Hi all,
One of the concepts I keep messing up is the interpretation of expected return in regards to pension accounting. Seemingly every question that involves this I get wrong and I’m clearly not understanding the explanations given. I figured I’d reach out to see if anyone can help break it down for me. So, Plan assets and TPPC are only affected by actual return and PBO is only affected by discount rate. Where does the expected return come into play and how should I interpret a change of expected return assumptions if the question prompts me with it?
Thanks for the help!
Expected return on plan assets is only relevant for US GAAP. It’s used in the calculation of net interest cost under US GAAP (i.e., PO x Discount Rate less ERPA x FVPA). Changes in the expected return has no impact on plan assets, PBO, or PPC. It does, however, have an effect on how much of PPC goes to the income statement and what goes to OCI. Holding all else constant, higher expected return = lower net interest cost on IS and higher remeasurement that is subsequently on OCI. Lower expected return results in the opposite. Those are the quick facts, hope it helped!
Thanks Black8Mamba23, this was very helpful!
i’d bet money that BM passes before anyone else.
Lol! I think we all get the results on the same day, but thanks for the compliment.