The reading on pension expense suggests that for analytical purposes, the analyst should adjust the pension expense on the income statement by appropriately allocating the individual costs. That is, instead of subtracting the entire pension expense ias part of operating expenses, the book suggests only backing out the current service cost from operating income, actual (not expected) return as part of nonoperating income/expense and add the interest portion to interest expense.
Fine, i get that. My question is though, what about the other 2 components of pension expense: actuarial gains and losses and past service cost - where should those be included, amortization expense ??
I know those are deferred costs, but are included in full when calculating economic pension expense, what is what i thought we’re doing here since we’re including actual return and not expected return. Either way, why does the text ignore the breakout of these two components?
Someone correct me if Im wrong but Im pretty sure you ignore amortization.
As I understand it: Pension Expense = Service Cost + Interest Cost - Actual Return on Plan assets. Actual return on plan assets is Expected Return On Plan Assets +/- Actuarial Gains and losses.
Thus when adjusting the I/S: you consider only these three items.
Expense is a real “loss”, thus all accounting recognition/ammozrization stuff doesn’t come into play here. You account for only what is real: real service cost, real interest cost and real return on the assets.
The book shows Pension Expense as (not including benefits paid):
PExp = Current Service cost + Interest - Expected return +/- Amor Actuarial G/L + Amor past service cost
What about the Amortizable amounts is not real? They definitely refer to real losses/gains, they’re just amotized for smoothing purposes. If an amount is amortized during the year, why is it not included as part of operating expenses along with current service costs ?
The book only reallocates current service costs (to optg expenses), interest (to interest exp), and actual return (to nonoptg income).
The formula in your example seems to be the Pension Cost. Accounting measure. If we are talking about the Economic Pension Expense (the adjustment), then it is equal to
Pension Expense = Service Cost + Interest Cost + Plan Amendment + Net Settlement/curtainlments + Actuarial gains/losses +/- currency translation adjustments Net - Actual Return On Plan Assets.
I think about it the same way as of Long Term Projects. You may either expense it immediately (recognize real costs now) or to put it on the balance sheet and ammortize it in future periods. There is no ammortization in the Economic Pension Expense. Take a look at the answer on the page 249.