimating the present value of its pension obligations. This is calculated as −£4,984 million times 5.48 percent = −£273 million; this represents an interest expense on the amount that the company essentially owes the pension plan.
3. C is correct. The remeasurement component of periodic pension cost includes both actuarial gains and losses on the pension obligation and net return on plan assets. Because Kensington does not have any actuarial gains and losses on the pension obligation, the remeasurement component includes only net return on plan assets. In practice, actuarial gains and losses are rarely equal to zero. The net return on plan assets is equal to actual returns minus beginning plan assets times the discount rate, or £1,302 million − (£23,432 million × 0.0548) = £18 million.

4. A is correct. The actual return on plan assets was 1,302/23,432 = 0.0556, or 5.56 percent. The rate of return included in the interest income/expense is the discount rate, which is given in this example as 5.48 percent.

   The rate of 1.17 percent, calculated as the net interest income divided by beginning plan assets, is ...