I have seen many varying posts on this, but can someone please confirm the formula for IFRS pension expense, is it: Current service cost + interest cost + past service cost - actual return OR Current service cost + interest cost + past service cost - expected return
Since the discount rate and expected rate of return are the same, it’s:
net interest expense = discount rate(Beg PBO) - discount rate(Beg FV of Assets)
reported pension exp under IFRS=current service+past service+net int expense
where net int expense=discount rate*prior funded status
there is no expected return on asset under IFRS, expected return=discount rate
If the formula is current service cost + past service cost + interest cost, Then why is there no return component, while U.S GAAP has expected return in its formula?
Because it’s “net interest expense”, which is equal to funded status at start of year times discount rate. This has the affect of including the expected return.
current service cost + past service cost + net interest cost
net interest cost = discount rate × beginning PBO – discount rate × beginning FMVPA
The discount rate × beginning FMVPA is the expected return on plan assets, even though they don’t call it that.
Thanks, and so net interest cost = discount rate x begin fund status?
Yes, as long as you’re careful.
Some people (I amongst them) define funded status as assets minus liabilities; others define it as liabilities minus assets. Some people want net interest cost to be a negative number (as an expense), while others want it to be a positive number (which they’ll subtract). So make sure you have the signs correct.