By definition, economic expense is supposed to reflect the cost of the pension plan (interest cost + service cost) offset by the actual asset return associated with the plan assets. Historical costs, such as unrecognized service cost, are ignored. Now assume that there was a plan amendment on August, 01, 2009 (with a cost of $X) and we are analyzing the income state as of Dec. 31, 2009. What will be the economic expense for 2009? A) Interest Cost + Service Cost - Actual Asset Return B) Interest Cost + Service Cost + $X - Actual Asset Return I do not have a definitive answer to the above-mentioned two options. I am thinking that if we are projecting Income Statement entries for future years, we will use option A but we will use option B if we are concerned about analysing 2009 statement only. But there are no such ifs and buts in the exam. So what do you guys/gals think? Thanks
The formula for Economic Expense is: Service Cost + Interest Cost - Actual return on Plan Asset +/- Losses (gains) from Plan Amendments in CURRENT period +/- Prior Service Costs (benefits) in CURRENT Period. So, for exam purpose, B is the only correct option. Also, Economic Expense is for Analysis Purposes only. It is for analysts to know the amount of expense that would have been reported, had it not been smoothened. Since, smoothening is an allowed practice (and for very good reasons), it is highly unlikely to see Economic Expense being reported on any actual I/S.