Pension Accounting

CFA Level II
#1

There’s a great post that tries to summarize and clarify pension accounting, however I’m still a bit confused, and decided to make this post to try to remedy those confusions (in conjunction with questions 23 and 24 from CFAI Mock 1 A). 1) Total Periodic Pension Cost (which is DIFFERENT than the Periodic Pension Cost*)

TPPC = Change in Funded Status - Employer’s Contribution

Alternatively,

TPPC = Current Service Cost + Interest Cost - Actual Return on Plan Assets [I’m assuming this calculation is the same for both GAAP and IFRS?]

2) Periodic Pension Cost

[IFRS] PPC = Service Cost (P&L) + Net Interest Expense (P&L) + Remeasurements (OCI)

  • Therefore, only Service Cost + Net Interest Expense appear on the Income Statement

  • Net interest expense = net pension liability x interest rate

[GAAP] PPC = Current Service Cost + Interest Cost - Expected Return on Plan Assets + Amort of Past Service Cost

  • All appear on the Income Statement

*See the answer to question 24 on CFAI Mock 1 A

Am I missing anything here? Anything to add?

#2

You missed that IFRS PPC also incudes past service cost. (or maybe you’re calling Service Cost = Current Service Cost + Past Service Cost)

Also, magician says its Periodic Pension Expense when referring to the P&L cost.

I have also seen total pension cost being calculated as just the Current Cost + Past Cast. I actually ran into this problem on the Boston Mock today which stumped me because I was triyng to calculate TPPC and it wasnt in the answer choices. I think the mock exam question in CFAI you’re refering to has to do with this issue.

#3

I think your TPPC is incorrect.

TPPC = Current Service Cost + Interest Cost - Expected Return - (Actual Return - Expected Return) + Past Cost + Actuarily Loss

= Current Service Cost + Interest Cost - Actual Return + Past Service Cost + Actuarily Loss

= P&L + OCI

#4

I don’t think TPPC includes Past Service Cost. I’m looking at the solution to question 24 on CFAI Mock A: Morning Session

EXHIBIT 2

SELECTED INFORMATION FROM NOTE F OF ATLANTIC’S 2013 ANNUAL FINANCIAL STATEMENTS ($ THOUSANDS)

Start-of-year pension obligations 72,544 Start-of-year plan assets 60,096 End-of-year pension obligations 74,077 End-of-year plan assets 61,812 Current service cost 1,151 Interest cost 5,441 Actual return on plan assets 5,888 Expected return on plan assets 4,597 Benefits paid to retired employees 5,059 Employer’s contributions 887 Amortization of past service costs 272

Answer:

Service cost 1,151 Interest cost 5,441 Less actual return on plan assets –5,888 Total periodic pension cost 704

#5

The reason why the mock answer doesnt include past service cost in TPPC is because there are no past service cost listed.

“Amortization of past service cost” has already been charged and is not the same as past service cost.

#6

I see. Good point.