CFA Level 2 - Pension Expense

CFA Level II FRA
#1

Hey members/candidates,

Question regarding Employee Compensation (under US GAAP): Assume that the Expected Return on Plan Assets INCREASES. Doesn’t this mean that an increase in the expected return on plan assets would INCREASE the periodic pension cost, thus reducing net income for that year? In a Schweser Mock exam, it stated that:

“The higher expected return reduces pension expense. Lower pension expense results in higher net income. Higher net income results in higher retained earnings. Neither the PBO nor the funded status is affected by the expected return on plan assets.”

Thanks in advance folks!

#2

Expected return will decrease periodic pension EXPENSE, as we will have less net interest expense. (Service cost + (Interest Expense - Expected return on plan assets))

#3

Thank you Dasstienn.