Economic Pension Expense Hint decided, economic, remember, different

laurab

I couldn't remember the economic pension expense formula to save my life. Somehow, looking at different EOCs, etc. I was able to derive a much simpler formula:

Economic Pension Expense = Contributions - (Change in Plan Assets - Change in PBO) = Contributions - Excess Contributions

So far it has worked wonders. Hadn't seen it in my reviews so decided to share. Hope it helps.

redskins44

Yep, believe the way it is outlined in Schweser is:

Change in funded status - Firm Contributions = Economic Pension Expense

stalkey

economic pension expense = change in funded status - contribution

mp3bu

know the full length way too... you never know what presentation CFAI is going to hit you with

DSquaredSlim

Is the full-length way essentially PBO (don't include benefits paid) minus actual return on assets?



Edited 1 time(s). Last edit at Sunday, May 29, 2011 at 11:29PM by daveyc18.

comp_sci_kid

Essentially, yes. Pick off all the costs that hit the PBO and subtract the actual return in plan assets. Note, sometimes CFAI is sneaky and the actual return is negative.

daveyc18 Wrote:
-------------------------------------------------------
> Is the full-length way essentially PBO (don't
> include benefits paid) minus actual return on
> assets?

CPATrader

daveyc18 Wrote:
-------------------------------------------------------
> Is the full-length way essentially PBO (don't
> include benefits paid) minus actual return on
> assets?

Yes. That's the other way to do it.

madaochenggong

One thing that's confusing me is that in Schweser's notes amortization of actuarial loss is under "pension expense," but it's omitted in PBO, where it should be included, too, right?

Otabek

Yes, Actuarial g/l are part of PBO.

giorgio10

Actuarial Gains and Losses and Plan Amendments are always included in PBO, in their total amount.

However, they are not recognized in the I/S immediately. Instead, they go directly into OCI.

Deferred Gains/Losses in OCI = Actuarial Gains/Losses + Difference between Expected Return and Actual Return on Assets

When the accumulated value of Deferred Gains/Losses in OCI exceeds the 'corridor' (=10%*max(PBO, PA)), you must amortize the excess over the corridor, over the remaining life of the plan. This amortization amount shows up as your "amortization of deferred gains/losses" in pension expense.

Plan Amendments also go into OCI, and this shows up as "amortization of prior service costs" in your pension expense calculation.

Note: under IFRS, any prior service costs that have been vested go directly into the I/S.

So remember: PBO is your OBLIGATION - it has to include the total impact of any plan amendments or changes in actuarial assumptions. But Pension expense is your PERIODIC expense - so that is why you only include amortization of these amounts (in an attempt to "smooth" pension expense and reduce volatility).

Also, under GAAP, the net pension A/L on the B/S is simply the funded status (PA - PBO). Under IFRS, the net pension A/L on the B/S is the funded status +/- adjustments for any UNrecognized costs in OCI.

Hope that helps!