In one of the examples in the FRA book regarding pension cash flow, a company pays an after tax amount of 48 Pounds contribution in excess of costs. They say that this is 48 pound cash outflow from financing, and a 48 pound cash inflow from operations. How is this a cash inflow from operations?
Basically, it is first treated as an outflow from operations since contributions made to pensions are operating cash flows (correct me if I am wrong here), so as a prudent analyst, when you over-contribute, it is equivalent to lending. If you contribute less than the total pension expense, then there is a liability (equivalent to borrowing - cash inflow from financing)… So what you would do is treat the excess contribution as a form of lending and you would add back that same amount to cash flow from ops since it was taken out of cash flow from ops to begin with.
Does this make sense?
I was just reading this last night so hopefully I get it right.
Excess contribution should be reclassified as CFF outflow instead of CFO outflow because it serves as a capital payment toward your debt (think it like the extra principal payment you pay toward mortgage).
Therefore, as you reclassify the OUTFLOW from operating to financing, your CFF goes down (more going out) and your CFO goes up (less going out).