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Total periodic pension cost - questions

Hello,

Few questions on the periodic pension cost:

1. What is the difference between the total periodic pension cost and the conventional periodic pension cost

2. For total periodic pension cost, why does the total periodic pension cost increase by the amount of employer contributions? It makes more logical sense that employer payments would decrease the total periodic pension cost outstanding

Thanks,

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keep_running wrote:
Hello,1. What is the difference between the total periodic pension cost and the conventional periodic pension cost

I’m not familiar with the term “conventional periodic pension cost”.  What does it mean?  Where did you see it?

keep_running wrote:
2. For total periodic pension cost, why does the total periodic pension cost increase by the amount of employer contributions? It makes more logical sense that employer payments would decrease the total periodic pension cost outstanding.

If the company pays for its employees’ wages, that’s a cost.  If the company pays the electric bill, or the rent, or income taxes, that’s a cost.  If the company pays for raw materials, that’s a cost.

If the company pays money into the pension fund, that’s a cost.

Simplify the complicated side; don't complify the simplicated side.

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What I meant was periodic pension expense. How is this different than the total periodic pension cost?

It isn’t.

Simplify the complicated side; don't complify the simplicated side.

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The book says (Kaplan) says that “while total periodic pension cost uses actual return on the planned assets .. periodic pension cost on the P/L uses expected return on the planned assets”

This is where I see that there could be a difference betweeen the two metrics.

keep_running wrote:
The book says (Kaplan) says that “while total periodic pension cost uses actual return on the planned assets .. periodic pension cost on the P/L uses expected return on the planned assets”

This is where I see that there could be a difference betweeen the two metrics.

Only a portion of the periodic pension cost is shown on the income statement.  That portion is called pension expense (not pension cost).

Kaplan’s wording is poor.

Simplify the complicated side; don't complify the simplicated side.

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Then how come in periodic pension expense is calculated off expected return (and then adjusted for actual return within actuarial gains/losses, while the total periodic pension cost is just calculated off of actual return?

keep_running wrote:
Then how come in periodic pension expense is calculated off expected return (and then adjusted for actual return within actuarial gains/losses, while the total periodic pension cost is just calculated off of actual return?

Because someone a long time ago decided that firms should be allowed to smooth their pension expense by estimating the return (at the same level each year) rather than having volatile pension expenses (by having to use the actual return, which will likely vary from year to year).

The cost is the cost; it doesn’t change because you estimate the return on plan assets.  The only thing that changes is what portion goes through the income statement and what portion bypasses the income statement.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/