Economic Pension Expension vs. Pension Expense

Let me see if I have this correct

So economic pension expense : contributions - (change in funded status, where an increase is positive and a decrease is negative) that same for both IFRS and GAAP

Pension expense: Service cost + Interest Cost + Amortized Prior Service Cost + Amortized gains/ losses - expected ROA for GAAP.

Not sure for IFRS, could someone help? Summer?

Oh one last one funded status, Plan Assets - PBO reported as a liability for GAAP, but with IFRS for funded status you add back in prior service cost and actuarial losses?

For IFRS you add unrecognized actuarial losses (gains) and unrecognized prior service costs.

F unded Status

+/- U nrecosgnized Actuarial Loss (Gain)

  • U nrecognized prior service cost

= N et Pension Asset

Economic Pension Expense has a few formulas… I’m not sure about the one you have there.

Funded Status at End - Funded Status at Beg - Contributions = Econ Pension Expense or

Current Service Cost + Interest Cost - Actual Return on Assets = Econ Pension Expense

MissCleo, reverse your first equation: Economic Pension Expense = Change in Funded Status - Contributions. Change in Funded Status = Ending PBO - Beginning PBO - Actual Return on Plan Assets.

…then you need to adjust your income statement to reflect the true “economic” expense.

  1. Add reported PE to operating profit. (To cancel it from there since it was subtracted already)

  2. Subtract service cost from operating profits (b/c it is an operating expense and should be subtracted)

  3. Add interest expense from PE to “interest expense” on income statement (b/c it is an actual interest expense).

(I mean add it as an additional interest expense, so may be I should say subtract)

  1. Add Actual return on Plan Assets to “Other Income” on I/S (b/c previously we added an expected figure not actual)

There you have it, your income before taxes is now economically sound.

Is there another way to to adjust income before taxes more directly than that? Probably.

My equation is right you just have to take special care, if it’s more underfunded than you’ll have a - change in funded status

It depends on what works for you, but just remember that Pension Expense is a cost.

If you say economic pension expense = contributions - change in funded status, it is not accurate. Why?

If pension expense =$1000, it means you deduct $1000 from your operating income. If you have paid $300 in contribution, that offsets your expense…but the way you did it, it increases your expense. If you know what you’re doing it’s ok, but you should be consistent.

Using the formula economic pension expense = contributions - change in funded status may be missleading. Just remember that:

Economic pension expense = Employer’s Contributions - decrease in the unfunded status.

When the status becomes “less unfunded” your expense decreases. The only real expense (economic expense) is the cash paid the company. The higher the decrease in your pension liability, the less cash you need to cover the liability, which in turns keeps more of it within the company.