Internet Expense = Beginning PBO *Discount rate ? can someone explain the logic pls ?

Hi guys ,

hardly 20 days for the exam and i am lagging big big time ! still got 18 readings to do + EOC of all chapters and then mocks . currently i came across a problem in the EOC for pension accounting where it says :

intrest expense = begining PBO * Disc rate . i dont really understand the logic behind it . isnt Disc rate used to from the PBO ?

First you need to know this applies to IFRS only. US GAAP interest expense is calculated differently.

So the rationale is this: IFRS nets interest expense and interest income into one figure. Now, what is interest expense and what is interest income.

Interest expense=interest expense calculated in Plan Obligations

Interest income=income from Plan Assets

We know PBO= Plan Assets-Plan Obligations

IFRS assumes the discount rate/yield used in both Asset and Obligation is the same number, say 6%.

So you have

Expense=6% * Obligation

Income=6% * Asset

To net interest expense with income you can write 6% * (Asset-Obligation) = 6% * PBO

Thanks kroko !!

your a life saver !

had no idea that intrest exp and return on assets are calculated on the same rate in IFRS .

Thanks again !

Here is a summary of IFRS and US GAAP difference as a reference

Thanks a ton brother !

I’ve saved it as an image on the PC .

P:S: u got summaries for other chapters as well , mainly ifrs VS Gaap ? :stuck_out_tongue: if i am not asking for much that is .

I just realized I may have answered a different question… :slight_smile:

You asked why Expense is DIscount rate * PBO, I answered why net expense is Discount * Funded Status (Asset-PBO).

Here is a bigger summary posted earlier

Woow ! thanks a ton bro ! i might just be able to ace FRA using this summary .

P:S: sorry for being greedy but , u have a summary for equity … i got tons to complete … hence , my greed …

No I don’t have any special notes on equity but dymke has done a terrific job in neatly condensing the curriculum.

Thanks alot again krok .

btw , one more question regarding pensions . How is a reduction in Disc.rate = reduction in liability i.e, PVBO ?

shouldnt an increase in Disc.rate have that effect and not a decrease ?

its from EOC Q15 form the curriculum .

You are right about the effect of discount rate on the PBO. ↑Discount rate=↓PBO

The question setup is somewhat confusing. Had the company used the 2007 rate instead of 2009, the PBO would have been lower…

hmmm … i see . and one final question :

reameasurement = Net return on planned asset +/- Acturial gain/loss .

now as per IFRS and U.S.GAAP is in the net reutn on planned asset calculated ?

this chapter is really confusing …

As we saw previously, in the income statement (regarding interest income) we use either the predetermined discount rate (IFRS) or the expected return (US GAAP). This expected return can be an arbitrary rate different from the discount rate.

At the year end you see that the asset return was actually different from the above. You calculate the differences and put it in OCI (not income statement). The methodology and calculations are illustrated in the above table under e) Remeasurement.

got it ! thanks .

only i should remember all the formulas and terms , its super confusing.