Clarification: FRA - Pension principal, increase, payment, adjust, amount

noel

Hi,

Just wanted a clarification, if Contribution > Economic Pension Expense, then treat like pre payment of principal and increase OCF and reduce FCF by the after tax amount (1-t);

if EPE > Contribution, treat like borrowing, how would we adjust FCF and OCF?

senlinlang

good question, the guy explaining this in schweser , stopped short of saying it. I just assumed it to be the reverse ?

FinancialAnaly

Yep it is the reverse.
Increase FCF and lower OCF by after tax amount.

zephyranalyst

(Economic pension expense - employer contributions)*(1-tax rate)

reclassified as financing cash flow, if epe >emp contrib.

Newhuman

Why increase CFF and reduce CFO? It makes sense the other way around to me....

A prepayment of principal is a use of cash for financing purposes. The contribution would have reduced net income and thus operating cash flow.

Therefore to back out the contribution you would need to increase CFO and decrease CFF.