Excess Company’s Contribution vs. Total Pension Costs on an after-tax basis is adjusted in cashflow statement by deducting the same from financing cashflows since it is analogous to paying debt early. Yes makes sense but question is why on after tax basis?
I didn’t find a satisfactory answer to this either. But then again, it’s not too hard to remember, especially if they give you the tax rate in the question.
You got a tax benefit in current CFO when you made the contribution, so when you reverse it and apply to principle reduction (outflow of CFF) you could only take out the after tax flow.
This link cpk123 explains it in more detail: https://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91095605
The company gets a tax benefit from contributions to the pension plan. Why would you expect the adjustment to be before taxes?
OK if it gets tax benefit then its fine… I never thought tax authorities would care if the contribution is in excess of the cost because companies will ensure to make excess contribution to get tax benefit… Or rather than paying each year company would pay a lumpsum contribution for say 5 years and get the benefit of the excess
Just to be clear, when employer contribution > TPPC (pension obligaiton increased more than fund plan assets)
we record the after tax excess as operating cash inflow and financing cash outflow (since we are “accelerating payment of principal”)
if TPPC > employer contribution
we record the after tax deficit as operating cash outflow and financing cash inflow (since we are “borrowing” to fund our higher than expected pension liability).
I guess I do not understand the reason for the adjustments to operating cash flow. principal repayment and borrowing only relate to financing cash flow activities.