Is my reasoning correct? change in funded status + employer contributions does this apply across all questions or it differs because of sign?
Total Periodic Pension Cost = Contributions - (Ending funded Status - Begining Funded Status)
You can never go wrong if you think about it this way.
Is this the same for both IFRS and GAAP?
I cannot apply it in the cfa mock starting macharia case. The actual pension question is Atlantic preserves? Did u work it out? If I take 877 - (183) It comes to 980 not to 704… As the funded stAtus decreased…
Yes it’s the same
they only differ in how they allocate it to the income statement vs OCI
In that question: Ending Funded Status = (61812 - 74077) = -12,265
Begining Funded Status= (60096 - 72544) = -12448
Therefore: Total Periodic Cost = 887 - (-12,265- (-12448) = 887 - (-12265+12448) = 887 - (183) = 704
Just go through this step by step and you’ll see why the answer is 704 and not 980.
Its the same under IFRS and GAAP. Also look at this intuitively:
The fomula is asking for the true economic cost as its sometimes referred to. Hence the true cost to company is contributions made PLUS funded status. If the funded status has gotten worse (negative), the true cost should be more than just the contribution( add). If the pension fund has improved surely the true costs should be less than the contributions (subtract).
What I m not getting is a negative and a negative cancel out each other so 887 - - 183 is 887 + 183 ???
I know what I did I deducted the beginning less ending … Thanks so much. Can I ask you how would CFF be impacted by extra employer contributions? Does the company provide a loan etc
Think of the cost in terms of economics: Decreasing increasing funded status (if its an asset making it more so or if its a liability reducing it) is a result of either the plan returning on asset, obligation reducing etc. So an increased funded status will help reduce amount of employee contribution that is needed. Think about the difference between these 2 as a cost. If you think of them in this way you will not get confused during the exam.
The reason the sign ‘changes’ is negligible as long as its consistent with the format of your funding status calculation as FS can be reported as an asset/(liability) or negative liability/(negative asset) they are the same thing essentially.
Periodic cost = Change in FS + ER contribution (where FS is calculated as +PBO - Plan Assets)
" " " - ER contribution (where FS is calculated as +Plan assets - PBO)
easy rule to remember ‘your’ sign of +/- ER cont must be the opposite to ‘your’ sign of plan assets in FS calc because ER Contr is part of plan assets.