There seem to be numerous posts about pensions. It would be good to consolidate it all under one thread. This is probably one of my worst subjects and it probably sucks for a lot of other people. Post tips, questions, and pointers for it. Discount Rate Increase —> Lower PBO Discount Rate Decrease --> Higher PBO Increase Compensation Growth —> Higher PBO Decrease Compensation Growth --> Lower PBO
Federal Companies reported the following information in the footnotes to its most recent financial statements: Beginning Projected Benefit Obligation (PBO) $65,000,000 Ending PBO---------------------------------------------106,000,000 Service Cost---------------------------------------------27,000,000 Interest Cost---------------------------------------------3,000,000 Benefits Paid---------------------------------------------5,000,000 Actual Return on Plan Assets-------------------------7,500,000 Given the information above, calculate Federal’s adjusted pension expense for the year. A) $22,500,000. B) $41,000,000. C) $35,000,000. D) $27,500,000.
A. Service Cost + Int Cost - Actual Return on Plan Assets
by definition, PE = increase in PBO --> that would mean 106-65 = 41. BUT, I’ve also seen: PE = SC + IC - Exp Rtn.
It is A.
I am too confused by the different calculation methods to derive pension expense. Can someone explain the rationale or let us know which method takes precedence?
I think the difference is that PBO calculations always use ACTUAL(ROA) versus pension expense is normally EXPECTED(ROA)…however in this cause it’s asking for adjusted pension expense which means you use actual instead…this is maybe why in this particular case it is best not to use the change in PBO to derive pension expense. But either way should normally get you the same answer right? Ah i hate pension stuff.
I take that back…FMV uses ACTUAL (ROA)… sorry. Ok so change in PBO also has BENEFITS PAID…which isn’t included in pension expense. maybe that’s the difference?
ozzy’s formula for adjusted pension expense is easiest way to remember it.
that is right - didn’t read the word ‘adjusted’
sorry to bring this up again…but if the word adjusted is left out…is it fair to say: pension expense= service cost+interest cost and Ending PBO= beg PBO+pension expense? or should we always subtract out expected returns from pension expense?
does the MPLA charge still exist after dec 2006?
ok there’s alot of stuff about pension that just purely terrifies me, i hope they don’t show on the exam though! remember that: Pension Expense = Service Cost + Interest Cost - E(ROA) adjusted for amortization E(ROA) = LR E(ROA) * Opening market related value Opening market related value = BGN Market related value + E(ROA) + Employer contribution + Employee Contributions - Benefits Paid and ± 20% of G/L over the past 5 years. VERY IMPORTANT Q: When calculating the economic Pension expense, DO WE OR DO WE NOT INCLUDE THE AMORTIZATION OF OFF-BL COMPONENTS? i.e. economic pension expense = Service Cost + Interest Cost - Actual ROA (without Amort)?
Yes - the whole point of the economic/adjusted pension expense is to calculate the actual economic expense. Thus you do not include all of the off balance sheet items. Pension Expense = Service Cost + Interest Cost - (Smoothed Events) Smoothed Events = Expected Return on Plan Assets, various Amortizations Economic/Adjusted Pension Expense = Service Cost + Interest Cost - (Actual Events) Actual Events = The only actual expense incurred is the Real Return on Planned Assets.