When Calculating Total Periodic Pension Expense is it = to Change in Funded Status minus contributions or contributions minus change in funded status? (change in funded status is beginning - ending status) Can someone explain the rationale so I can better remember?
thanks in advance
Here’s how I think about it:
You start with a funded status. You have some costs, which make your funded status worse. Then the employer contributes some $$ which makes your funded status better.
So if your funded status is -2000 (underfunded), and you had to pay total costs of 1000, then your new funded status would get worse, -3000. Contributions would improve that. So 500 contributions would make it -2500. Your status got worse (from -2000 to -2500), which makes sense because contributions didn’t cover the costs.
The formula falls out of that.
Total periodic Pension expense(Economic Pension Expense) can be thought as Income Tax expense* and Employer contribution cab be thought as Income tax for tax purpose (Cash Tax) .
Change in Deffered Tax Asset/Liability = Income Tax paid for tax Purpose(Cash Tax) - Income Tax Expense (Income Statement)
Change in Funded Status = Employer contribution - Total periodic Pension expens
*However we don’t show Total periodic Pension expense(Economic Pension Expense) in income statement but we show a modified version of it.
Income statement pension expense = Economic Pension Expense -Actual Return +Expected Return
Formula is (if i’m not mistaken):
Employer contributions + (Change in funding status of the plan)
The way I retain it is
Imagine the status of your pension plan does not change. Then the second part of the formula is 0, and the cost for the company is only the employer contribution. (which makes sense).
Then imagine that the pension fund manager screwed it and the return on assets is 100 bucks below the liabilities.
Then the cost for the company is the employer contribution + the 100 bucks (which also makes sense)