Excess Pension Plan Contributions

CFA Level II FRA
#1

Guys, I will appreciate if you could help me on this.

This is an example from Reading 23, Example-10.

When the company contributions exceed the economic expense, the anaylst should adjust the excess contribution $67 ($48 after tax) towards financing cash flow (outbound). Why is it after tax? If it is treated as an additional payment to the principal, would you pay tax?

Also, the same $60 ($48 after tax) is added to operating cash flow. I don’t understand why we add to operating cash flow?

Thanks in advance.

#2

Pension expense is “above the line” item, therefore you should compute after tax cash flow. You’re net asset on this. Company plan assets are greater than your liabilities to pay future pension obligations therefore you’ll have to adjust CFO up and CFF down.

Think of it as you have less liabilities since you’ve upfront cash now on your pension obligations. Don’t think too deep.