Pensions - Actual vs. Expected return on plan assets

CFA Level II
#1

Hi all,

Quick question on pensions accounting. On Schweser Book 2, page 107, there is an example related to reclassifying periodic pension costs for analytical purposes.

In that exercise, in order to better allocate pension cost between operating and non-operating income, they add up the entire periodic pension cost in P&L back to operating income (using the expected return on plan assets). Then, they allocated current service cost to operating expenses, interest cost to interest expense and they add ACTUAL return on assets to Other income. Why is that? I thought that we only recognized the EXPECTED return on plan assets in the P&L and that ACTUAL return was only used to measure the difference to expected return and included in the “Remeasurements” section in OCI (IFRS) or into Actuarial gains/losses on OCI (US GAAP).

What am I missing?

Many thanks guys!

#2

That exercise is designed to compare the actual cost to the cost reported under accounting standards.

You’re correct: under accounting standards, you’re allowed to use expected returns instead of actual returns; the idea is that that smooths the pension cost year after year.

But an analyst doesn’t want to know what the manipulated accounting numbers are; the analyst wants to know what the actual numbers are. Thus, you “unsmooth” the pension expense.

#3

Makes total sense, thanks for the quick and clear answer Mr. Campbell.

#4

My pleasure.