I’m not sure why I’m not getting this. I’ve got through most of the reading but this still doesn’t make sense to me. Here goes: Why would interest expense be calculated over the beginning pension obligation? I would think it would be calculated over the net funded amount and only if that was a net negative amount (liability). If your obligation is fully funded, why would you be paying any interest?
I may be way off on this one, and I have not yet reached the pension reading. I am still struggling thro’ the details on the investments chapter. it is still an obligation. so you have not yet paid it, and it would be collecting interest over the time, till it is still paid. even if it is fully funded, it just means you have got enough money set aside to make the payments, but it is still to be paid, so it would require an interest collection for that. Also the amount is based on current assumptions - about the future growth rate of salary, life expectancy etc. etc. so it is just an estimate still.
yeah, i don’t have a great answer for you on this one but i think cpk is on to something. you have your PBO which is your future obligation. yes, you have your assets that are set aside to fund the obligation and you have your net asset/liability with the fair value of plan assets - PBO which states kind of your reality where you stand on the plan. but as CPK said, the PBO is still the obligation, and it’s going to increase by the beginning PBO x discount rate annually, which is the interest cost. If you’re fully funded at the beginning of the year and your assets are earning the same discount rate, sure at the end of year it’d be the same story… but what if the assets gain more or lose or whatever? even though we net the assets and liabilities on the B/S to get the pension asset/liability, i think you do have to look at the 2 not netted out when you’re looking at the obligation side growing over time and the assets growing over time. i think? maybe? if that doesn’t fly, just blindly accept this fact, it’s beginning PBO x discount rate… it just is b/c the CFAI told me so. 
i’m doing pensions this weekend also and it’s like torture. i’m just about done with the schweser readings. going to do those end of chapter questions then see if i can move onto some CFAI q’s today. that’s all i have in me for this weekend. pensions are just too painful to do quickly. this is the bad stuff nola. we’ll get through it.
cpk123 Wrote: ------------------------------------------------------- > I may be way off on this one, and I have not yet > reached the pension reading. I am still struggling > thro’ the details on the investments chapter. > > it is still an obligation. so you have not yet > paid it, and it would be collecting interest over > the time, till it is still paid. Its interest expense, so something being paid out. It talks about Return on Plan Assets separately. > > even if it is fully funded, it just means you have > got enough money set aside to make the payments, > but it is still to be paid, so it would require an > interest collection for that. I think this is what my question is about. If there is a difference between the pension obligation and the funded amount, you would pay interest on this amount which would be a liability… right? the book makes me think that you calculate interest over the entire obligation, ignoring if part of it has been funded… which doesn’t make much sense to me. Unless I understand the terms incorrectly. Also the amount is > based on current assumptions - about the future > growth rate of salary, life expectancy etc. etc. > so it is just an estimate still. It talks about actuarial gains/losses separately as well. Edit: I didn’t see bannis’s post. Do you think it has to do with the expected return on assets vs the actual return on assets?