Actually cpk, since I’ve never seen this in action, how would you do:
2008 Cash Flow Statement Excerpt:
CFO:
Economic Pension Expense=(700)
Employer Contributions=400
Tax Rate: 20%
CFF:
None
You would add (700-400)(.8)=240 to CFF and subtract 240 from CFO? Is that it? No other adjustments?
Because deriv108 CFF is being increased by the amount of the loan. You are receiving money in the amount of the after-tax difference between EPE and Employer Contributions.
it is not cash flow and economic pension expense.
It is when there is a difference between economic pension expense and the Employer’s contribution, which the analyst should adjust to reflect on the cash flows.
If EPE (Eco. Pension Exp.) Employer’s Contribution
the difference is basically an extra loan available to the company. So CFO would be reduced by and CFF increased by EPE - EC)*(1-T)
If EPE Difference is a repayment of principal - an overall reduction in the pension obligation.
Huh, I vaguely remember reading this too.
I think if it economic pension expense is greater, then look at it like financing (cash flow doesn’t cover the true pension expense).
If cash flow is greater than economic pension expense, then its like an early principal payment on a loan.