PENSION EXPENSE CALCULATION UNDER GAAP vs. IFRS!

[doobsmeister]

Hey guys, just trying to figure out the pension expense under GAAP vs. IFRS. For GAAP, do you add the amortized costs of past service costs to the income statement using GAAP? I believe that is a component of it.
On another note:
I understand that GAAP pension expense is:
Service cost + interest cost - expected returns
And IFRS is:
Service cost + interest cost - actual
Is this right?
Also what does this mean?
US GAAP
All actuarial gains and losses including differences between the actual and expected returns on plan assets are recognized immediately in P&L or, more commonly, recognized in OCI and subsequently amortized to the P&L using the corridor approach or faster recognition approach.
Measurements are:
Differences between expected and actual returns
A.) Actual returns - (plan assets x expected return)
B.) Actuarial gains and losses
If actuals are also included, how are they placed in the income statement in addition to the expected results. so when we go back to the formula:
Service cost + interest cost - expected results
Do we add back actual results?? I am quite confused with the statement above.
Any clarity here would be helpful.

 

[Finkid]

doobsmeister wrote:
Hey guys, just trying to figure out the pension expense under GAAP vs. IFRS. For GAAP, do you add the amortized costs of past service costs to the income statement using GAAP? I believe that is a component of it.

Yes. Two amortizations under GAAP. One amortization of past service cost, like you already said.
The other amortization of Actuarial Gains/losses, which you have mentioned at the end of your post.
There is no amortization of anything under IFRS. Actuarial Gain/loss goes in the OCI and past service costs are recognized in the income statement when incurred. (IFRS)

doobsmeister wrote:
On another note:
I understand that GAAP pension expense is:
Service cost + interest cost - expected returns

Make it
Service cost + interest cost - expected returns +- Amortization of Actuarial losses/gains + Amortization of past service costs (Under GAAP)

doobsmeister wrote:
And IFRS is:
Service cost + interest cost - actual
Is this right?

No. Under IFRS Pension expense is equal to
Service cost + interest cost - expected return (assumed to be same as discount rate used: a yield on a high quality corporate bond) + Past service cost

doobsmeister wrote:
Also what does this mean?
US GAAP
All actuarial gains and losses including differences between the actual and expected returns on plan assets are recognized immediately in P&L or, more commonly, recognized in OCI and subsequently amortized to the P&L using the corridor approach or faster recognition approach.

Let’s bring the pension expense equation for GAAP again
Service cost + interest cost - expected returns +- Amortization of Actuarial losses/gains + Amortization of past service costs (Under GAAP)
This amortization of actuarial gain/losses is done through Corridor method or a faster recognition method. The Actuarial gains/losses are amortized over the average service life of employees.

doobsmeister wrote:
Measurements are:
Differences between expected and actual returns
A.) Actual returns - (plan assets x expected return)
B.) Actuarial gains and losses
If actuals are also included, how are they placed in the income statement in addition to the expected results. so when we go back to the formula:
Service cost + interest cost - expected results
Do we add back actual results?? I am quite confused with the statement above.
Any clarity here would be helpful.

The difference between actual return and expected return is termed is part of remeasurements under IFRS which goes in the OCI.
The difference between actual return and expected return is included in the acturial gains/losses figure which goes in the OCI and is subsequently amortized (Using corridor or a faster recognition method) and recognized in the Income statement.
Hope it helped.

 

[CMLSML]

Finkid, you must be an accountant!

 

[doobsmeister]

Finkid! you are the man!! this chapter almost got me cross-eyed. This explanation helped a lot.

 

[doobsmeister]

Hi Finkid, one more question:
Regarding this equation:
No. Under IFRS Pension expense is equal to
Service cost + interest cost - expected return (assumed to be same as discount rate used: a yield on a high quality corporate bond) + Past service cost
Let’s go back to what the book describes:
IFRS Component
IFRS Recognition
Service Cost
Recognized in P&L
Net Interest Income/Expense
Recognized in P&L as the following: Net Pension Liability or asset x interest rate
Remeasurements: Net return on plan assets and actuarial gains and losses
Recognized in OCI and not subsequently amortized to P&L
- Net return on plan assets = actaul return - (plan assets x interest rate)
- Actuarial gains and losses = changes in the company’s pension obligation arising from changes in actuarial assumptions
Service Cost - check
Interest Cost - check
expected return - not quite sure where it fits in here. It must be the same as interest cost since discount rate is equal to expected return in IFRS (correct me if I am wrong).
Past Service cost - check (since it is part of overall service cost)
Thanks again man!

 

[Finkid]

CMLSML wrote:
Finkid, you must be an accountant!

Hahaha. Fortunately, no. It’s just that I spent a lot of time on Accounting.

doobsmeister wrote:
Hi Finkid, one more question:
expected return - not quite sure where it fits in here. It must be the same as interest cost since discount rate is equal to expected return in IFRS (correct me if I am wrong).

Let’s revisit the equation for pension expense under IFRS
Service cost + interest cost - expected return (assumed to be same as discount rate used: a yield on a high quality corporate bond) + Past service cost
You are right, the discount rate used for calculating interest cost and expected return used for calculating expected return cancel out and their net effect on Pension expense should be zero. However, it is not the case because their bases are different.
The base for Interest cost calculation is beginning pension benefit obligation (PBO) and
the base for expected return calculation is beginning fair value of plan assets
In equation form, this goes like this
Interest cost = Interest rate * beginning pension benefit obligation (PBO)
Expected return = Interest rate * beginning fair value of plan assets
The interest cost and expected return are netted and called Net Interest expense/income. As you can see, the interest cost and expected return will always be different as long as Beg. PBO and Beg. FV of plan assets are different. In other words, if the beginning funded status of the pension plan is not zero, the interest cost and expected values will be different.

 

[doobsmeister]

Finkid, you are the man!! Thanks.

 

[doobsmeister]

Finkid, i saw this in the curriculum:
Under IFRS, net interest expense/income is defined as the discount rate multipled by funded status.
That should be the same as the difference between the expected return and the interest cost right?

 

[AFusername1234]

Finkid]</p> <p>

wrote:
Finkid, you must be an accountant!

Hahaha. Fortunately, no. It’s just that I spent a lot of time on Accounting.
@Finkid- spoken beautifully, so clear. Working through the good ole pension accounting again before d day.
Just out of curiousy- do you know what happens with OCI under IFRS. Does the balance just chill on the balance sheet foreeveerrrrrr? Appreciate it, hombre.