Can someone explain definitely the difference between the 2? I thought they were equal until I ran into the March Mock Exam AM Q23 and Q24. The amounts calculated from Atlantic preserve’s 2013 periodic pension cost and total pension are different. The solution provided makes little sense, I don’t know why the results are different. Thanks in advance for your support
The only conclusion I can make is:
when they ask for periodic pension cost they mean expense so p&l items and total periodic cost aggregate oci and p&l. I find it confusing too, but that’s the only logical answer given the solution
Hi Phil, Using your definitions the answers to the mock make more sense. EDIT: shouldn’t the Net Periodic Pension Cost be called Pension Cost Expense? In that case it would be clear that’s only the P&L portion that we are after. I think I saw that being brought up on the forum in dearlier years discussions. The vocabulary makes the problem unnecessarily confusing, I hope on exam day the questions will be clear if the issue shows up.
I agree. At least it would have focus our attention on this point!
periodic pension cost = pension expense on P&L
total periodic pension cost = total pension cost (including items on OCI)
More proof pension accounting is the wackiest thing in the business!
From CFAI solution:
periodic pension cost = pension expense on P&L
total periodic pension cost = total pension cost (including items on OCI)
But I see other places (schweser and curriculum) say periodic pension cost include OCI
So confusing…
Why in the mock exam if Periodic pension cost is items on the P/L do they include Amortisation of past service costs?
In the exam what they have for periodic pension cost is this:+
Periodic costs = Service cost current + interest cost on obligatoin - E(Return on plan assets) + AMORTISATION of past service costs
What is that? It’s US GAAP question and why are they including this past service cost item? Past service cost is OCI in gaap.
This is by far the worst touched on topic in the text. I undrestood everything so far and this has ruined 3 hours of my life. And i’m more confused then when i started.
Any help is highly appreciated.
With US GAAP, you amortize the past service costs. Under IFRS, you expense it the same year.
Components of reported pension expense (on the income statement):
- Current service cost—the present value of benefits earned by the employees during the current period. Expensed in income statement.
- Interest cost—the increase in the PBO due to the passage of time. Expensed in income statement.
- Expected return on plan assets—reduces pension expense. Under U.S. GAAP, the expected rate of return is assumed. Under IFRS, the expected rate of return is the discount rate. Offsets pension cost in the income statement.
- Amortization of actuarial gains and losses—under U.S. GAAP only, the losses (or gains) during the year due to changes in actuarial assumptions and due to differences between expected and actual return are recognized in OCI and amortized using the corridor method. Under IFRS, the actuarial gains and losses during the year are recognized in OCI and are not amortized.
- Amortization of past service cost—under U.S. GAAP only, an increase in PBO resulting from plan amendments granting a retroactive increase in benefits is amortized. Under IFRS, past service costs are immediately expensed in the income statement.
Total periodic pension cost includes costs reflected in the income statement (discussed above) as well as in OCI.
total periodic pension cost = contributions – change in funded status
or
total periodic pension cost = current service cost + interest cost – actual return on plan assets +/– actuarial losses/gains due to changes in assumptions affecting PBO + prior service cost
This is from Schweser !
I figured it out after but I wish you typed that out about 6:00pm yesterday. Would’ve saved me 3-4 hours of horrible studying. I was ready to throw my CFA books into a bonfire and have a couple - maybe 10 - beers.
Thanks though.
These questions (PM q23 and 24) still appear in the mock…
If ever we run into “periodic pension cost” during the actual exam, should we assume that they refer to the pension expense on the I/S only (as per these two questions) or to “total periodic pension cost” (as per curriculum and Schweser) ?
Periodic costs are those which appear in P/L. TPPC are those which appear in P/L and OCI. Pay attention on different treatment of period costs (those in P/L) between IFRS and USGAAP. By each reading of FRA vignette, one should first check if is it American entity in example or another on which IFRS applies. As I remember, if not stated different, IFRS are default on exam.
I was just asking on the meaning of “periodic pension cost” vs. TPPC, as it seems to vary from case to case.
In accounting (and probably in CFAI curriculum) under term “periodic cost” always is meaning that are considered as costs of current period, those which appear in current P/L.
So Amortisation of past service cost is in the IS for US GAAP now?!?!
Just finished the afternoon CFAI mock and their differentiation of PPC vs TPPC in Q’s 23&24 is really bugging me! Per above discussion, they have GAAP ‘periodic pension cost’ using expected returns. Then TPPC using actual. Does anyone have a good grip on this? I’ve always ignored expected.
The flashcard I made has TPPC/PPC = Past Serv + Int + Serv +/- Actuarial - Actual Returns
Badly worded question in my opinion. Hopefully the exam says “expense” if it comes up.
If they do keep cost in both TPPC and PPC hopefully (similar to the pm mock) they won’t have answer options for both calculations. That’s what saved me in the afternoon mock. I calculated both numbers and saw the answer on my calculator wasn’t an available answer in both questions so I knew which was whict.
From my understanding TPPC is what is disclosed in the footnotes. Periodic pension cost is what shows up in your I/S as the actual expense line item.
TPPC = Employer’s Contributions - [Ended Funded Status - Beginning Funded Stats]
Beginning Funded Status = Beg. Plan Assets - Beg. PBO
Ending Funded Status = Ending Plan Assets - EndingPBO
Your actual pension I/S loss changes depending on GAAP or IFRS.
GAAP:
Service Costs + Interest Costs (PBO * discount rate) +/- Expected Return on Plan Assets +/- Amortize Gain +/- Past service costs (*cordor approach)
IFRS:
Service Costs +/- Net interest expense (beg funded stats * discount rate) ± past service costs
*Corrdor approach = amortize over the remaining service life if Past service cost is greater than 10% of the beg PBO or Plan Assets