Pension Interest Expense : IFRS VS US GAAP

[Norest]

Under IFRS, pension interest expense: [Net Pension Liablity/Assets (also known as Funded status) * Discount rate]
Under US GAAP, pension interest expense: (Plan Assets * Expected Return)
However, Elan’s 11th hour also states that IFRS pension interest expense as “a return on plan assets based on the discount rate”…
This is a little confusing as my understanding is “plan assets” =/= “funded status” … can someone confirm/verify which is correct?

 

[Norest]

bump

 

[kikentai]

the interest/discount rate is an actuarial assumption.

 

[S2000magician]

I believe that you’re confusing two ideas: interest expense and return on assets.
Interest expense = beginning value of PBO × discount rate; it increases pension expense.
Return on assets = beginning value of plan assets × expected return; it decreases pension expense.

 

[stunnerrunner]

Isn’t is also called net interest cost or income?

 

[CarloRoco]

under IFRS it is reported as net interest (cost) expense. because they required expected return and interest expense to be equal, both can be simply netted under the line “net interest expense.” Gaap allows differences hence expected return and interest cost are split.

 

[Norest]

S2000magician wrote:
I believe that you’re confusing two ideas: interest expense and return on assets.
Interest expense = beginning value of PBO × discount rate; it increases pension expense.
Return on assets = beginning value of plan assets × expected return; it decreases pension expense.

Thanks for the response S2000,
My initial question might have been a little confusing, so let me rephrase it:
Under US GAAP, interest expense is measured as (Plan assets x Expected return on Assets)
Under IFRS, interest expense is measured as (? x discount rate)
From my readings, “?” has been classified as both “net pension liability/asset” AND “Plan Assets”
My understanding is that they’re different, as Net pension liability/asset = Funded status (PBO - Plan Assets)?

 

[Me VS CFA]

Plan assets x Expected return is the return on plan assets not interest expense. Interest expense under GAAP and IFRS is measured the same way: Begging PBO x discount rate. However, under IFRS the discount rate is the same as the expected return and therefore you can calculate the NET interest expense (interest expense - expected return on plan assets) as: funded status x discount rate.
Also, be careful when you are choosing between actual and expected return. Expected return is used to calculate pension expense and actual return is used to calculate fair value of plan assets.
Please, correct me if I am wrong.

 

[S2000magician]

Norest wrote:

S2000magician wrote:I believe that you’re confusing two ideas: interest expense and return on assets.
Interest expense = beginning value of PBO × discount rate; it increases pension expense.
Return on assets = beginning value of plan assets × expected return; it decreases pension expense.

Thanks for the response S2000

My pleasure.

Norest wrote:My initial question might have been a little confusing, so let me rephrase it:

My initial response might have been a little confusing, so let me rephrase it:

Norest wrote:Under US GAAP, interest expense is measured as (Plan assets x Expected return on Assets)

That is not the computation of interest expense; it’s the computation of return on plan assets.
Under US GAAP:
Interest expense = beginning value of PBO × discount rate.
Interest expense is the adjustment to the PV of the pension liability from amortizing the discount; it’s simply a matter of time and the discount rate. It has nothing – nothing! – to do with plan assets. It increases the pension expense on the income statement.
Expected return on plan assets is an actuarially smoothed version of the actual return on plan assets:
Return on assets = beginning value of plan assets × expected return.
The actual return increases (we hope!) the value of the plan assets and the expected return reduces the pension expense on the income statement. Both of these have nothing – nothing! – to do with plan liabilities.

Norest wrote:Under IFRS, interest expense is measured as (? x discount rate)
From my readings, “?” has been classified as both “net pension liability/asset” AND “Plan Assets”
My understanding is that they’re different, as Net pension liability/asset = Funded status (PBO - Plan Assets)?

Under IFRS, the discount rate for pension liabilities and the expected return on plan assets have to be the same rate (they can be different under US GAAP), so IFRS nets the two:
Interest expense = funded status × discount rate.