question about periodic pension cost

CFA Level II
#1

Could you folks look at question 10 on page 212 of FRA please? can anyone explain why they use the discount rate to calculate return on plan assets when they actually give you the return on plan assets? I don’t get it. Thanks!

#2

Without looking at the problem, is this a company reporting using IFRS? If so, we use the discount rate * beg plan assets to calculate expected return on plan assets.

#3

because this is IFRS.

use DR*Beginning FS to calc Interest Cost.

However when US GAAP (EOC 11) :

use expected return rate when you are calc expected return on plan asset

#4

Thanks folks, I’m aware of those but why can’t you just use the actual return, in this case $2,700, that they give you??? The DR*Beginning FS is $2,730 but in the problem set they tell you the actual return is $2,700.

#5

Is this Kaplan or CFAI?

#6

CFAI

#7

They’re calculating the periodic pension cost and we don’t use the actual return on plan assets here to calculate what we show on our P&L.

For IFRS, pension expense on the Income Statement include:

Current Service Cost +200

Past Service Cost +120

And Net Interest Expense, which breaks down to…

(Discount Rate * Beg PBO) - (Discount Rate * Beg Plan Assets). This is basically the equivalent to the US GAAP version where we calculate interest cost (Discount Rate * Beg PBO) - Expected Return on Plan Assets.

And I know the question doesn’t ask for it but this may be the cause of your confusion… under IFRS periodic pension cost in OCI will include:

Acturial Gains/Losses: -460

Actural Return - Expected Return which for IFRS is analgous to (Discount Rate * Beg Plan Assets): 2700 - 2730 = -30

So the total reported for OCI would be 490. That’s where you use your actual number.

#8

@Mosstatic : how you calculate EOC no 9 ?

TPPC = delta FS - EC or TPPC = delta FS + EC

Please also check EOC no 6 for this issue…

#9

The Total Periodic Pension Cost can be found two ways:

  1. Find the delta between Funded Status and add in Employee Contributions

  2. Individually add all the components of TPPC: Current Service Cost + Past Service Cost + Interest Expense + Actuarial Gain/Loss - Actual Return on Plan Assets

From here you’ll have your entire TPPC and then you decide how exactly you break it up (i.e. - Which goes to P&L and which goes to OCI).

This is when they’ll ask questions like they did for #10: The amount of periodic pension cost that would be reported in P&L under IFRS is closest to

They want to see if you know to break out the individual components and send them to the appropriate areas.

#10

Thanks Mosstastic. I get it now. Many thanks

#11

Why the solution on EOC no 6 subtracting delta FS with EC instead of adding it ?

#12

It’s (Discount rate * Beg PBO) - (E® * Beg Plan Assets) in US GAAP.

And Jounin83, I think the rule is: TPPC = Contribution - (Ending Funded Status - Beginning Funded Status). The formula changes depending on the calculation of FS, but if you stick to this standard formula, you will be right.

#13

@Gurifissu E® * Beg Plan Assets = Expected Return on Plan Assets at least that’s what I meant. I just didn’t specify

#14

Remember we are calculating a liability. So we add EC. IMO, the curriculum seems to make this confusing :-? …Ah actually they do put an explanation in the footnote.

#15

@Lake House : Yes, i got it yesterday from watching “workshop” video Fitch (by Richie Owen) yesterday.

@Gurifissu : Thanks brother :slight_smile: