Total Periodic Pension Cost question

CFA Level II
#1

So this is the sample question I was given word for word…

The following is partial information related to the defined benefit pension plan of CompuTech Inc. ($000):

Defined benefit obligation, beginning of year $35,000

Defined benefit obligation, end of year $38,420

Beginning of year fair value of plan assets $41,000

Fair value of plan assets, end of year $45,330

Contributions $5,050

Benefits paid $4,000

Actuarial loss incurred in the current period $820

Past service cost from current period plan amendment $1,500

Current Service Cost $3,000

Interest Cost $2,100

Actual Return on Plan Assets $3,280

Amortization of past service cost/acturial losses $515

What is the current year total periodic pension cost?

The answer is $4,140,000 but I am not sure how to arrive at that. I get a pension expense of $2,335,000 based on current service cost + interest cost - actual returns + amortization, but I assume I am going wrong in the treatment of OCI from this point with regards to amortization, past service cost, and actuarial loss. Can someone please explain how to get the answer? Thanks.

#2

Pension cost = contributions − Δfunded status

$5,050 − (($45,330 − $38,420) − ($41,000 − $35,000)) = $4,140

#3

In addition to what S2000 mentioned:

Total periodic pension cost = current service costs + past service costs + interest expense +/- actuarial losses/gains due to changes in asssumptions - actual return on plan assets

3000 + 1500 + 2100 + 820 - 3280 = 4140

#4

It appears that you’re confusing pension cost with pension expense. The entire cost is pension cost, regardless of whether it’s presented on the income statement (pension expense) or in OCI.

#5

S2000 - you’re right. If one were going to examine what goes into OCI from this question though, can you elaborate on that? Thanks.

#6

It depends on whether this company uses IFRS or US GAAP. Under IFRS, pension expense (on the income statement) will comprise:

  • Current service cost
  • Past service cost
  • Net interest expense (= interest expense − (beginning plan assets × discount rate))

and OCI will include:

  • Actuarial gains/losses
  • Actual return − (beginning plan assets × discount rate)

Under US GAAP, pension expense will comprise:

  • Current service cost
  • Interest cost
  • Expected return on plan assets (reduces pension expense)
  • Amortization of previous past service costs
  • Amortization of previous actuarial gains/losses

and OCI will include:

  • Past service cost
  • Actuarial gains/losses
  • Actual return − expected return
#7

Thanks for all the help, really appreciate it.

#8

My pleasure.

#9

I just came across this thread as I find some material in the kaplan and official CFA material confusing.

In Kaplan it stated the following:
US GAAP: Interest cost = discount rate x (beg. PBO + past service costs)
IFRS: Net Interest cost = discount rate x (beg. funded status - past service costs)

However, when I look at the CFA material past services costs were never part of the equation.

Could somebody clarify?

Thank you:)