Just trying to understand why the expected rate of return has no impact on the PBO, Service Costs and Pension expenses.
Is this becasue expected return does not come into Service cost calculation. Increase in expected return reduces the Expected return on plan assets component on GAAP (therefore lower) I presume the Expected return has no impact on the PBO either right? And that for IFRS no changes in expected return should make any impact on anything?
Increase in discount rate = lower PBO, Lower Service cost, lower pension exmepnse
Increase in compensation = higher of all above
Increase in expected rate of return = SC N/A Obligation N/A Pension Expense lower
sorry guys one other question
On Q23 CFA mock Afternoon paper in calculating the periodic pension cost, why did the remeasurement component not include the difference between actual return and expected return on plan assets? Answer keys only shows the amortization of past acturial losses component?
I’m actually doing the question on Q23 Afternoon right now so good timing. I haven’t FULLY understood the AR - ER part, but what I do know from looking at it long enough is that it cancels out elsewhere (meaning the ER or the AR appears elsewhere in the formula).
By the way - the answer key doesnt show the amort. of past ACTURAL LOSSES. It’s the amort. of past SERVICE COSTS.
The bottom line is periodic pension cost for US GAAP = service cost + amort. of past service + interest cost - ER (expected returns) - acturial galns/losses. Just follow this formula and you’ll hit the right answer.
And note, this IS NOT the same formula as total period pension cost (periodic pension cost looks at items that go to both I/S and OCI) whereas period pension cost/expense only looks at items going to the I/S part and not the OCI part.
Hope that helps.
Now can you do me a favour? Would you be able to explain each of the items in English for me? Running out of time and I just can’t get my head around what service cost is, actuarial gains/losses, past service costs etc. What exactly are they in plain English?
Thanks.
Increase in Expected Rate of Return only decreases Pension Exp for GAAP. IFRS doesn’t use it.
For IFRS the expected return on plan assets = the discount rate used. For US GAAP it does not so the expected return on plan assets and full interest cost are calculated. For IFRS the interest cost is simply the Funded status of the plan multiplied by the discount rate. I blieve, could very well be wrong
In IFRS there is not expected return on plan asset. Netted (unlike measure in USGAAP) interest expense is discount rate x beginning funded status. May be positive (thus income not int. expense) if is overfunded.