March 2014 Mock AM - Periodic pension cost

CFA Level II FRA
#1

Source: CFAI March 2014 mock; Case of Atlantic Reserves

There are 2 separate questions. One asks for “Periodic Pension Cost” and the other asks for “Total Periodic Pension Cost”.

A/c to the solution,

Periodic Pension Cost = Service cost + interest cost - expecteted return on plan assets

Total Periodic Pension Cost = same as above except they use actual return on plan assets

Is this an error? I used Schweser to study and I didn’t find this distinction in the book.

#2

bump

#3

Actually, Schweser use this distinction mate (granted - they do it in a subtle way before the distinctions between IFRS and US GAAP). It took me a while to realise, but it’s there and I just committed it to memory.

#4

Oh!! That’s interesting. Will look it up now.

#5

What they mean by “periodic pension cost” is the part to be recognized into IS; “total periodic pension cost” -the whole cost for the period. I prefer periodic pension cost (for what goes into both OCI and IS) and periodic pension expense (only in IS). Note that in older texts you can meet " economic pension expense" for the whole amount and only “pension expense” for the part that goes into IS.

#6

Yep - and the expected return on plan assets goes into the Income Statement.

#7

Makes perfect sense - thank you

#8

Great explanation. Just one question. What’s with expected and actual return? Where to use expected and where to use actual return?

#9

Only under US GAAP we use expected return. When calculating the amount for the IS, use expected return of plan assets (=% expected return * beginning FV of plan assets). When calculating total periodic pension cost or change in FV of plan assets, use actual return of plan assets.

Under IFRS, same % is used for interest cost and return on plan assets, i.e. for the IS we have

net interest expense = discount rate * (beginning PBO - beginning FV of plan assets)

Again when calculating total periodic pension cost use actual return on plan assets.

#10

Periodic Pension Cost = Service cost + interest cost - expecteted return on plan assets

Total Periodic Pension Cost = same as above except they use actual return on plan assets

#11

How to calculate interest cost under U.S GAAP? Is it (discount rate x Beg Pension Obligation)

#12

Yes, it is.