First off, apologies because I’m working with L2 Kaplan books from 2015.
But my question revolves around the periodic pension cost formula. I keep encountering inconsistencies in it so there must be some application exception I’m missing. Basically, do you use the expected return or actual return? For example, on page 108 of my FRA book, it states:
total periodic pension cost = employer contributions + interest cost - actual return on assets +/- actuarial losses/gains
BUT later on in a quiz question explanation (page 125) it states:
periodic pension cost in P&L = current service cost + interest cost - expected return on assets
Could someone shed some light on this? Is expected used return if applying in the P&L? If so, where exactly do you use the actual return on assets formual I listed first?
Periodic Pension Cost is identical for IFRS and US GAAP. It can be calculated two ways:
Ending Funded Status - Beginning Funded Status + Employer Contributions. Funded Status is PBO - FVPA, and this particular method assumes Funded Status (aka net pension liability/asset) is shown as a positive number for a liability and negative number for an asset. This distinction is important because the formula is different if you show a liability as a negative number. Pick one way and stick with it.
PPC = Current Service Costs + Past Service Costs + Interest Costs + Actuarial Losses - Actuarial Gains - _ ACTUAL RETURN _ on Plan Assets
Expected return is used with US GAAP only, and it does not come into play at all when calculating Periodic Pension _ Cost _, nor does it impact actual return on plan assets (actual return is, well, actual observed return for the period).
Periodic Pension _ Expense _ is something different. It’s the amount of the PPC that gets reported on the P&L statement, and is different between IFRS and US GAAP.
Expected return on plan comes into play in Pension Expense in the Interest Expense/Income calculation, which is not “netted” like it is with IFRS. Under US GAAP, Interest Expense = PBO x discount rate (one line item) and Interest Income = FVPA x expected return on plan assets (another line item).
Expected return on plan assets also comes into play in Remeasurements (reported in OCI) under US GAAP, which measures the difference between the Actual Return on Plan Assets and the Expected Return on Plan Assets (Actual Return - (FVPA x Expected Return on PA)).
Hope that helps a bit. This section can be confusing, and you just have to keep going over it until it sinks in. It took me over a year to really (I mean really) get it, and sometimes I still confuse myself.
TPPC total periodic pension costs in OCI and P/L same under USGAAP and IFRS.
periodic pension costs in P/L = current service cost + interest cost - expected return on plan assets
are periodical (P/L) costs under USGAAP only.
periodic pension costs in P/L under iFRS = current service costs + interest expense + past service cost
also be aware of different calcualting an interest expense between standards. Under IFRS they are netted (discount rate x begin fund status). Under USGAAP an interest expense is calculated by multiplying discount rate with beginning BO.
Firstly, why is the total periodic pension cost the same for IFRS and GAAP? Are these not different with IFRS and GAAP using respectively:
Service costs Past and present + Net pension Asset/Liability x Discount Rate ± Remeasurements (difference between actual and discount rate of returns)
CSC + PSC + Interest Expense (as PBO x Disc Rate) ± Expected return on plan assets (Plan assets x expected return) ± AGL from change in Actual and Expected returns
Surely these two will give different answers for the pension cost (which is the overall cost of the obligation right?)
I am quite confused because on the current 2016 Schweser Book (P102) the total periodic pension cost does not tell you whether its GAAP or IFRS which I thought would change the answer?
OK, and the interest cost is taken as the PBO x discount rate right? (Like GAAP). This is where I got confused as some elements of TPPC use GAAP costing mechanism.
So when would we use the formulas I have written above? Is that if they specifically ask you for the cost from say GAAP or IFRS? Or if they ask you to calculate what is expensed through PnL and what is OCI etc ?
While I understand the details we are talking about here, I am always confused why one is called total period pension cost one is periodic pension cost, where is the total come from?
From what I understand, I could be wrong, we only care about begining and ending funded status plus e.c, teh reason is excatly because the accounting inside is different, so you just wanna see whats starting whats ending how much you paid, there, thats how much the cost was
Current period expenses, those appear in P/L are considered as periodical in accounting. Total period pension costs are periodical + the rest appear in OCI.
Your formula above will be more undestable if you can learn in this form:
TPPC = Contributions - (Δ Funded status).
It is also recommended to learn TPPC calculated as:
current service costs + interest costs - actual return on plan assets ± actuarial G/L + past service costs.
^correct. You must test if there is condition to apply corridor approach but not sure what is probabilty for this approach to be tested since I haven’t found it in any question.
