If contributions exceed total pension cost, schweser is saying that we must treat it like a principal repayment. So decrease cash flows from financing and increase cash flows from operating.
I don’t understand why you would increase cash flows from ops?
If you’re making more cash payments than your pension expense… you are decreasing you net income by more than you have too… so you would reverse this by decreasing CFF and increase CFO by the after tax net difference between contributions and pension expense?
At first i was thinking… if you make an extra principal payment well you decrease cash flows and decrease CFF not increase CFO. But thinking through this more clearly … we have already made the extra contribution and therefore CFO is already understated.
The CFO has a section named ‘Pension Contribution’. Thats the reason why we adjust the operating cashflow by the methods you stated. Put it another way, the pension expense is the cashflow required from OP, and like you said anything in excess will need to come out of CFF. Thats the logic behind why we bump up CFO and peel off CFF.
the pension liability is like a loan taken by the company.
When you had say 100$ to payout in Pension Contributions - but you actually paid 120$ - the 20$ is like a repayment of principal. Since you are making an excess payment - that excess is a Principal Repayment. Hence it would classify as a CFF. It is like a “prepayment on a mortgage”.