I think my brain is just too tired to sort this out, so forgive me if it’s a stupid question. I know that when pension expense exceeds employer contributions significantly, we reclassify the difference from CFO to CFF. But for some reason I’m not sure exactly how. Do we subtract the difference from CFO and add to CFF?
I think you add it back to CFO, and then subtract it from CFF … cause, when pension exp > employer contributions (significant) you consider it as a source of borrowing, not an operating expense. hence you add it back to CFO and treat like issuing new debt…so you add it to CFF not 100% tho to be honest! someone wanna verify?
If Contribution is > Eco expense… You increase CFO and Decrease CFF If Eco Exp > Contribution then I guess its the opposite because difference is borrowing while if Contribution > Eco Expense then its decrease in Pension Ob. So answering your question, I would decrease CFO and Increase CFF.
Bilal Wrote: ------------------------------------------------------- > If Contribution is > Eco expense… You increase > CFO and Decrease CFF > That what gets me… if company *paid cash* (contribution) more than what it’s actual pension expense calls for, why would that *increase* CFO? I’m just memorizing it for now!
i guess because paying cash contribution increases fv of plan assets, thus it isn’t really an ‘outflow’ also, i think the difference between contribution and economic pension expense would be adjusted for tax before making the adjustment i thought i had a handle on this like 3 weeks ago, i dont know wtf is going on anymore
momoneymoproblems Wrote: ------------------------------------------------------- >> i thought i had a handle on this like 3 weeks ago, > i dont know wtf is going on anymore That’s why I say review is more important than mocks or learning new stuff… the wosrt thing is getting a question wrong on a concept you know so well.
Totally agree. Thanks everyone!
momoneymoproblems Wrote: ------------------------------------------------------- > i guess because paying cash contribution increases > fv of plan assets, thus it isn’t really an > ‘outflow’ > > also, i think the difference between contribution > and economic pension expense would be adjusted for > tax before making the adjustment > > i thought i had a handle on this like 3 weeks ago, > i dont know wtf is going on anymore Can you expand this further? If Contribution > economic expenses, you subtract the tax adjusted difference to CFO, and add the same amount to CFF?
=) what im gona do is memorize memorize memorize … that’s what ive done for 50% of quantitative lol
Don’t forget to apply the tax rate to the net adjustment.
ok, this is what i think… if contribution is greater than economic expense, you need to reclassify from CFO to CFF. from what i understand that means, adding back the tax adjusted difference to CFO (since that’s where it was classified originally) and subtracting the tax adjusted difference from CFF since it will be seen as a ‘principal paydown’, which is a cash outflow from CFF
Thanks. I think either way we need to reclassify the tax adjusted difference from CFO to CFF. The difference is the sign. When contribution > expenses, it is a CFF cash outflow (prepayment); when expenses > contribution, it is a CFF inflow (borrowing). Anyone thinks otherwise?
Dreary Wrote: ------------------------------------------------------- > Bilal Wrote: > -------------------------------------------------- > ----- > > If Contribution is > Eco expense… You increase > > CFO and Decrease CFF > > > > That what gets me… if company *paid cash* > (contribution) more than what it’s actual pension > expense calls for, why would that *increase* CFO? > I’m just memorizing it for now! When you reclassify a deduction ( (Contr - Eco Expense)*(1-tax) was already deducted from CFO) from CFO to CFF you add it back to CFO and deduct from CFF. – I see people already posted similar explanations
If Contribution > Economic Expense … increase CFO and Decrease CFF … However if Eco Expense > Pension Cost , you adjust by difference x (1-t).
Based on this, it looks like pension expenses are always considered operating expense so ADJUST. Two scenarios with examples: Lets say @tax 40% Scenario 1 -------------- Contrib=75 Expense=50 CFO = 200 CFF = -150 Pretend we are paying off the debt: (CFF- and CFO+) CFO’ = 215 (200-[75-50]@1=tax) CFF’ = -165 Scenario 2 ------------- Contrib=75 Expense = 100 CFO = 200 CFF = -150 Pretend we are borrowing: (CFF+ and CFO-) CFO’ = 185 (200-[75-50]@1=tax) CFF’ = -135 Can someone double check this for me please?