pension plan

CFA Level II FRA
#1

If the company contributing more into the pension plan than the total pension cost occurred in the same period, this can be viewed as a kind of repayment of the borrowing, reducing the pension obligation. As for its effect on cash flow, I understand that outflow of CFF will be greater cause of the repayment, but why this will also increase the inflow of CFO by an equal amount?

Thanks.

#2

If the company contributing more into the pension plan than the total pension cost occurred in the same period, this can be viewed as a kind of repayment of the borrowing, reducing the pension obligation.

I dont think it will reduce the pension obligation, However it will increase the pension assets. Pension obligation can be changed by benefits paid (absent actuarial gains/losses, past service amendments etc)

CFF will be lower not higher (for repayments) and since this was originally not put in as a financing outflow it was deducted as an operating outflow. so you make the necessary after tax adjustments.

It was because entire expense was categorised as operating expense in case of GAAP (GAAP reequires you to present pension expense in one line whereas under IFRS it is represented in various lines so for comparison purposes you make the due adjustments)

It would be better someone confirmed my answer. I am almost sure but not a hundred percent

#3

Thanks, nitinsiwach.

I reread the reading and I think before I misunderstood what it wrote. But here are some points I’d like to make for what you’ve mentioned:

  1. You are right that contribution will not reduce pension obligation (I was stupid…). It will increase pension assets, which is true as it’s the most direct effect, and it will ultimately reduce net pension liability for that period.

  2. CFF will be lower, for sure, but I said the outflow of CFF will be higher…which is actually the same thing. About the CFO outflow I got it now. Was a misunderstanding before.

You acquired this knowledge better than me.

#4

I think of this relationship in a different way which is kind of generalization: if you increase/deacrease any of the cash flows, you have to adjust for the same amount somewhere else. In the context of pension expense/contributions, CFF and CFO are complenetary and the movements of the cash flows is from the one source to the other.

#5

Thanks DaRookie. That’s absolutely true!