on the free cfa mock there was a question about the pension expense for a company. so you have: + Service cost + Interest cost can we talk for a sec about the smoothed stuff? - expected return on plan asset (so if expected is a pos number, you subtract here, fine) +/- amortization of unrecognized prior service costs. talk to me here- so if the company decides to give employees let’s say 1% more a year, it ups the cost, so would this number then be a + number that you’re adding to the expense? +/- amortization of unrecognized loss/gain. what is this? changes in assumptions like the discount rate or something? so let’s say you upped the discount rate to make your PBO smaller… do i add or subtract and what am i adding or subtracting? any help on those 2 +/- ones to get them straight in my head would be fantastic. thanks!
bannisja Wrote: ------------------------------------------------------- > on the free cfa mock there was a question about > the pension expense for a company. > so you have: > + Service cost > + Interest cost > > can we talk for a sec about the smoothed stuff? > - expected return on plan asset (so if expected is > a pos number, you subtract here, fine) Smoothed by using market related value to calculate the asset base on which the expected percentage return is multiplied by to get a dollar number. > > +/- amortization of unrecognized prior service > costs. talk to me here- so if the company decides > to give employees let’s say 1% more a year, it ups > the cost, so would this number then be a + number > that you’re adding to the expense? True, the change will be amortized into the IS over the service life of the employees (I think). > > +/- amortization of unrecognized loss/gain. what > is this? changes in assumptions like the discount > rate or something? so let’s say you upped the > discount rate to make your PBO smaller… do i add > or subtract and what am i adding or subtracting? > Since this is an expense item running through the IS an increase in the discount rate would be a negative number (decrease the expense). Again this change will not all run through the IS at one time, but will be amortized in over time. > any help on those 2 +/- ones to get them straight > in my head would be fantastic. thanks!
mwvt9 Wrote: > > True, the change will be amortized into the IS > over the service life of the employees (I think). >> Hi Mwvt9 … agree with your reply but will make a slight change G/L arising due to change in accturial assumption (discount rate, expected rerun, compensation/salary rate and change in life expectancy) amortized, Under IFRS over the service life of the employee and under US GAAP over the employee’s life expectance.
Rakesh Wrote: > G/L arising due to change in accturial assumption > (discount rate, expected rerun, > compensation/salary rate and change in life > expectancy) amortized, > Under IFRS over the service life of the employee do you mean under expected remaining service life? > and under US GAAP over the employee’s life > expectance.
1% more a year (from unrecognised prior sevice costs) , is ultimately an increase in service cost; this will increase pension expense. The amortized amount for that period will be added to reflect the true pension expense. increase in discount rate will reduce PBO; consequently reducing pension expense. therefore, the amortized amount for that period subtracted to get the pension expense. Thats my understanding of it.
maratikus Wrote: ------------------------------------------------------- > Rakesh Wrote: > > > G/L arising due to change in accturial > assumption > > (discount rate, expected rerun, > > compensation/salary rate and change in life > > expectancy) amortized, > > Under IFRS over the service life of the > employee > > do you mean under expected remaining service > life? > > > and under US GAAP over the employee’s life > > expectance. Hi Maratikus, YES. Also, under IFRS any G/L arising due to change in pension plan (plan amendment) is expensed and under US GAAP (as per new Std) it is shown on BS(funded status) but not expensed i.e on PNL we still amortized. The comparison btween IFRS and US GAAP for pension is bit tricky as we need to remember the OLD US GAAP too.
thanks, Rakesh. i don’t think I will remember everything …
There’s a few misconceptions abover. Clarify: A. Unrec. prior service cost: for pension plans will almost always be a + number since it will arise when increasing benefits. This allows companies to ‘spread’ the cost of providing better benefits over time, rather than take a huge hit in P&L now. B. Unrec. gain/loss: will arise for a. any change in actuarial assumptions b. any experience in the plan that is different than acturail assumptions (e.g. assumed 8% return on assets, plan actually returned -10%). Both A. and B. above are amoritzed over expected working lifetime of actives (under IFRS or GAAP). The only time average future lifetime is used is if the plan does not have any actives employees, then it switches from working liifetime to life expectancy. Also, pension expense is calculated the same under both old- and new- standards under GAAP, the difference is how that expense, and resulting benefit liability, impact the balance sheet.