CFAI Voume 2, Page-198 states, Periodic Pension Cost = Ending Funded Status _ - Employer Contribution _ - Beginning Funded Satatus. the same equation is also shown in the soloution to the EOC No-6 at page no 217. But untill now I knew the Equation as follows:
If you’re referring to Total Periodic Pension Cost, which it appears you are, the easiest way for me to remember the formula is: TPPC = Contributions - (Change in funded status); where you enter the contributions as a positive number, if the funded status is a(n) asset (liability) enter it as a positive (negative) number.
So, using the data on page 211 of CFAI Vol 2, TPPC = 693 - (-4774 - (-4984)) = 483
The first one could be correct (if you look at it properly); the second one cannot be correct (as written).
The first one is correct if you interpret a negative number (or a lower number) as higher cost, and a positive number (or a higher number) as lower cost; this isn’t an unreasonable way to look at it – we generally think of costs as cash outflows – but I’d say that it’s an uncommon way of looking at it, and most people would misinterpret it without some serious practice.
The second one is wrong, but easily fixed:
Periodic Pension Cost = Ending Beginning Funded Status _ + Employer Contribution _ – Beginning Ending Funded Status
This is the negative of the first formula, and is, I submit, more easily interpreted: a positive number (or a higher number) means a higher cost, and a negative number (or a lower number) means a lower cost.
I would like to specify something here which has been a great source of confusion for me as I have been reviewing pension accounting for the L2 exam. I hope this can provide useful for other people who may also be confused or reviewing this material. It has to do with Total Periodic Pension Cost vs. Periodic Pension Cost vs. Pension Expense.
To summarize and specify:
TOTAL Periodic Pension Cost = Contributions - Change in Funded Status = service cost + interest cost - actual return on plan assets +/- actual g/l on change in PBO assumptions + prior service cost
Periodic Pension Cost (NOT TOTAL) = Pension Expense on the P&L which varies depending on whether you are using GAAP or IFRS but uses EXPECTED return on plan assets NOT actual return on plan assets.
For GAAP, Periodict Pension Cost aka Pension Expense = service cost + interest cost - expected return on plan assets +/- amortization of actual g/l + amortization of service costs
So TOTAL periodic pension cost is not the same as periodic pension cost. Periodic Pension cost is the same as pension expense which is what runs through the P&L, not OCI, when looking at financial statement impacts.
I hope this helps clarify a subject which is simply way more confusing that it needs to be and diverts attention away from the actual learning of the material. I hope this is rectified in future material.
Nethw, So to make it in one sentence Periodic pension cost “US.GAAP” = service cost + interest cost - expected return on plan assets +/- amortization of actual g/l + amortization of service costs
Periodic pension cost “IFRS” = Current service cost + Past service cost (+/-) Net return on plan asset., is that true?? apparently, this topic is a nightmare given the very poor explanation provided by Kaplan.