Hi,
A bit confused here - do we always subtract out the employer contributions? Some people are saying you add it back in.
Q6 EOC CFA P211
Answer suggests the Ending Funded Status - beginning funded status - employer contributions = the periodic pension cost. Yet on some old threads a lot of people suggest you add it back not subtract?
thanks
TPPC = Employer Cont - (Change in Funded Status)
They will give you the same answer but one will be negative and one will be postive. Would be tricky if they put both on the exam. Both are costs though so from a company stand point they are a deduction, so both technically negative.
I think you got the formula wrong. TPPC = Contributions - (End Fund Status - Bgn Funded Status).
This basically tells us the true economic cost to the employer for the year. If the funded status gets worse (i.e. more negative) then this raises the TPPC which makes sense because it is basically saying the employer didn’t contribute enough to the actual plan so just by looking at the contributions it would understate the true cost for the year.
Great minds think alike Jeff015!
thanks guys, my formula came from the book answers.
I see both work so thats fine.
The confusion comes from the curriculum’s decision to show the net pension liability (funded status) as a negative number. I always ignore the negatives and use (End FS - Beg FS) + Employer Contributions, since I think it’s easier to understand this stuff when working with costs and the net pension liability as positive numbers. It’s the way I learned it from Basit’s guide (Elan/Wiley) which I think does a better job explaining pensions than the curriculum (or easier to understand anyways).
Contributions - Δ Funded status
So it is easy to remember this one and all similar accounting, corp. finance and other formulas which include change in some measure or activity. Delta in accounting always means last (end) balance - begin. balance.
PS
If you have negative delta (negative change) this means an increase in TPPC because two negative prefixes are offset to postitive value. It is simply to remember in this manner.
O/p obligation 800 O/p assets 600 therefore under funded by 200 now closing obligation 1200 assets 900 underfunded by 300 now if employer contributions are say 50 this means i am reducing my liability from 200 to 150 but at the end it shows 300 this means my liability has increased by 150. Another way to think is like I purchased goods at the beginning for 200 on credit(ie the underfunded part) during the year i pay 50(ie employers contributions) but at the end my purchases are 300 this means i bought additional 150 goods(ie periodic pension cost). Hope this makes easier.
In the book there’s an example and I have a hard time understanding the calculation
Funded status at beginning of year –£4,984
Funded status at end of year –£4,774
Employer Contributions : £693
So according to the formula, the periodic pension cost is : £483. (-4774-693-(-4984))= 483.
What I don’t understand is that if there would not have been any employer contributions, would the periodic pension cost be a positive 210?? (-4774-(-4984))=210.
Hi,
can anyone help with periodic pension cost reported in OCI under IFRS. By the book (Schweser) only Actuarial G/L should be reported in OCI under IFRS and that is:
= changes in actuarial assumption + difference between actual and expected return on plans asset
In example on page 44 increase in benefit obligation due to changes in actuarial assumption is $628 and difference between actual and expected return on plan asset is 96 (1795-1699) and that should resulted in PPC in OCI of $794. However, they have calculated PPC OCI = TPPC - PPC P&L which resulted in PPC OCI of $957.
Where have I went wrong?
Thanks!
It is true that under IFRS the amount recorded in OCI is actuarial gains/losses plus actual return on plan assets less expected return on plan assets.
It is also true the amount recorded in OCI is total periodic pension cost less the amount shown on the income statement.
As for the the numbers you’ve shown, I cannot comment as I don’t have the Schweser books.
Yes.