it is to my understanding that interest expence referes to the funded status multiplied by the discount rate and interest expence is a term relevant to only IFRS. Under us GAAP it is interest cost and as the interest rate is not assumed implicitly equal to the discount rate (talking about GAAP) they are not treated like IFRS
How are the interest expences/costs treated in GAAP
can somebody clarify how interest expence, expected return(on assets) and actual returns(on assets) are treated in GAAP system.
preferrably how it would be different from IFRS.
a little example would be really appreciated
Hi there,
From what I red on the manual for IFRS and US GAAP in regards to interest expense there are differences because US GAAP is considering distinctively Pension Plan Asset Returns (PPAR) and Interest Expense on Pension Obligation (IEPO) in every period.
IFRS simply uses the Discount Rate (DR) to consider both, this brings the simple formula you mentioned; using the DR on the Funded Status ( =Pension Plan Assets - Pension Obligations).
US GAAP is not using the DR to calculate PPAR but the Expected Return (ER).
So immagine we have:
Beg PPA: 1200
Beg PO: 1450
DR: 4.2% ER: 7.3% AR: 5.5%
US GAAP: 1) PO + Interest Expenses = 1,450*1.042 = 1,510.9
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PPA + Pension Plan Assets Return = 1,200*1.073 = 1,287.6
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{to compare with IFRS} Net Interest Expenses = 1) - 2) = 223.3
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Remeasurement (Actuarial Gains) = PPA*(ER-AR) = 21.6
IFRS: 1) PO + Interest Expenses = 1,450*1.042 = 1,510.9
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PPA + Pension Plan Assets Return = 1,200\ *1.042 = 1,250.4
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Net Interest Expenses = 1) - 2) = 260.5
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Remeasurement (Actuarial Loss) = PPA*(DR-AR) = -15.6
With both we obtain with remesurement 244.9 Net Interest Expenses. The difference will then be on the way the Actuarial Gains/Losses are reported in OCI and PnL for each accounting method.
I’ll let you finish! I have no more time, but let me know if I have made any mistake.
Regards,