This should be easy to some of you more prepared than I obviously am…
If economic pension expense exceeds cash flow ==> then net of tax difference is treated as a borrowing in cash flow statement… (right?)
Do you include this number with “Net Borrowing” for FCFE formulas?
Hmm…logically economic expense represent the economic meaning behind number, it’s not th number we present to tax authority so I don’t think we have taxe relating to economic expense, only pension expense reported in IS
True – but the net of tax difference is used to increase CFF and decrease CFO in the statement of cashflows.
If econ pension expense > employer contributions = difference (net of tax) is reclassified from CFO to CFF
and vice versa
Understood but since this is reclassified because it’s considered “borrowing” from the pension fund (hence the CFF treatment) does this number get added to FCFE formulas as part of Net Borrowing.
tricky but I dont see why you would exclude.
Think the reverse where employer contributes > econ pens exp. That reduces borrowing and that cash no longer available to equity owners.
Economic pension expense is equal to the change in the funded status for the period, excluding the firms contributions.
Your net pension asset (libability) already accounts for the funded staus. If net pension liability increase from period to period then this increase in liabilities will be reflected in the deduction of net working capital part of FCFE forumla. I believe if you include it in net borrowing you will be double counting.
So if it is reclassified as CFF and CFO is adjusted, then you would just be adjusting NWC and Net borrowing. And the outcome of FCFE would be the same. But since Net borrowing is not included in FCFF, the outcome will be different under FCFF. My 2 cents, let me know if i am way off…
Economic pension expense is equal to the change in the funded status for the period, excluding the firms contributions.
Your net pension asset (libability) already accounts for the funded staus. If net pension liability increase from period to period then this increase in liabilities will be reflected in the deduction of net working capital part of FCFE forumla. I believe if you include it in net borrowing you will be double counting.
So if it is reclassified as CFF and CFO is adjusted, then you would just be adjusting NWC and Net borrowing. And the outcome of FCFE would be the same. But since Net borrowing is not included in FCFF, the outcome will be different under FCFF. My 2 cents, let me know if i am way off…