In the FRA book, Reading 23, page 240, Question 2 on Economic Pension Expense (Answer on page 247). This is a straight forward question on getting the economic pension expense by subtracting changes in assets from changes in liabilities; however, they have you adjust the liabilities by adding on the benefits paid and adjust the assets by subtracting employer contribution and adding benefits paid. My question is why I am adding Benefits Paid to both sides of the equation only to cancel them out by subtraction. Essentually: (Liability + Benefits Paid) - (Assets - Benefit Paid) = Liability - Assets. Does someone have a reason behind this?
My understanding of it is you want to see the change in the values without the effects of the cash deposits and withdrawals. So you remove those effects by subtracting them out, because discretionary cash deposits/withdrawals aren’t related to an economic expense. Then you have just the intrinsic value changes in the accounts. I hope that gives you some ideas.
Thanks, that helps some. Especially if I wanted to evaluate a cleaner intrinsic value of the numbers. But if I’m only looking for the Economic Pension Expense, you see my point though? I can arrive at the same answer in this question by (Change in Benefit Obligation) - (Change in Asset Obligation - Employer Contribution). If I’m not looking to analyze the Adjusted Liability and Adjusted Asset, why should we bother with the grueling task of adding the same number onto both sides of a subtraction problem. I don’t get the logic but I guess it’s not that big of a hassle.
Nevermind, the next set of questions (p.241) shows the benefits paid as two different numbers. That would justify the action. Thanks!