I am finding difficultly in understanding defined benefit pension obligation. Can any one please explain why the pension cost is capitalized as part of inventory?
Moreover please help me out if you are aware of reading on Compensation which is simpler than the one in CFA curriculum and is conclusive also at the same time.
where did you read that pension cost is part of inventory? please let me know.
try on youtube:“employee compensation cfa”
Thank you for your reply. I was refering to below mentioned text. I am still confused with regards to same.
""Reporting the Periodic Pension Cost. As noted above, some amounts of pension costs may qualify for capitalisation as part of the costs of self-constructed assets, such as inventories. Pension costs included in inventories would thus be recognised in P&L as part of cost of goods sold when those inventories are sold. "
(Institute 185) Institute, CFA. CFA Institute Level II 2014 Volume 2 Financial Reporting and Analysis. John Wiley & Sons P&T, 2013-07-12. .
When a company produces inventory, that inventory is valued (carried on the balance sheet) at the cost of production. The cost of production includes direct elements, such as the cost of materials used as well as more indirect expenses, such as some fraction of the depreciation charged on machinery and other long-lived assets used in the production of that inventory as well as an allocation of the remuneration/wages/benefits production employees receive for their work.
Employee benefits include an element of pension cost, so it is indeed true, that some of the pension cost ends up being capitalised as part of inventory instead of hitting the P&: immediately.
Thank you Wojtek for clarification. Now i can make sense as to why it should be capitalized as inventory.
Glad to hear it! You are welcome.
I see lot of people have problems with pension. I would recommend you to get hold of Elan’s Employee Compensation chapter, it is awesome. For me, pension is one of the easiest chapter in FRA just because how well Elan has explained the chapter. I was able to walk over the EOCs after going through Elan Study Notes and Vids… In fact they have gone a step further in explaining concepts not properly explained in curriculum. There is a lot of confusion in curriculum on Pension Chapter. I strongly recommend Elan’s Guide not only for Pensions but for your prep, their material is much better than Schweser…period!
@Asahkir:
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