A question in FSA

In schweser notes book 2 page 198, what is the difference between market related value and fair value of plan assets? Any ideas? THANKS

Market Value may or may not be fair !

If there is a market value then it is the fair value. If there isn’t a market value, the fair value is the value at which the company thinks it could exit the position.

tennisboy, see p.132 of the 2008 CFAI Curriculum, Volume II.

I think market “related” value is smoothed pension expense. I do not know what is the difference between fair value and market value. It seems they are the same thing. But for pensions, they are only talking about fair values of asset, etc.

Whoa~ Market-related value in pension accounting is the value that is used to determine the expected dollar return on plan assets. Recall that many companies use expected return on plan assets instead of actual return to calculate pension expense. This is to protect a company from reporting a pension expense that distorts their total operations expense. If a company has a great year operationally, but takes a loss on its pension asset portfolio, that negative return would amplify pension expense, which actually has nothing to do with how great the firm managed its operations. So now there are four calculations to consider: 1) Pension Expense= +Service cost +Interest Cost -Expected Return on Plan assets +/- Ammortized Stuff 2) Expected Return on Plan Assets= Beginning market related value (Last Years Ending Market related value) x Expected Long term rate of return on plan assets 3) Ending Market Related Value of Plan Assets= Beginning market related value +Expected Return on plan assets +Employer Contributions -Benfits paid +/- 20% of last 5 yrs deferred gains/losses 4) Ending Fair Value of Plan Assets= Beginning Fair value of the plan assets +Actual Return on plan assets +Employer Contributions -Benfits paid The difference between 3) and 4) is the use of the expected return based on a market related value vs actual return based on a fair value, respectively. The last item in the market related value calculation is the amortization of the actual gain/loss on plan assets. This creates a smoothed base for calculating the expected return on plan assets, by multiplying the expected long term rate of return by a “market related value” instead of an actual fair value. If the plan assets actually loose 10% this year, instead of basing next years expected dollar return as a fixed percentage of that already smaller portfolio, we get to spread the loss over 5 years and calculate next years expected return on a “market related”, or “averaged plan asset value”. Since the porfolio includes the smoothing from both gains AND losses over the last five years, the result is a market related value that is less volatile than the actual fair value of the plan assets.

^ The key takeaway for the analyst is to be able to look at “economic pension expense” by removing the impact of smoothing and deferred items. This is performed by adjusting reported pension expense by removing the amorized stuff from 1) and replacing expected return on plan assets with the actual return on plan assets.

Lisa Marie- Schweser should have hired you to write FSA because you made more sense in your post than any of the material in FSA. Is it me or is there a clear disctintion in the writing style between the Econ and FSA sessions? The ideas are much better explained in Econ and FSA is so redundant.