Page 47 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

LOS 15.f: Interpret pension plan note disclosures including READING 14: INTERCORPORATE INVESTMENTS
cash flow related information.

EXAMPLE: Adjusting cash flow: Bhaskar Thakur is analyzing the financial statements of Box Car MODULE 15.6: ANALYST ADJUSTMENTS
(BC) Inc., a manufacturer of equipment for the railroad industry. Thakur notices that BC has a defined
benefit pension plan in place. He finds out that the company made a €340 million contribution to the
plan during the year. He collects the following additional information about the company:

BC reported a net income during the year of €812 million. Cash flow from operating activities and financing
activities were reported as €948 million and €112 million respectively. BC’s tax rate was 40% during the year.

Compute:
1.The total periodic pension cost during the year.
2.Cash flow from operating and financing activities after making appropriate adjustments.
Total periodic pension cost = contributions − [ending funded status − beginning funded status] = 340 − (2,180 − 2,530) = 340 − (–350) = €690 million

BC’s contributions were €350 million less than the total periodic pension cost.

• after tax shortfall = 350(1 − 0.4) = €210 million

• adjusted cash flow from operating activities = 948 − 210 = €738 million

• adjusted cash flow from financing activities = 112 + 210 = €322 million

Wondering why we adjust over- or under- contributions for tax?

The coverage here is (mostly) based on the U.S. tax code, where companies can deduct only actual cash
contributions made to their pension plan.