Adjustment for CFO in Pension Fund Accounting

CFA Level II FRA
#1

When I was doing some mock I encounter some problem. Here is the cited data from the question

Pension

Plan A

Fair value, beginning of year

40,900

Interest income on plan assets

1,636

Remeasurement gains recognized in other comprehensive income

1,841

Employer contribution

3,150

Participant contribution

1,250

Benefits paid

(2,080)

Fair value, end of year

46,697

Pension

Plan A

Balance, beginning of year

58,700

Current service cost

1,850

Interest cost

2,348

Participant contributions

1,250

Benefits paid

(2,080)

Remeasurement losses recognized in OCI

3,460

Balance, end of year

65,528

Pension

Plan A

Current service cost

1,850

Net interest expense

712

Net retirement expense for the year

2,562

Actual return on plan assets

3,477

The question ask us to adjust CFO,

Model Answer:

3150 - 2562 = $588

–> CFO $588 higher

I don’t understand why it use Net Retirement expense rather than TPPC? Shouldn’t we compare difference between TPPC and Contribution ?

#2

this is like the 4th time the question has been posted.

in conclusion, it’s inconclusive. we don’t know.

#3

I got a 17 percent on that vignette. 60 percent overall on the AM Mock because of it. Guarantee the pension accounting stuff won’t be nearly as hard on Saturday. Good Luck

#4

This is a SOB of a question. The trick here is that they used the word economic perspective which basically changes everything. Rather than calculating (Contributions - TPPC), they are asking for the difference in real outflow terms i.e how much money could actually be spend to settle the above. So we calculate (Contributions - Periodic Pension Cost) instead of the above, because PPC is what could actually be expensed in the income statement and Contributions are the only actual cash outflow.

If you calculate Periodic Pension Cost as (current service cost + interest expense) you will get the 2562. It is also stated as net retirement expense for the year.