Two Short Questions

1)If there’s “employee contributions” and “employer contributions”, the “employer contributions” are what are calculated in deriving economic pension expense, right? 2) Question 9, reading 24, CFAI Book 2: “If Passaic Industries statement of cash flows for the year ended 2008 shows the reconciliation of net income to cash flows from operating activities for the period, the associated adjustment to net income related to the defined-benefit pension plan is closest to $526 million (the amount of company contributions)”. I don’t understand their explanation: "The company’s contributions to pension plans are deducted from net income as part of the reconciliation between net income and cash flow from operating activities. It’s the company’s contribution ($526 from 2008) that appears on the statement of cash flows."Are they saying that you always subtract the company’s contribution from net income to balance something out in the cash flow statement?

In my understanding, (1) is correct. In (2), you deduct 526 because that is employer’s contribution and a cash outflow. And you do not account for this cash flow in the income statement where the pension expense reported is just the Net Periodic benefit cost. Economic pension expense will be : Initial funded position: 43484-45183 = -1699 Final funded position: 46203-45582 = 621 Change in net funded position = 621 - (-1699) = 2320 Company’s contribution = 526 Economic expense = 2320 - 526 = 1794 Since company’s contribution < Economic expense, so we deduct complete 526 from CFO, else only economic expense would have been deducted from CFO and rest would have been part of CFF.

OK so you don’t really deduct $526 from the income statement; this is just an adjustment for analytical purposes, right? Also, about that last part you wrote: isn’t it supposed to be (economic pension expense - contributions)*(1 - tax rate)? Are they assuming there are no taxes?

Yes, as per my understanding for the first question (I am 95% confident). I hope someone with better understanding will confirm that. For the second question it may be that they are assuming that it is prepayment of debt (just the principal) and therefore ignoring the taxes. What do you think rellison?

Rellison you are right. I ignored the taxes part because I could not find it in the question set :). Thanks, else I would have assumed forever that taxes do not matter.