Pension expense discrepancy

CFA Level II FRA
#1

Hi, i’m confused by the calculation of total pension expense (total periodic pension cost). Sometimes i see the calculations as service cost + interest cost + plan amendments - actual return on plan assets, and sometime i see EXPECTED return on assets instead of ACTUAL.

Eg if anyone has schweser notes, concept check 5 (p.120_ and challenge problem 17 (p. 122). Both provide various figures including both actual and expected return on asset and say to calculate the pension expense, both are GAAP and yet in the answer for #5, it reads, word for word “total pension expense = current service cost + interest cost - actual investment return” and for #17, “pension expense = current service cost + interest cost - expected return on assets”

can anyone explain the discrepancy? how come sometimes you subtract actual return and sometimes expected?

#2

For expense that you show on your income statement, you’re allowed to use either actual or expected return on assets. Most companies use expected return because it’s less volatile, and that’s generally all that’s shown in the curriculum.

For calculating economic expense, you use actual return; here, you’re trying to calculate what you really spend, so expected return is inappropriate.

#3

would you say its safe to assume we should always use expected return then on the exam?

#4

Always use expected return when computing pension expense for the income statement (accounting pension expense) unless they specifically tell you to use actual return (which is like a 1,000,000:1 shot); always use actual return when computing economic pension expense.

#5

@S200magician: Your responses are not correct. Pension reading has changed considerably this year. We use expected return only under U.S. GAAP when calculating the pension expense.

Also, there is no such thing called as economic pension expense in the reading now.

#6

@OP: Please use the search function on this forum and check out the recent threads about Pension. You will hopefully get your answer.

#7

Thanks for the correction. I didn’t teach Level II FRA this year, so I was unaware of the changes.

It’s S200_ 0 _, by the way: as in Honda’s incredible roadster.

(Or did you subtly demote me because I was wrong?)

#8

To the original question from debonder.

Think of word “cost” as the economic cost and the word “expenses” as the accounting treatment. It helped me a lot.

Actual return is useful in calculating the (economic) pension costs.

Expected return is useful in calculating (accounting) pension expenses (GAAP).

Rgs Henning Hansen

#9

H, thanks for that. The books seems to say that cost & expense are just interchangeable words and actually mean the same thing. I think S2000 was right in that we usually would use expected on the exam…unless someone thinks otherwise?