I’m confused by the relationship/difference between pension cost and expense and going back through the Schweser study notes and the curriculum, I’m having a hard time clarifying it.
So in the study notes on pg 108 (book 2), it starts with:
In the concept checkers at the end of the reading, question #3 is asking for “reported pension expense”, which the solution defines as:
service cost + interest cost - expected return on assets
Then question #5 asks for total pension expense, which is then defined as:
Current service cost + interest cost - actual investment return
Can anyone shed some light on the link between pension cost and pension expense? and then why one of the pension expense questions required expected return and the other actual return? Thanks
PERIODIC PENSION COST is the total cost related to a company’s DB pension plan for a given period. Various components of this total cost can be recognized on the P&L or in OCI under IFRS and US GAAP.
PERIODIC PENSION EXPENSE refers to the components of periodic pension cost that are recognized on nthe P&L (not OCI).
This formular is almost useless when you solve EOC problems.
Try to get the components of fund status into this equation and solve it. You’ll get one with the service cost, interest cost, etc. This one will be the most helpful.
Periodic pension expense is a component of periodic pension cost. Periodic Pension expense is always reported in the income statement while some component of of periodic pension costs may be reported in Other comprehensive income.
Periodic Pension Cost looks at the change in the funded status adjusting for employer’s contribution, so let’s say at the end of a period there is a change, the logical question to ask then is, what is reponsible for this change?
Well, the change could be due to Periodic pension expense, or change in acturial losses/profits or even change in assumptions used.
If you decided to narrow it down and focus on these bits one by one, then you may ask, what is responsible for a change in Periodic pension expense?
The answer to that question will be seen in the components which include current service charge, interest cost and expected/actual returns of the plan’s assets. Both the current service charge and the interest costs increase peridoic pension expense while the retruns on the plans assets reduces the periodic pension expense.
US GAAP uses expected return, IFRS uses actual return.