CFA MOCK AM Anish Shah Case (question 17)

the CF adjustment is just the difference between: Contribution and Total periodic pension cost.

If TPPC < contribution then adjustment from CFF to CFO, otherwise other way around

Now in the exercise I tried to calculate for pension plan A (as said) the TPPC = Contributions - Delta Funded Status = Delta PBO + benefits - actual return on plan assets but:

both formula gives me another result (did thousand of times in Schweser mocks and always worked well) and moreover, not one corresponds to the TPPC which according to the Mock is in the exhibit 4 under “Net retirement expense for the year”.

I don’t know why the formulas for TPPC doesn’t give me 1) the same result, 2) the same result as the “net retirement expense for the year”

  1. TPPC = 3150 - ((46697-65528)-(40900-58700)) = 4181

  2. TPPC = (65528-58700) + 2080 - 3477 = 5428

what the hell??? as I said on schweser mock I use both and never had problems, can’t figure it out why here doesn’t works and why the TPPC are the net reritement expense for the year… should be the same as TPPC

Somebody can help me?

At least, at least someone!!!

According to the answer you just have to take the figure from Exhibit 4 “net retirement expense for the year” - a definition which I have never heared. And no calculation is needed. And I have no idea why the calculation taught by both Schweser and the Curriculum does not work.

I hated this mock.

if I’m trying to defend cfai here,I can say that net retirement expense is just ppc/pension expense but I know that doesn’t make much sense.

Ok Ok but then why the calculation does not work?

This stuff about the excess contribution and how tppc has to be calculated is (was) crystal clear. Until the mock.

I’m not an accountant and in my country there are no defined benefit plans so I have no idea how this in real life works, but the curriculum taught us two ways to calculate tppc and these do not work in this vignette. How?

If TPPC < contribution then adjustment from CFO to CFF

I actually figured out how to arrive at 2562

it’s current service cost + (interest cost - interest income of assets) [net interest expense/income] which is pretty much pension cost under IFRS is it not?

Very clever Edbert.

So you take interest income on plan assets of 1,636 instead of actual return on plan assets of 3,477.

Actually the 3,477 is the sum of interest income on plan assets and remeasurement gains recognized in OCI.

This would mean that

  • when calculating the fair value of plan assets you use the sum of interest income and remeasurement gains

  • when calculating tppc you just take the interest income on plan assets

Which would mean that the formula

tppc = contributions - (ending funded status - beginning funded status) still doesn’t work, does it?

For some reason the tppc

Formula for tppc should work, this exercise doesn’t make sense.

to look at changes at CFF and CFO you have to work with total periodic pension cost, not pension cost!

It doesn’t make sense to me

I just did that one only from AM. My calculation for TPPC is

4181 = 1850 + 712 + 3460 - 1841 = 18831 - 17800 + 3150

which is not relevant for the right answer.

Yes and if you calculate it with the second formula you get another result, which is also wrong…

4181 = 1850 + 2348 + 3460 - 3477

I did this as well and came up with 4181 as well. Atlast I picked the answer ’ unchanged’ because it was coming up as borrowing as per $4181 so thought of it as no change in CFO. It was confusing since we learnt it in a different way in curriculum

So, if this sort of question shows up in real exam, should we do as CFO= employer contribution- net pension expense for the year?

should show up in real exam I think we should write to cfa after the exam questioning the question.

Most probably this question will not show up, but after this any other formula in the pension chapter might be wrong, not?

exactly… it’s just CFA style, do a lot of things but badly.

Even I found this question confusing but I think difference here is that we are doing calculation for pension fund A which is essentially your defined contribution pension plan not the benefit plan. TPPC calculation which we do is for befit plan.

The mock assumes that the adjustment is only done on the difference between contributions and pension expense REPORTED IN THE INCOME STATEMENT. Schweser states to use the difference between total periodic pension cost and the contributions.

Under IFRS, the amount reported in income statement for this case will be current service cost (1850) + interest cost (2348) - interest income on assets utilization the discount rate (1636) = 2562.

FYI: Alternatively it is just the current service cost + net interest expense. Same thing.

Contributions are 3150. Therefore 3150-2562 = 588

NOW, I am unsure whether it is TPPC or expense reported in the income statement that we compare the contributions too. The latter makes more sense considering OCF starts from Net income.

Schweser clearly states the difference between TPPC and contributions.

Overcontributing means an increase in CFO

Undercontributing means a decrease in CFO.

So basically we’re saying that Schweser is wrong and misleading? Gives me a lot of confidence going forward. Yesterday I tried those Ethics Topic Tests on the CFAI website, and those were brutal.

And now this question has put me off completely as well!

I have had 75%+ scores on Schweser Mocks (done more than 5 complete exams), but I am losing faith to pass this exam in an incredible rate.

Are you sure schweser is wrong in saying its Contributions - TPPC and not cfai thats wrong in saying its Contributions - PPC?

I’ve seen cfai be wrong just as much as schweser for level2, and from what i’ve heard cfai really messed up pensions a few years ago in the curriculum with explaining TPPC vs PPC… so this might just be an old question?