Page 41 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

LOS 15.c: Describe the components of a READING 14: INTERCORPORATE INVESTMENTS
company’s defined benefit pension costs.

MODULE 15.3: DEFINED BENEFIT PLANS, PART 1—PERIODIC COST

The periodic pension cost (i.e., total periodic pension cost or net periodic pension cost) is the employer’s contributions adjusted for changes
in funded status. The expense to the company is either paid (via contributions) or deferred (via a worsening of the plan’s funded status).

total periodic pension cost (TPPC) = employer contributions − (ending funded status − beginning funded status)

Alternatively,
total periodic pension cost = current service cost + interest cost − actual return on plan assets +/– actuarial losses/gains due to changes in
assumptions affecting PBO + prior service cost

NOTE: The main difference between U.S. GAAP and IFRS is the allocation of total periodic pension cost between the income statement
(i.e., reported pension expense) and OCI. Under both GAAP and IFRS, total periodic pension cost = periodic pension cost in P&L +
periodic pension cost in OCI.

Periodic Pension Cost Reported in P&L

Current service cost: PV of benefits earned by the employees during the current period. The increase in PBO that is the result of the employees
working one more period. It is immediately recognized in the income statement.

Interest cost: The increase in the PBO due to the passage of time (PBO at BOY * discount rate). Immediately recognized as a component of
pension expense.

Under IFRS, net interest expense/income = discount rate * beginning funded status (i.e., interest cost is offset against expected plan return). If the
plan is reporting a liability, an expense is reported, otherwise, interest income is reported.

Expected return on plan assets: This is a component of reported pension expense. Expected return (instead of actual return) on plan assets is
used for the computation of reported pension expense. The difference in the expected return and the actual return is combined with other items
related to changes in actuarial assumptions into the “actuarial gains and losses” account.

Under IFRS, the expected rate of return on plan assets is implicitly assumed to be the same as the discount rate used for computation of PBO and
a net interest expense/income is reported as discussed above.