Reading 22: Employee Compensation: Post-Employment and Share- center, income, economic, 2010, style

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Session 6: Financial Reporting and Analysis: Post-Employment and
Share-Based Compensation and Multinational Operations
Reading 22: Employee Compensation: Post-Employment and Share-Based

LOS h: Calculate the underlying economic pension expense (income) and other post-employment expense (income) based on disclosures.

 

 

 

Financial analysts can use select data from a company’s financial statements to derive an adjusted pension expense in order to better reflect the company’s true economic pension cost. Which of the following formulas will most accurately calculate a company’s adjusted pension expense?

A) Beginning fair value of plan assets + service cost + interest cost – ending fair value of plan assets.

B) Service cost + interest cost – actual return on plan assets.

C) Service cost + interest cost – actual return on plan assets – benefits paid.

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An adjusted pension expense is calculated without reflecting the amortization of unrecognized items and other smoothing mechanisms included in reported pension expense, and in addition uses the plan’s actual return on assets, rather than the plan’s expected return.

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An “adjusted” pension expense can be calculated to better reflect a firm’s true economic pension cost than the reported pension expense. Which of the following adjustments to reported pension cost should be made?

A) The inclusion of amortization of unrecognized items.

B) The use of actual instead of expected return on assets.

C) The inclusion of actual benefits paid to employees.

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Reported pension cost can be adjusted by the removal of both the amortization of unrecognized items and other smoothing mechanisms, plus the use of actual return on assets rather the expected return. The resulting adjusted pension expense is a more accurate portrayal of the firm’s true pension cost.

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Which of the following statements regarding economic pension expense is least accurate?

A) It is equal to the sum of all the changes in projected benefit obligation (PBO) for the period (except for benefits paid) less the actual return on assets.

B) It is equal to the change in the funded status for the period.

C) It is a more volatile measure of pension expense than reported pension expense.

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Economic pension expense is equal to the change in the funded status for the period excluding the firm’s contributions.

Economic pension expense is calculated by eliminating the smoothed amounts from reported pension expense and including the actual return on assets. The result is a more volatile measure of pension expense.