Pensions are a pain alright.
I am confused over net periodic pension cost
OR
CFAI text page 192, 2.4.3 , 2nd para shows formula no 2.
lets get to the EOC. solution to EOC question no 6 on page 210 uses the same formula no 2.
solution to EOC question no 9 on page 210 uses formula no 1.
Confused. what am i missing.
Net Periodic Cost = Contributions - (Ending status - Begining Status)
I am confused on another part though in other questions the material says that pension expenses = service cost + interest cost + past service cost +/- Actuarial Losses/Gain - Expected Returns
What is the difference between Net Period Cost and Total Pension Expenses as explain above?
Total pension expense more or less drives net period cost, because it explains the change in the PBO and therefore funded status.
Put another way, total pension expense is what is changing the funded status. When that status increases towards overfunded, it means we require less contribution to cover that periods cost. So for example any actuarial gains will decrease what we have to pay to meet our obligation.
CFAI has really done a poor job in explaining this stuff. Remember this: Contribution are always ADDED to the funded status when calculating periodic pension cost. What you should be be concerned about is whether the sign of the funed status is positive or negative. In EOC # 6, funded status is NEGATIVE. Funded status at end of year = 28,879 of PO - 24,105 of PA = 4,774 Funded status at beginning of year = 28,416 of PO - 23,432 of PA = 4,984 Change in FS = 4,774 - 4,984 = - 210 (see it is negative)
We are now going to add the contributions to calculate periodic pension cost. Periodic pension cost = -210 + 693 of contributions = 483. In EOC #9, funded status is POSITIVE. FS at end of year = 41,720 of PO - 38,700 of PA = 3,020 FS at beginning of year = 42,000 of PO - 39,000 of PA = 3,000 Change in FS = 3,020 - 3,000 = +20 (see it is positive)
But, we will still add the contributions to calculate the periodic pension cost. Periodic pension cost = 20 + 1,000 = 1,020 Hope this makes sense to you now. Just be extremely careful about the signs while calculating the change in funded status. 
Alternatively, you can also calculate the periodic pension cost for EOC #9 as:
Periodic pension cost = current service cost + past service cost + interest cost + actuarial losses - actuarial gain - actual return on plan assets Periodic pension cost = 200 + 120 + (42,000 * 0.07) + 460 - 2,700 = 1,020
If you are still having trouble, then i will highly recommend you to purchase the Elan Guides’ reading on Pensions. I swear i’d not have understood this reading if i haven’t read from Elan.
Pension expense is just one component of the Periodic pension cost that goes out into the P&L.
Under both the standards, periodic pension cost is SAME but pension expense is treated DIFFERENTLY!
PBO includes the actuarial gains and losses right? But under IFRS, it is the component of remeasurement and it is taken directly into OCI and is never subsequently amortized into P&L. Then, how can you say that pension expense explains the change in funded status? Makes no sense to me!
SpyAli
Thanks i understood after i went through Elan Notes. They have really done a good job explaining the stuff.
Eesh…yeah for those that said intercorporate questions are trickier…I have to agree. Time to take a lunch break and spend the afternoon/evening on intercorporate again. The CFAI EOC’s are tricky.
When you say buy Elan notes to help, did you mean Elan videos, or Elan notes??
Folks, the 2012 Schweser books (I dont know 2013 has, thats why I am saying this) had couple of wonderful problems which clarified Intercorporate Investments very well for me. Also analystnotes.com questions a few of them were just too good for pensions.
The key to remember a formulae is to keep solving problems. So keep doing them every week in the last couple of months and you should be great. And pensions is sure shot itemset in L2 anyway, so why take a chance. Well worth the effort!
Note: IMHO even though pensions are considered tough, they are the easiest to score off - believe me… I dont deny its extremely tough to learn, but very easy to score off (unlike intercorporate investments)… They can ask you the following points:
a) net funded status (under IFRS, GAAP)
b) how to calculate funded status in ifrs from GAAP,
c) Effect of actuarial assumptions on Funded status
d) Pension Expense and whats economic pension expense…
Thats about it actually? CFAI text has done a very poor job of explaining. I went for a class locally and the guy made presentations which were very good… Why? He explained GAAP first, then applied a delta for IFRS - so eveyrthing was very clear. If you could prepare this way, it could be really helpful.
Good luck mates!
I had the same hard time as you after reading pension from Schweser. I did quite good on the Schweser EOC, but when i went to the CFAI EOC, it was impossible.
i have then read the chapter in the CFAI textbook, which has helped me a lot. Along with the deeper explanations, it has some little term names variations which comes more familiar.
FYI - for level 1 i have studied only from CFAI, and now only schweser doing the EOCs from CFAI. And i think besides being extense, CFAI text is very good. But i am getting along well with Schweser too, the only topic that schweser seemed to fail is pension (i have only book5 left to cover).
As in elan material, do you mean notes or videos? Thanks
I was just refering to their material in general as I have both of them. It’s upto you if you have enough time and stamina to sit through the 4 hours long pension video then by all means buy the video else go for their notes. Both are excellent!
Anyone looked at Q10 & 11 from the EOC of CFAI books?
According to Scwesser pg 108 (and most other online resources I have researched):
“The Return on Plan Assets has no effect on the PBO. However, the expected return on the assets reduces pensions expense” - in other words, we reduce pension expense in the I/S by the amount of the expected return on the plan assets for IFRS and GAAP
However, in the CFAI book pg 179 we are told that it is only under GAAP that the expected return on plan assets reduce the pension expense.
Can anyone please clear this up for me? I would, of course assume, thtat the CFAI way is correct but it seems at odds with all other resources which is causing me a bit of confusion.
Thanks
Bit the bullet, and bought Elan intercorporate notes for additional help. Worked great. Now i am mulling over whether Elan does a equally good job covering Reading 23 [Evaluating Financial Reporting Quality(Accruals/Cash)].
Can anyone tell me if Elan does a good job covering it? Its $5 dollars I know, but I am broke (legal issues).
The curriculum appears to have it wrong in one of their tables.
Are you refering to Exhibit 3 on pg 186?
Thanks for the clarifications. I was also struggling on pensions.