FSA- Pension Expense adjustments to Cash Flow

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roumancesoiree

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I was just wondering when there is an adjustment from operating to financing or vice versa for the contributions made by the employer in excess of pension expense, why does that adjustment take place AFTER we net for taxes?
 
Things to think about:
“Economic Pension Expense” is usually greater than the “Reported Pension Expense” on the Income Statement.
If Economic pension Expense > Employer Contributions
you have a situation that there is a extra loan amount pending to the extent of “Economic Pension expense” - “Employer Contributions” that is due to be made by the Employer.
So reclassify (“Economic Pension Expense” - “Empl Contrib” ) * (1-T) as a CFF Outflow from CFO.
Increase CFF, Decrease CFO
If Employer Contributions > Economic Pension Expense
essentially a portion of the loan principal is being repaid.
So reclassify as CFF reduce, CFO Increase.
If Economic Pension Expense had really been reported - Net Income would have reduced to the extent of the after tax component, and essentially that is what would be available to make the employer contributions. Hence after tax… is how I think about it.
 
cpk,
what adjustments need to be made if economic pension expense is greater then pension expense?
 
none…
economic pension expense is a calculation analysts are responsible for and basically says how different the number on the income statement is from what is “the real number”. That is about it.
 
Yeah, cpk is right. You have to look past the “smoothing” of pension expense as reported by GAAP and find out what it actually is.
 
CPK, I also remember studying in CFAI textbook that some analyst state the gross amount of pension asset and liability on the balance sheet to get a ‘true’ representation of total assets and liabilities. Any thought about this adjustment?
 
There is a question in the text which also shows this exact same adjustment.
check out reading 23, q5 in the book..
http://www.analystforum.com/phorums/read.php?12,922167
someone else had asked a question about it – and swaptiongamma and I had provided some explanation in this thread above on the same.
from the analyst’s point of view - showing the complete asset + liability on the balance sheet - is more disclosure.
US GAAP under SFAS 87 (Old standard) showed a smoothed number and you had to go thro’ the footnotes to figure out where things were hidden.
SFAS 158 (new standard) shows the Funded Status of the plan on the balance sheet - which says whether it is an asset position or a liability position, and by how much, but even now you need to go to the footnotes to determine how big a PBO (liability) it is and how much of assets have been set aside to meet this liability.
showing both the FV Plan Assets and the entire PBO on the face of the balance sheet - will provide much more disclosure.
 
Thanks a lot CPK…was just looking for a clarification since i didn’t see this adjustment in Schewser
 
cpk123 Wrote:
——————————————————-
> Things to think about:
> If Economic Pension Expense had really been
> reported - Net Income would have reduced to the
> extent of the after tax component, and essentially
> that is what would be available to make the
> employer contributions. Hence after tax… is how
> I think about it.
So looks like contributions like dividends are subtracted from net income ie after tax. Is that correct? If so, when making adjustements for CF why do you need the (1-T) factor.
Seems like the following should give the adjustment required - Economic Expense (1-T) - Emp Contribution
I know the correct answer is (“Economic Pension Expense” - “Empl Contrib” ) * (1-T) but the 1-T for Employee contribution is killing me. Appreciate if anyone can point out what I am missing.
 
employer contrib is also converted to an after tax term so you really are comparing apples to apples.
For the purposes of the exam … take difference and *(1-T)
do not overthink it, not at this stage….
 
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