Pensions

There is a question in schweser that I do not get:

Hiten Reshmiya is analyzing the financial statements of Tarun Textiles. He collects the following information for the year ending December 31, 201X: Item Rs. Millions PBO at the beginning of the year 1,822 PBO at the end of the year 1,915 Fair value of plan assets at the beginning of the year 2,015 Fair value of plan assets at the end of the year 2,232 Contributions made during the year 321 Cash flow from operating activities 469 Cash flow from financing activities 113 Tax rate 30% Tarun’s adjusted cash flow from operating activities is closest to: A. Rs. 556 million. B. Rs. 506 million. C. Rs. 593 million Total periodic pension cost = Contributions – change in funded status = 321 – [(2,232 – 1,915) – (2,015 – 1,822)] = 197 million. After-tax excess contribution = (1 – 0.3) × ( 321 – 197) = 86.8 million Adjusted cash flow from operating activities = 469 + 86.8 = 555.8 million

why is the “321” being deducted twice; once in calculating the total periodic pension cost and the second time in calculating the after-tax excess contribution??

It’s not being deducted twice.

It’s not even being deducted once. It’s not being deducted at all.

In the first calculation, you’re trying to determine the annual pension cost; because the company contributed 321 million, that’s part of the pension cost.

In the second calculation, you’re trying to determine whether the company contributed more than it needed to contribute: you start with the amount it contributed and subtract the amount it needed to contribute.

Imagine you go to the grocery store and pay \$100 of the bill in cash and the other \$50 in coupons; that’s the first calculation.

Then you get home and discover that you didn’t need to buy okra because you already had five pounds of it: you paid more at the grocery store than you had to. That’s the second calculation.