IFRS pension cost recognized in the income statement

For IFRS net interest income expense I noted the formula to calculate as such:
discount rate x (beginning funded status-past service cost)

In a practice question I noticed to calculate net interest expense no deduction of past service cost allthough this past service cost was part of the the service cost.

Should I use the formula “discount rate x (beginning funded status)” instead?

I have the impression I should delete past service cost from the formula and use those instead:

US GAAP beginning PBO x discount rate

IFRS beginning funded status x discount rate

even if there is a past service cost in the income statement which should be taken into account for both in terms of DB related expenses income statement (except if there is an assumption no amortization of past service costs).

I don’t think so.

Is there anything about past service cost in this question?

Yes there was a current service cost and past service cost for the pension cost recognized in the income statement.
But in the answer the net interest expense is calculated as discount rate x (beginning funded status) not deducting any past service cost…

Just checked on the CFA website and quite some confusion on this question, seeing similar questions as mine. For US Gaap it seems logic no to take into account for calculating interest expense as past service cost is via OCI and could be amortized over service life but not necessary. For IFRS would seem logic past service cost needs to be deducted for calculating net interest rate expense as it is recognized in the income statement but in the practice question answer not the case. They use IFRS beginning funded status x discount rate allthough past service cost being recognized in pension expense for the same year.

Past service cost is deducted from beginning funded status, or from beginning PBO, before interest expense is calculated.

Treat past service cost as if you had accounted for it in the past.

Whoever wrote that question got it wrong.

It’s not logical.

Past service costs are in the past, so they adjust the beginning PBO and the beginning funded status.

Whether it’s recognized on the income statement or directly to OCI doesn’t matter; what matters is its affect on the liability, and it affects the beginning liability.

Trust me on this. I’ve been doing this twenty years.

Thank you, very good and clear explanation! You r the master :pray:

My pleasure.

You’re very kind.


I have tried to research this for a while but I am having trouble as published accounting standards are behind the paywall and I am not an accountant.

Do you have a source documents for the approach you are using? References I find from accounting bodies suggest that with “significant” chnages you get an adjustment to opening valaution by doing a revalaution otherwise no adjustment is made.

The published approach by the CFA does not take the approach you suggest and the examples they use balancing opening and closing funded status does not imply any adjustments to opening balance when calculating interest cost.

I am not trying to be awkward here. I just want to fully understand what the correct approach in the real world is nd if the CFA approach is incorrect.

Regards, Mike

Unfortunately, CFA Institute has gutted their explanation of the treatment, and I no longer have the 2017 curriculum which I used when I wrote my article on pension accounting.

The best I could find was an old copy of White, Sondhi, and Fried’s Financial Statement Analysis, which used to be the textbook for FRA for the CFA program. They describe past service costs as retroactive: the adjustments are made to historical financial statements, and, thus, would affect the beginning PBO and funded status.

The treatment is much the same as the treatment for changes in an accounting principle (e.g., changing from LIFO to FIFO, or from straight-line to accelerated depreciation): you change your financial statements retrospectively; i.e., redo your historical statements as if you had been using the new principle all along.

Thank you.

From looking at guidance notes given by large accounting firms I think I understand as the following.

If the effect of past costs is significant then opening liability should be re-valued, otherwise no adjustments need to be made to opening liability due to past pension costs.

Interest cost calcualted should reflect and payments into and benedits from the fund which may effect the calculation of “costs due to the passage of time”. But I see no guidance suggesting that opening liability should be adjusted for past service costs before calculating interest rate liability. I get the idea you reference from the accounting text but i don’t see that in the guidance notes.

If we then look at it from a CFA exam perspective.

Where the CFA do reconiclations of opening and closing funded status and calculation of interest costs they do not adjust for past pension costs.

They used to make the adjustment in one of their US GAAP focused questions but the recent errata has changed this to not making an adjustment for past service cost, if memoryt serves me correctly the orgainal adjust to include past service only came in as an errat in a previous year.

As far as students go, who should be able to answer questions from the tex,t there is no reference at all about making any adjustments to opening liability to calculate interest costs. I don’t know how a student, unless they were a qualified accountanty would know anything other than what is presented in the text interest cost - opening liability x interest cost%


As I said, CFA Institute has gutted their explanation of the treatment.

Therefore, I cannot imagine having a question on the actual exam that asks a candidate to compute the interest cost when given past service costs.

I’m so glad that I’m not a candidate these days!

As a CFA I get really upset by the quality of the stuff they put out. As a student I would be really cross given the amount they collect in exam fees and the quaility of the product you get.

Oh well.

I hope your new interactions with them make them up their game.