When you encounter a question in FRA that says calculate pension expense and you’re given current service cost, interest cost, expected asset return and actual asset return, do you automatically assume you’re to calculate the reported pension expense or the economic pension expense? ------------------------------------------ Also, any easy way to get the answer for this type of question below? The funded status of a company on 12/31/2009 is $85 underfunded. Unrecognized actuarial gains is $12M. Unrecognized prior service cost is $27M. Calculate the amount of net pension liability reported on 12/31/2009 according to IFRS. So I figured since the funded status is underfunded, funded status is ($85). Actuarial gains should reduce your liability. Prior service cost should increase your liability So I did -85 + 12 - 27 = -$100. Answer is -$70. What the heck did I do wrong?
For the first question I would calculate reported pension expense unless they specify in the question that they want economic pension expense.
For first, i agree with idreesz. For second, PBO = 85, assuming plan assets are 0. Adjusted PBO for IFRS = 85 +12 - 27 (same logic as you have given for adding/subtrating gain/losses) = 70 New funded status = 0 - 70 = -70
I think the formula to use is: current service cost + interest cost then subtract expected return then add the actuarial gain + prior service cost, does that = 70?
Should be Funded Status (FV of Assets - PBO) +/- Unrecognized (Gains) and Losses You subtract the gains +/- Unrecognized Past Service Cost +/- Unrecognized Transition (Asset) or Liability You subtract asset, add liability ________________________ Net Pension Asset (Liability) So it would be Funded Status - Unrecognized Gains + Unrecognized Past Service Cost -85 - 12 + 27 = -70
I remember Schweser having a good explanation in Italic about this which was helpful. Under IFRS, the one line item on the BS is Net Pension Asset (liability). This is NOT the Funded Status (true economic position of the plan). Net Pension Asset (liability) is a smoothed version of the funded status, adjusted for unrecognized things that did not hit the Income Statement yet. For example, an unrecognized past service expense that didn’t hit the IS yet, is already reflected in the Funded Status (remember, true economic position, nothing hidden), but IFRS wants us to also smooth the results by the net pension asset (liability) on the BS. So, we have to add back the unrecognized expense… In short, we end up adjusting Funded Status by adding unrecognized expenses and subtracting unrecognized gains to get to net pension asset.