diff between CF and economic pension expense

CFA Level II
#1

If the diff between CF and economic pension expense is material, what shall the analyst do? Totally forget this one.

#2

Huh, I vaguely remember reading this too. I think if it economic pension expense is greater, then look at it like financing (cash flow doesn’t cover the true pension expense). If cash flow is greater than economic pension expense, then its like an early principal payment on a loan.

#3

it is not cash flow and economic pension expense. It is when there is a difference between economic pension expense and the Employer’s contribution, which the analyst should adjust to reflect on the cash flows. If EPE (Eco. Pension Exp.) > Employer’s Contribution the difference is basically an extra loan available to the company. So CFO would be reduced by and CFF increased by :(EPE - EC)*(1-T) If EPE < EC Difference is a repayment of principal - an overall reduction in the pension obligation.

#4

You’re right. I don’t quite understand why you reduce CFO if EPE > EC. The employer contributes to pension plan and reduced CFO first; then you adjust CF by reducing CFO again and increasing CFF. Can you explain a little on it? Thanks.

#5

Because deriv108 CFF is being increased by the amount of the loan. You are receiving money in the amount of the after-tax difference between EPE and Employer Contributions.

#6

Actually cpk, since I’ve never seen this in action, how would you do: 2008 Cash Flow Statement Excerpt: CFO: Economic Pension Expense=(700) Employer Contributions=400 Tax Rate: 20% CFF: None You would add (700-400)(.8)=240 to CFF and subtract 240 from CFO? Is that it? No other adjustments?

#7

Rellison, if you have QBANK, there are couple of examples there