CFA Level 2 FSA
CFA Level 2 FSA
CFA Level 2 FSA
Effect on
Balance sheet
liability
Pension expense
Increase discount
rate
Decrease
Decrease
Decrease rate of
compensation growth
Decrease
Decrease
Increase expected
rate of return
No effect
Decrease (GAAP)
For health care pension, there is the ultimate healthcare trend rate, which is used for the
prediction
Analysts view: Disclosures of Pension and Other Post Employment Benefits
o Evaluating the disclosure assumptions
Discount rate
Expected compensation growth rate
Expected return on assets
o Metric for analysis:
Consistency with other company
Consistency with economic environment
Consistent internally
Net Pension Liability or Asset
The balance sheet discloses only the net amount
Analysts can use the net amount to adjust a companys asset and
liability for the gross amount so it better reflects the companys
true asset and liability
Compare the gross amount with the sponsor companys asset,
equity and earnings.
Total periodic cost (analyst view of total periodic cost)
Definition: The total periodic cost of a companys DB pension plan is the
change in the net pension liability or asset, excluding the effect of the
employers periodic contribution into the plan
Net Periodic Pension Cost=Ending fund status Beginning fund
status employers contribution
Periodic Pension cost recognized in P&L vs. OCI
Adjust GAAP companys P&L so it becomes comparable with IFRS
(a) Include past service cost
(b) Exclude amortization of past service cost arising in pervious
period
(c) Including an amount of return on plan assets at the discount
rate rather than the expected rate
Or use OCI as the basis for comparison
Classification of periodic pension cost
Exclude from operating income the amortization of past service cost and
net actuarial gain and losses
Exclude interest expense and the return on plan assets from operating
income
Interest expense be added to the companys interest expense and return on
plan asset be treated as non-operating income
Added back the actual return of asset back into other income
Cash flow
If sponsoring companys periodic contribution to a plan exceed the total
pension costs of the period, the excess can be viewed as a reduction of
pension obligation
Over-contribution (prepayment)
o CFO is added
o CFF is subtracted
Under-contribution (borrowing)
o CFO decreases
o CFF is added
A periodic contribution that is less than the total pension cost of the period
can be viewed as a source of financing