Pension Cost - Different Methods of Calculating

Hi I’m a retaker this year and Reading 20 Employee compensation has changed somewhat with the new changes to IFRS. I was confident with this topic last year but some changes have thrown me off this year.

As you know there are three different ways of calculating pension cost (formerly called ’ pension expense’-)

  1. US GAAP Version ( Service Cost + Interest - Expected return +/-Amort G/L + Amort PSC)

  2. IFRS Version (Service Cost + Net Int exp/inc + PSC

  3. Total Periodic Pension Cost version ( Ending Funded status - Employer Contributions - Beginning funded status)

Number 3. last year was actually called ‘economic pension expense’ so it was easy to differentiate with the other two methods when calculating pension expense in an item set.

My question is will a question have to specify which calculation to use? I mean will they say calculate pension costs under GAAP or IFRS ? Will calculation 3 more resember the IFRS version of calculating pension cost (as it doesnt use expected return on assets?)

Could somebody please clear this up please it’s doing my head in


Yes, they’ll be clear. When it’s a question between 1. and 2., you’ll know which because they’ll specify in the vignette whether the company is using US GAAP or IFRS. When it’s a question of using 3. or not, they’ll specify in the question whether they mean economic or accounting pension expense.

Thanks s2000.

Can another candidate please give me some input aswell.

For e.g in an item set if they specify that they are a company in the UK you can infer that they use IFRS and you can use equation 2. Can you also use 3?

I will expect that the question will be very clear. This particular section involves several estimates/assumptions and i think in order to avoid a confusing situation where two candidates may read the same statement and arrive at different assumptions -and in which both will be theoretically right, the CFA will want to make sure ALL information are given in a clear concise manner.

My pleasure.

I don’t know why candidates (many, many candidates) harbor this notion that CFA Institute tries to trick them on these exams, in this case by making them guess whether to use US GAAP or IFRS.

The purpose of this exam isn’t to see whether you can guess which is the correct accounting system to use. The purpose of this exam is to determine whether, when you know which accounting system you’re using, you can use it correctly.

They will let you know. Stop worrying about it. There are things to worry about on this exam; this ain’t one of 'em.

@trogulj: Did you solve EOCs of Pensions? They have clearly indicated when to use IFRS and when to use U.S. GAAP.

And by the way total periodic pension cost is same under both the standards. It is just the treatment of the COMPONENTS of pension cost which is different. For e.g. in US GAAP, past service first goes in OCI and then it is later amortized into P&L. While in IFRS, it is already a part of service cost and so go directly in P&L.

Yeah I ended up doing them last night. They were really good EOC questions and tested everything in the reading.

Thanks everyone