Defined benefit: What is rationale behind doing tax-adjustment on cash-flows that we reclassify from operating to financing?
Let’s say we have employer contributions of $100, total periodic pension cost of $90, and an effective tax rate of 25%. I understand that the employer’s contribution in excess of the pension cost (i.e., $100 - $90 = $10) can be viewed as an outflow from financing.
But what is the rationale behind reclassifying the cashflow (for analytical purposes) on an after-tax cash basis? Using the example above, the text’s suggested approach would be to increase CFO by $7.5 and decrease CFF by $7.5 (instead of by $10).
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