Does actual return on plans assets impact pension expense under IFRS?
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S2000magician
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You’re allowed to use actual return on plan assets, but most companies use expected return on plan assets as it’s less volatile. I’d assume expected return unless told explicitly otherwise.
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The answer says that is has no impact but I simply don’t buy it.
Yet in pension expense (under both GAAP and IFRS) we have the line difference between actual and expected return. So higher actual return shoul increase pension expense.
Or I am missing something…
Yet in pension expense (under both GAAP and IFRS) we have the line difference between actual and expected return. So higher actual return shoul increase pension expense.
Or I am missing something…
(A) Higher actual return drecrease economic pension expense
(B) Higher expected return decrease accounting pension expense
Generally speaking, the bottom line is
accounting pension expense = service cost + interest cost - expected plan asset return + plan amendments
Do you see actual return in the formula?
(B) Higher expected return decrease accounting pension expense
Generally speaking, the bottom line is
accounting pension expense = service cost + interest cost - expected plan asset return + plan amendments
Do you see actual return in the formula?
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There no such thing as economic pension expense in 2013 syllabus.
Look in the CFAI text. The line “difference between actual and expected return” is included in pensions expense (in OCI).
EDIT: As far as I am concerned the higher the actual return the lower the OCI part of the pension expense.
Isn’t that correct?
Look in the CFAI text. The line “difference between actual and expected return” is included in pensions expense (in OCI).
EDIT: As far as I am concerned the higher the actual return the lower the OCI part of the pension expense.
Isn’t that correct?
jitendra179
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pension expense reflects only P& L part, where in IFRS they take the net effect on Funded status ( PBO-Plan asset) * Disc rate and difference between disc rate & Actual rate of return on plan asset goes as remeasurement in OCI under IFRS. You may be getting confused with Periodic pension Cost ( P& L and OCI)
Where as GAAP u calculate interest expense on PBO *Disc rate and substract Interest income from Plan asset* Expected returns.
Hence I feel its affects pension expense in GAAP & not IFRS, correct if I am wrong.
Where as GAAP u calculate interest expense on PBO *Disc rate and substract Interest income from Plan asset* Expected returns.
Hence I feel its affects pension expense in GAAP & not IFRS, correct if I am wrong.
jitendra179
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(Total )Periodic pension cost -Reflects in comprehensive income ( P & L + OCI)
Pension Expense is subset of (Total )Periodic pension cost, comprising what reflects in P & L out of all components.
Pension Expense is subset of (Total )Periodic pension cost, comprising what reflects in P & L out of all components.
jitendra179
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Please refer CFAI Page 192
jitendra179
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Label: Exam
“2.4.4 Periodic Pension Costs Recognised in P&L vs. OCI
Each period, the components of periodic pension cost—other than any amounts that qualify for capitalisation as part of the costs of such assets as inventories—are recognised either in P&L (an expense) or in OCI. To understand the economic pen- sion cost of the period, an analyst should thus consider the amounts shown both in P&L and in OCI.
IFRS and U.S. GAAP differ in their provisions about which periodic pension costs are recognised in P&L versus in OCI. These differences can be relevant to an analyst in comparing the reported profitability of companies that use different sets of stan- dards. Under IFRS, P&L for the period includes both current and past service costs; in contrast, under U.S. GAAP, P&L for the period includes only current service costs (and any amortisation of past service costs.) Under IFRS, P&L incorporates a return on plan assets set equal to the discount rate used in estimating the pension obligation; in contrast, under U.S. GAAP, P&L incorporates an expected return on plan assets. Under U.S. GAAP, P&L may show the impact of amortising actuarial gains or losses that were recognised in previous periods’ OCI. Under IFRS, P&L would not show any similar impact because amortising amounts from OCI into P&L is not permitte”
“2.4.5 Classification of Periodic Pension Costs Recognised in P&L
Amounts of periodic pension costs recognised in P&L (pension expense) are gen- erally treated as operating expenses. An issue with the reported periodic pension expense is that conceptually the components of this expense could be classified as operating and/or non-operating expenses. It can be argued that only the current service cost component is an operating expense, whereas the interest component and asset returns component are both non-operating. The interest expense compo- nent of pension expense is conceptually similar to the interest expense on any of the company’s other liabilities.
(Institute 193)
Institute, CFA. Level II 2013 Volume 2 Financial Reporting and Analysis. John Wiley & Sons (P&T), 7/9/2012. <vbk:9781937537289#page(193)>.
“2.4.4 Periodic Pension Costs Recognised in P&L vs. OCI
Each period, the components of periodic pension cost—other than any amounts that qualify for capitalisation as part of the costs of such assets as inventories—are recognised either in P&L (an expense) or in OCI. To understand the economic pen- sion cost of the period, an analyst should thus consider the amounts shown both in P&L and in OCI.
IFRS and U.S. GAAP differ in their provisions about which periodic pension costs are recognised in P&L versus in OCI. These differences can be relevant to an analyst in comparing the reported profitability of companies that use different sets of stan- dards. Under IFRS, P&L for the period includes both current and past service costs; in contrast, under U.S. GAAP, P&L for the period includes only current service costs (and any amortisation of past service costs.) Under IFRS, P&L incorporates a return on plan assets set equal to the discount rate used in estimating the pension obligation; in contrast, under U.S. GAAP, P&L incorporates an expected return on plan assets. Under U.S. GAAP, P&L may show the impact of amortising actuarial gains or losses that were recognised in previous periods’ OCI. Under IFRS, P&L would not show any similar impact because amortising amounts from OCI into P&L is not permitte”
“2.4.5 Classification of Periodic Pension Costs Recognised in P&L
Amounts of periodic pension costs recognised in P&L (pension expense) are gen- erally treated as operating expenses. An issue with the reported periodic pension expense is that conceptually the components of this expense could be classified as operating and/or non-operating expenses. It can be argued that only the current service cost component is an operating expense, whereas the interest component and asset returns component are both non-operating. The interest expense compo- nent of pension expense is conceptually similar to the interest expense on any of the company’s other liabilities.
(Institute 193)
Institute, CFA. Level II 2013 Volume 2 Financial Reporting and Analysis. John Wiley & Sons (P&T), 7/9/2012. <vbk:9781937537289#page(193)>.
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- #15
Thank you mate, this cleared a crucial concept to me
So the answer to headline qestion is NO…
EDIT: One more thing, all this implies that periodic pension cos = both P&L + OCI part = change in funded status -+ employer’s contributions. Is that right?
jitendra179
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Yes