Excess Employer Contribution then Total Pension cost impact on CFO & CFF

CFA Level II
#1

I have just seen a problem in curriculum where excess Employer Contribution then Pension cost increases both CFO & CFF, my assumption was it only increases CFF. Please share any logic of this

#2

As far as i remember if the employer contributions are greater than the funded status - it is like a loan thus it impacts cash flows the CFF…

Any suggestions?

#3

Yes I also think it only impacted cash out flow from CFF, but in curriculum one of the question it told will increase both CFO & CFF, hence confused

#4

It increases the outflow in CFO, which is a reduction.

#5

one goes up and the other goes down. They can’t both go in the same direction.

the way I look at it is this. If employer contributions > TPP then you are paying back a loan which means outflow of CFF (goes down), then do opposite to CFO so it goes up.

and vice versa if employer contirbutions < TPP as you are taking out a loan to pay for the extra costs that are above what you (the firm) are able to contribute

#6

if contributions are greater, do we have to multiply this by (1 - t) before adding to CFO?

#7

Yeah excess contribution * (1-t)

#8

When contributions > expense, and we add the shortfall to CFO, why do we only add after-tax amount?

#9

Ya it is right, i have rechecked that BB example there they increase cash infow for CFO & also increase Cash outflow for CFF, that incease word has in turn confused me.

Failed to observe inflow & outflow.