FRA: Pension Accounting interest, investment, following

badonkus

Reference: Schweser FRA Reading #24 pg. 123, #5

The answer calculates Economic pension expense as $15 with the following formula:
Econ pension exp = Current service cost + interest cost - actual investment return
Econ pension exp = 63 +29 - 77 = 15


However, when I use an alternative formula I get a the same answer but with a negative number:

Econ pension exp = (End funded status - Beginning funded status) - Employer contributions
Econ pension exp = (120 - 87) - 48 = -15

Is my formula wrong?

busterbluth

Yes, quite correct. I think sticking to one way of interpreting the expense would be less confusing - otherwise we'd be prone to negation errors.

In the text, Schweser solves it the way I did above but in #5 they used a separate formula causing a non-negative number ... but all in all they seem to mean current economic expense is down by $15. Had the actual investment return been greater the expense would be up by the higher return difference.

redskins44

That is so intuitive ... thanks.

Sometimes I get so bog down with the signs as if there is something hidden when in reality I should be checking my common sense ...

kingstongal

Yes you can have a negative or positive pension expense, so be careful.

zhaoyp

It is -15.

In the first formula, think of expense and cost as negative numbers, etc.

Econ pension exp = -Current service cost - interest cost + actual investment return
Econ pension exp = - 63 -29 + 77 = -15

Your pension will cost you the Current service cost, payment for interest, then you get back as an adjustment actual investment return. Always think whether you are paying money or getting money.

Sportsman

This would be the same if you use the alternate formula:

Change in funded status less employer's contribution = employer's contribution - change in funded status. The signs would be opposite. But you should be concerned only about the absolute amount. Because a positive number cannot mean something like "pension income" right. So just don't worry.