Sign up  |  Log in

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).

Make the most of your CFA® Progam prep in one weekend! Join renowned instructors, Peter Olinto, Darren Degraaf & David Hetherington in May for a live, two-day intensive final review class.

I have the same question/doubt. The journal entry to record this contribution (regardless of the fact it was in excess of TPPC) would be a debit to net pension liability (the funded status) and a credit to cash (or a pension liability payable). Neither side of the entry hits the income statement, so I am quite perplexed by this after-tax treatment.