Expected return on plan assets vs. Pension expense

F

FrankCFA

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Why increase expected return on plan assets will decrease the pension expense? I think PBO and interest cost will not be affected….. Thanks!
 
Pension expense = current service cost + interest cost – expected return on plan assets +/- amortization
 
Thanks. But the formula you mentioned is for U.S. GAAP. So IFRS should be no affected? Thanks.
 
FrankCFA wrote:Thanks. But the formula you mentioned is for U.S. GAAP. So IFRS should be no affected? Thanks.
Click to expand...
The formula I mentioned is correct for both US GAAP and IFRS: IFRS merely nets interest expense and expected return on plan assets. The conclusion’s the same: expected return on plan assets reduces pension expense.
 
But the IFRS is using Net return on plan asset. The formula is Actual return - (Plan assets*Interest Rate)
Given IFRS is uising market interest rate instead of expected return, why IFRS will be affected by expected return?? Thanks.
 
FrankCFA,
I think with IFRS, it depends on the funded status. If it is overfunded, then you have net interest income and that will help you reduce the net periodic pension expense on your income statement. If however, it if underfunded, it will increase your pension expense.
 
Thanks. But all the componet is not affected by expected return why overall approaching will.
 
The method of calculation is the same in IFRS, i.e., planned return of plan assets.
 
It is. Remember with IFRS, the expected rate of return on plan assets is implictly assumed to be the same as the discount rate used for computation of PBO. So it is assumed that the assets and the liabilities are expected to yield the same % return. That is the reason you take net interest income/expense. They cancel each other account.
 
elcfa wrote:
The method of calculation is the same in IFRS, i.e., planned return of plan assets.
Click to expand...
But curriculum page.184 using different formula
IFRS using market interest rate
GAAP using expected return
 
Ah,
We are getting very technical now, which I tried to avoid to get bogged down to the nitty gritty.
IFRS changes its approach slightly in its IAS 19 in 2011. Here is a summary of the change:
1. The service cost component will include current service cost, past service cost and any gain or loss on settlement. The changes in demographic assumptions will remain included in the remeasurements component together with other actuarial gains and losses and will be excluded from the service cost.
2. The net interest will be determined by multiplying the net defined benefit liability (asset) by the discount rate used to determine the defined benefit obligation. Before the Amendments, the expected return of plan assets was required to be used.
3. The remeasurements will comprise the actuarial gains and losses on the defined benefit obligation, the difference between the actual total return on assets and the interest income on plan assets calculated based on the discount rate used to determine the defined benefit obligation, as well as any changes in the effect of the asset ceiling excluding the amount included in net interest. This definition of remeasurements differs from the definition of actuarial gains and losses in IAS 19 before the Amendments because the introduction of the net interest approach has changed the disaggregation of the return on plan assets and the effect of the asset ceiling.
Slightly different computation, but the principle is still the same (concerning your question). It still use (sort of) “expected” return, i.e., calculating the plan return using a proxy: a discount rate which is defined as
The discount rate used is determined by reference to market yields at the end of the reporting period on high quality corporate bonds, or where there is no deep market in such bonds, by reference to market yields on government bonds. Currencies and terms of bond yields used must be consistent with the currency and estimated term of the obligation being discounted [IAS 19(2011).83]
The discrepancy between real return and this proxy (expected return) is taken out in remeasurement.
So coming back to your question: if this increase expected return on plan assets will decrease the pension expense? yes, but since this return is now the same as the discount rate for gross obligation, the net result is dependent on the net obligation as pointed out by above by sunpak.
 
elcfa wrote:
Ah,
We are getting very technical now, which I tried to avoid to get bogged down to the nitty gritty.
IFRS changes its approach slightly in its IAS 19 in 2011. Here is a summary of the change:
1. The service cost component will include current service cost, past service cost and any gain or loss on settlement. The changes in demographic assumptions will remain included in the remeasurements component together with other actuarial gains and losses and will be excluded from the service cost.
2. The net interest will be determined by multiplying the net defined benefit liability (asset) by the discount rate used to determine the defined benefit obligation. Before the Amendments, the expected return of plan assets was required to be used.
3. The remeasurements will comprise the actuarial gains and losses on the defined benefit obligation, the difference between the actual total return on assets and the interest income on plan assets calculated based on the discount rate used to determine the defined benefit obligation, as well as any changes in the effect of the asset ceiling excluding the amount included in net interest. This definition of remeasurements differs from the definition of actuarial gains and losses in IAS 19 before the Amendments because the introduction of the net interest approach has changed the disaggregation of the return on plan assets and the effect of the asset ceiling.
Slightly different computation, but the principle is still the same (concerning your question). It still use (sort of) “expected” return, i.e., calculating the plan return using a proxy: a discount rate which is defined as
The discount rate used is determined by reference to market yields at the end of the reporting period on high quality corporate bonds, or where there is no deep market in such bonds, by reference to market yields on government bonds. Currencies and terms of bond yields used must be consistent with the currency and estimated term of the obligation being discounted [IAS 19(2011).83]
The discrepancy between real return and this proxy (expected return) is taken out in remeasurement.
So coming back to your question: if this increase expected return on plan assets will decrease the pension expense? yes, but since this return is now the same as the discount rate for gross obligation, the net result is dependent on the net obligation as pointed out by above by sunpak.
Click to expand...
Many thanks! Hmm…try….to understand above…..
 
FrankCFA wrote:But the IFRS is using Net return on plan asset.
Click to expand...
Yes: that’s exactly what I wrote. Interest increases the expense, expected return decreases it. That’s the netting. The particular interest rate that they use for the expected return doesn’t change the fact that expected return reduces pension expense; it only changes the amount of the reduction.
 
Just noticed Schweser Book2, page 110, Figure 5.
Increase expected rate of Ruturn will decrease Pension Expense - There is ** and says it’s not applicable under IFRS….
why?
 
Under IFRS there’s no “expected rate of return”
It takes the net of interest expense and interest income (assuming you will get the market rate)
So “net” interest expense = discount (beginning obligation - beginning asset)
while GAAP uses
interest expense = discount (beginning obligation) - expected return (beginning asset)
Do not confuse pension costs with pension expense (part of the pension cost that you report on income statement).
Expected rate of return has no effects on OVERALL PENSION COST. You pension expense decreases due to higher expected return; however, the remeasurement component on OCI will increase as a result of higher expected return
Actuarial loss - acturial gain - [actual return - expected return (beginning asset)]
so the 2 will cancel each other out, resulting in the SAME total pension cost.
 
cgy5478 wrote:
Under IFRS there’s no “expected rate of return”
It takes the net of interest expense and interest income (assuming you will get the market rate)
So “net” interest expense = discount (beginning obligation - beginning asset)
while GAAP uses
interest expense = discount (beginning obligation) - expected return (beginning asset)
Do not confuse pension costs with pension expense (part of the pension cost that you report on income statement).
Expected rate of return has no effects on OVERALL PENSION COST. You pension expense decreases due to higher expected return; however, the remeasurement component on OCI will increase as a result of higher expected return
Actuarial loss - acturial gain - [actual return - expected return (beginning asset)]
so the 2 will cancel each other out, resulting in the SAME total pension cost.
Click to expand...
Thanks. Is below my conclusion correct?
Under IFRS, Expected rate of reutrn has no affect on both Pension Expense and Pension cost (Because it uses market rate)
Under GAPP, Expected rate of reutrn has no affect on pension cost (will offset as mentioned cgy5478) but will affect the pension expense (Recognised in P&L as the floowing amount Plan assets * Expected return)
 
You must log in or register to reply here.
Back
Top