Hi guys
I have a question related to Reading 19 Employee Compensation in Book 2 FRA.
Just wondering are we or are we not including expected return on plan assets in the part of TPPC reported in P&L under IFRS? I thought expected return is counted in Income statement as stated in Schweser notes Figure 4 in Reading 19 (p101), but apparently in CFAI EOC Question 10 of Reading 19, we don’t add it in (same for a blue box example on Zenith Industries in Schweser notes P102). So I’m quite confused now.
Thanks as always.
Just wondering if anyone had a thought about it? Thanks in advance 
It’s important to consider whether you’re calculating for IFRS or US GAAP.
Under IFRS, the Interest cost is considered Net Interest Cost. For net interest, we would take the beginning funded status and multiple that against the discount rate determined for the PBO.
Under US GAAP, our interest cost can be thought of as two components: (beginning PBO x discount rate for PBO - which would be the same used for IFRS calculations) and (beginning plan assets x expected return (%)).
Notice under US GAAP we’re separating out the funded status (difference between PBO and Plan Assets) and use two separate discount rates, while under IFRS we are simply taking the funded status and using one rate. Therefore, a firm using GAAP accounting could game the system if its expected return on plan assets were greater than the assumed discount rate on PBO.
Thanks a lot Mitchel. Looks the like the main difference results from two discount rates: in IFRS expected return rate = interest rate, hence we could combine Interest Cost and Actual Return to become Net Interest Cost, while in US GAAP, two rates are different so we have to seperate both items. It makes sense now. Thank you for the explaination!
Periodic pension cost is reduced by the _ actual _ return on plan assets, not the expected return on plan assets.
Pension _ expense _ is reduced by the expected return on plan assets. (Note: IFRS doesn’t use the term “expected return on plan assets”, but they use the concept, with the expected return rate equal to the discount rate on the plan liabilities.)
Thanks for the further clarifications S2000.