pensions.....expected return on plan assets vs. actual return on plan assets

CFA Level II FRA
#1

Where is each one used, and why wouldn’t you use the actual return on plan assets when you have them?

Thanks.

#2

Because actual return are too volatile, accountants don’t like to deal with uncertainty so they “smoonth” and replace it with expected return to derive accounting pension expense.

#3

so are actual returns ever considered in PBOs (beginning or ending) or pension costs, etc.?

#4
  1. Actual return would not appear in Income Statement, expected return would,

Accounting pension expense = Service cost + interest cost - expected return + plan amendments

  1. The difference between actual and expected return is recorded in the OCI under Actuarial G/L.

  2. Actual return won’t impact PBO but would impact Plan Asset

Ending PBO = Beginning PBO + Service cost + Interest cost + Prior service cost +/- Actuarial G/L - Benefits paid

Ending Plan assets = Beginning plan assets + Contributions + Actual return - Benefits paid

  1. Actual return won’t impact accounting pension expense, but as an anaylyst you have to know how derive economic pension expense which is total periodic pension costs (unless someone proves me wrong)

Total periodic pensions costs = Economic pension expense

Total periodic pensions costs= contributions - change in funded status

Economic pension expense = Service cost + interest cost - Actual return + plan amendments

#5

correct me if I’m wrong (going from memory) but:

“expected return” is used in the income statement net pension expense.

“actual return” is used in the pension plan asset calculation.

The “remeasurment” portion (actual versus expected) is amortized in OCI.

My Question:

Isn’t GAAP different here from IFRS? I think GAAP can put taht remeasurement in OCI or P&L?

#6

On BS side, I think they agreed with each other (Thank God!).

On IS side, they differ:

IFRS:

  1. Expense prior service cost immediately

  2. Actuarial G/L in OCI (well I wouldnt call it amortise…)

US GAAP:

  1. Pior service cost amortised over length of service

  2. Actual G/L in OCI using Corridor method: amortised in IS, unamortised in OCI

#7

This is how Exp return and Actuarial effect affect Pension expense

US

s ervice cost+int cost -Exp return+Amortisation of Actuarial G/L(as per Corridor App)+Amort of past service (only US)

IFRS

s ervice cost+int cost-Exp return(assumed to be same as disc rate used in High corp Bond)+past service cost. IFRS Nets int expense i.e int cost in offset against Exp return. Int cost= int rate *Beg PBO & Exp Ret= Int rate(assumed to be the same as high corp bond)* Beg F V of plan assets.

#8

“Smooth” is a forbidden word in accounting, as it implies manipulation of the figures. Actuals are to be recorded whenever available, estimates are recorded when actuals are unavailable.