Can anyone explain the difference between these Costs…I thought the difference stemmed from the fact that the expected return was taken away from pension cost in the P&L statement along with the iterms that go into the OCI which are not reported in the Income Statement. In the CFAI questions on this topic, in question 10 (IFRS) they do no take away the expected return to arrive at the periodic pension cost but in the following question for US GAAP they take it away…I cant remember seeing that under IFRS you dont take away the expected return on plan assets in the IS…A Clear distinction would help.
Part of pension cost goes through P&L, and part goes to OCI. The part that goes through P&L is pension expense; the part that goes through OCI is not.
Pension cost comprises:
- Current service cost (+)
- Interest cost (+)
- Past service cost (+)
- Actuarial gains (−)/losses (+)
- Actual return on plan assets (−)
Under IFRS, pension expense comprises:
- Current service cost (+)
- Past service cost (+)
- Net interest expense* (+/−)
*= interest cost − (beginning pension assets)(discount rate)
Under US GAAP, pension expense comprises:
- Current service cost (+)
- Interest cost (+)
- Amortization of past service cost (+)
- Amortization of actuarial gains (−)/losses (+)
- Expected return on plan assets (−)
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Thanks s2000…two other questions…I thought Net Interest Expense under IFRS was (funded status * the discount rate) and also isnt the expected return subtracted from the pension expense under IFRS as well? Looking at what you have for the interest portion I think you have re-arranged the equation which makes sense as interest cost is beginning PBO * discount rate…correct?
My pleasure.
It is.
IFRS doesn’t use the term “expected return”, but they essentally use the idea: (beginning assets)(discount rate).
Yes: net interest expense is:
(beginning PBO)(discount rate) − (beginning assets)(discount rate) = (funded status)(discount rate).
IFRS doesn’t use the term “expected return”,…but they essentally use the idea: (beginning assets)(discount rate)…what do you maen by this…is this figure then subtracted after adding current service cost, past service cost and net interest expense together? Or are you saying expected return is explicitly included in the net interest expense/income amount?
It’s explicitly included in net interest expense:
Net interest expense = (funded status)(discount rate)
= (pension obligation – fair value of plan assets)(discount rate)
= (pension obligation)(discount rate) – (fair value of plan assets)(discount rate)
The first part – (pension obligation)(discount rate) – is the same pension expense you’d show under US GAAP. The second part – (fair value of plan assets)(discount rate) – is analogous to US GAAP’s expected return, except that it uses the discount rate instead of the expected return rate.
Thanks a million…Top explanation 
…I cant thank you enough…Im well set now in this topic area…in a few posts you added that missing piece these books couldnt explain in a million pages smh
You’re quite welcome.
This is an awesome post, thank you Sir
This is a great post! 3 questions:
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How do you calculate interest cost for Total Periodic Pension cost? Discount rate x Bg. PVDBO? Also, as Total cost is not reported so both IFRS and GAAP will have the same value?
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Is this formula correct: Bg. PVDBO + Service costs + Int costs +/- Actuarial loss/ Gain - Benefits Paid ? If Yes, then is Int exp calculated by using: Discount Rate x Bg. PVDBO
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What is remeasurements and in which formula is it used. The books loosely use the term and it is very confusing.
In 2. I mean Int cost not exp.
So I have figured out 3. Remeasurements. So if the difference in actual and expected return is positive, we will subtract it from Total pension cost?
For 1 and 2, both IFRS and GAAP will have different values for int cost right? However, the same int cost will be used in both total periodic cost as well as in pension expense?
I think the problem is that different books are showing things differently so it is very confusing.