Hi guys,
Regarding the latest errata issued by CFA Institue, could someone please explain why under US GAAP, we do not include the Past Service Cost in the interest expenses calculation?
US GAAP accounting standards only expect opening value of liability to be revalued after year end if their is a “significant change” (see below).
“120” is not significant
The interest cost should therefore be based on the opening liability withou adjusting for past service costs.
Oast services costs themselves are part of OCI under USGAAP and amortized to P&L under the corrider method over time.
3.2.6 Amortization of prior service cost
Prior service cost arises from a plan amendment (including initiation of a plan) that grants increased benefits for service rendered in prior periods. It is measured by the increase in the projected benefit obligation at the date the amendment is adopted (generally the approval date, not the effective date, of the amendment). If the amendment is deemed significant, the employer should perform an interim remeasurement of the benefit obligation and plan assets and would also develop a new measure of net periodic benefit cost for the period from the remeasurement through the end of the fiscal year. If an amendment is not deemed to be significant, the effects of the amendment would be determined as of the date of the next annual measurement date
The term “Significant” here is kinda ambiguous. It seems small related to the Beg.PBO, however, if we keep ignoring the PSC in the subsequent year, Isn’t the accumulating going to be huge, and we would under-record big interest expenses and benefit pension expenses?
No because it wil be included in valuation at end of year. It is not ignored for ever.
120/42000 = 0.285% never going to be significant.
The reading makes no mention of any adjustments ever been made to the oprning value.
Only that interest expense - opening value x interest.
If they want you to make the adjust then they should explain it in the reading
I also have read another question for the same provided information on Curri 2023, and it was a question (no more exists in Curri 2024) to calculate the Pension Cost for the fiscal year as follow:
"The amount of periodic pension cost that would be reported in P&L under IFRS
is closest to:"
The answer was: “Under IFRS, the components of periodic pension cost that would be reported in P&L are the service cost (composed of current service and past service costs) and the net interest expense or income, calculated by multiplying the net pension liability or net pension asset by the discount rate used to measure the pension liability. Here, the service costs are 320 (= 200 + 120) and the net interest expense is 210 [= (42,000 + 120 − 39,000) × 7%]. Thus, the total periodic pension cost is equal to 538.”
In this case, I understand that the PSC has been included in the Beg.PBO. So is this the difference in “interest expense calculation” between IFRS & US.GAPP
Many thanks !!!
Yes and I believe that to be an error.
Can you quote from study text - not questions - where it tells you that interest expenses is calcuated by adjusting opening liability by past serice cost?
I emailed the CFA about this questions and asked that they either
Explaining what is going on. Explain why this adjustment to opening liability is made and tell students what is happening. (prior to 2022 the answer this question did not adjust for the 120 it came initially as an errata with no explantion of why).
Or they change the answer
I sent them a copy of the IFRS accounting standards.
The results was they issed the errata as above.
I think if you want to justify why the 120 should be added you need to go back to accounting standards not versions odf CFA questions which over the years have has different solutions withou explanations.
I am happy to be corrected if you have evidence from accounting standards
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