I am not sure if I am missing anything here, but I am confused. At the bottom of page 108 of Vol 2, the following is stated: " To better reflect a company’s operating performance, an adjustment can be made to operating income by adding in the full pension expense and then subtracting out the service costs." Then in Example 6, the adjusted income is $3069 ( $3027+$96-$54). But there is this statement, "The $96 pension and other post-retirement benefits expense from the footnote is SUBTRACTED from net income. Only the service cost component of $54 is added back as an operating expense. Does this not contradict with what was written in pg 108 and in the calculation? Going by this statement, the answer should be $3027 - $96 + $54 = $2985. My take on this is that the statement in the example question is correct - the whole pension expense is usually treated as an operating expense, but only the service cost component is conceptually the same as an operating expense, so you should use the original operaitng income - total pension expense + service cost.
I got this figured out. Misread the statement.
Any thoughts on why in example 1 of the reading, pg 89 e that calulating ROE w/o SFAS 158 is lower by the net effect of sfas158 on ‘accumulated other comprehensive loss, net of tax’ ?? Thinking i need to review but I’m without my L1 books at the moment. Thanks
You need to add the SFAS 158 adjustment of 2671 to the Common Equity. That would have been added to the NI if the SFAS Adjustment had not been there and would have made it to the Common Equity. Also SFAS 158 introduces the concept of the AML (Alternate minimum liability) since per the writeup this was the first year the SFAS 158 was being introduced. Given that the Common Equity would change from 6859 to 6859+2671-229 = 9301 ROE = NI / CE – and NI remains the same so ROE reduces to 39.89% from 46.26%
Yep, as what cpk123 has said you’d need to factor in the following 2 adjustments - a. AML adjustment per SFAS 87 and b. SFAS 158 adjustment. As “Accumulated other comprehensive income” is part of the Equity component you’d need to do:6859-229-(-2671)=9301 as given. ROE = NI/equity = 3537/9301=39.89%