just to clarify- if economic pension expense > employer contribution, the difference net of taxes is reclassified from CFO to CFF? so CFO is reduced and CFF increases?
Yes. If EPE > contributions, its as if the plan is borrowing money, which would increase CFF. If EPE< contributions, its as if debt is being paid down, which reduces CFF.
thanks spanish. another adjustment is to income. only service cost is added to operating income. interest cost is added to interest expense, and actual return on plan assets are added to other non operating income. am i missing anything else?
theCFAway Wrote: ------------------------------------------------------- > thanks spanish. another adjustment is to income. > only service cost is added to operating income. > interest cost is added to interest expense, and > actual return on plan assets are added to other > non operating income. am i missing anything else? adjust ment to cashflow with indirect method to reflect true economic position: adjustments to reported cashflow: add back reported pension expense less contribution from employer adjustment to reported NI: (add back reported pension expense less economic pension expense) X (1 - tax rate)
theCFAway Wrote: ------------------------------------------------------- > just to clarify- > > if economic pension expense > employer > contribution, the difference net of taxes is > reclassified from CFO to CFF? so CFO is reduced > and CFF increases? Correct but drop “net of taxes” in the above.
well schweser does read net of taxes … care to explain dreary ? please … thanks 
If Change in Funded Status = +$100 milion, and you paid $80 in employer contribution, economic pension expense (EPE) = +$100 - $80 = +$20 million. So, EPE < contribution, which means you have in reality (economically) paid $60 million more, that full $60 million is a CFF outflow. If Change in Funded Status = +$200 milion, and you paid $80 in employer contribution, economic pension expense (EPE) = +$200 - $80 = +$120 million. So, EPE > contribution, which means you have in reality (economically) generated an extra cash flow of $40 million, which is a CFF inflow. That’s my understanding. No taxes are involved. Your CFO is computed as: CFO = NI + P.E. - Contribution, because P.E. is non cash, and contributions are cash payments. Not sure, though, of exactly what you have to do to account for the CFF adjustment we did above, so that you take “something” out of CFO and put it in CFF. Still, would be nice if someone confirms all of this.
Dreary - I agree with all your calcs. However, you need to multiply the adjustments above by (1-T) so you can get the after-tax effect. Why after tax effect? Because in a scenario, for example, where contribution > EPE, you are paying down principal. Interest expense is tax deductible.
…my head is still spinning from these adjustments…I just have to commit to memory.