Hi all, Can somebody explain how economic pension expense has been calculated in Example 5 (solution 1) of the FRA book on page 107? My fragile foundations are stirred now! Many thanks
2 formulae (methods) to use: Method 1: a. Take PBO End - PBO Begin b. Add Benefits Paid c. Subtract the Actual Return on Plan Assets =============================== Economic Pension Expense =============================== Method 2: a. Take Net Funded Status End (PBO End - FVPA End) b. Take Net Funded Status Begin (PBO Begin - FVPA Begin) c. do Net funded Status End - Net Funded Status Begin d. Subtract Employer Contributions from c. ========================================= Economic Pension Expense ========================================= You might find sign differences (like one number in method 1 might be positive, the other number from method 2 may be negative) but the number should be essentially the same. Another source of difference - might be especially if u use the Method 1 (where the complete PBO is figured in) you might find the numbers may be a little bit off because of the adjustments etc. But that is the method. try this on the problem you have issues with, and see if it resolves your question.
CP, I am not clear with method 1. First, benefit paid should cancel out- but what you are saying is it is addresses only in PBO. What happens to the plan asset side. What about employer contribution in method 1. Can you please, illuminate me on this? S
there is no illumination required. read the book it is all there laid out. benefit paid will not cancel out. benefit paid is not part of the expense. look at it another way: all other portions of change in PBO between periods other than the “Benefits Paid” are the true pension expense. Company receive Actual return on Plan assets. So that is a benefit to the company, and this helps offset some of the pension expense. That is the method 1. No Employer Contribution needs to be included in Method 1.
Thanks CP, Very valuable- "look at it another way: all other portions of change in PBO between periods other than the “Benefits Paid” are the true pension expense. "
I just did this question. I found the easier way would be to do it like this: Econ Pen Exp = Ending Funded Status - Beginning Funded Status - Employer’s Contribution The tricky part here is that, you need to use (negative) for Funded Status as a liability (and positive for asset). Employer’s contribution would always be negative because it is a spending. If you messed up the signs (like I did initially), you will not get the right answer.