Hi All, FinQuiz’s Morning Mock FRA Pension question #26 asks to calculate pension cost reported in P&L (under IFRS) giving you the following:
Current Service Cost $250, Past costs $150, Beg PBO $48,000, Beg Plan Assets $45,000, discount rate 6.5%.
My understanding is under IFRS, pension cost in P&L = current service costs + past service costs + (funded status * discount rate) = 250+150+[(45,000-48,000)*.065] = $205
The answer sheet shows the calculation as 250+150+[(48,000-45,000)*.065] = $595 (they reverse the PBO & plan assets in calculating funded status)…
Which of these is right? I feel like FinQuiz is wrong. Many thanks
It seems wrong, but it is right. When calculating the IFRS interest expense in the P+L you should switch the sign on the result from the traditional way you calculate beginning funded status. Kinda counter intuitive, but:
- If the plan is reporting a liability, interest EXPENSE is reported
- If the plan is reporting an asset, interest INCOME is reported
Traditional way: 45,000 (Beginning plan assets) - 48,000 (Beginning funded status) = -3,000 (an underfunded plan, a liability)
Since we have a liability, the P+L will report a positive interest expense. The way you calculated would actually reduce the total P+L expense.
Hope this helps.