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101 Concepts for the Level II Exam

Level II Concept 23: Components of pension costs


Total periodic pension costs (TPPC) is equal to the contributions plus change in the pension liability during the year.

Total periodic pension costs = net pension liability at the end of the period – net pension liability at the start of the period + employer contribution

Each period, the periodic pension cost is recognized in profit or loss (P&L) and/or in other comprehensive income (OCI).

Under IFRS, the periodic pension cost is viewed as having three components:

IFRS Component IFRS Recognition
Service costs Recognized in P&L.
Net interest income/expense Recognized in P&L as the following amount: Net pension liability or asset × interest ratea
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 = Actual return – (Plan assets × Interest rate).

Actuarial gains and losses = Changes in a company’s pension obligation arising from changes in actuarial assumptions

Under US GAAP the periodic pension is viewed as having five components.

US GAAP Component US GAAP Recognition
Current service costs Recognized in P&L.
Past service costs Recognized in OCI and subsequently amortized to P&L over the service life of employees.
Interest expense on pension obligation Recognized in P&L.
Expected return on plan assets Recognized in P&L as the following amount: Plan assets × expected return.
Actuarial gains and losses including differences between the actual and expected returns on plan assets Recognized immediately in P&L or, more commonly, recognized in OCI and subsequently amortized to P&L using the corridor or faster recognition method.b

Difference between expected and actual return on assets = Actual return – (Plan assets × Expected return).

Actuarial gains and losses = Changes in a company’s pension obligation arising from changes in actuarial assumptions.

a The interest rate used is equal to the discount rate used to measure the pension liability (the yield on high-quality corporate bonds.)

b If the cumulative amount of unrecognized actuarial gains and losses exceeds 10 percent of the greater of the value of the plan assets or of the present value of the DB obligation (under US GAAP, the projected benefit obligation), the difference must be amortized over the service lives of the employees.

Current service cost: amount by which pension obligation increases as a result of employees’ service in the current period.

Past service cost: amount by which pension obligation relating to employees’ service in prior periods changes as a result of plan amendments or a plan curtailment.

Example:

Assume that the following information is provided about a company reporting under IFRS:

  • PVDBO at start of year = 140
  • FVPA at start of year = 120
  • Discount rate = 10%
  • Actual return on assets = 15
  • Service costs = 7
  • Increase in pension obligation due to changes in actuarial assumptions = 4

The components of pension costs can be calculated as:

Service cost = 7 (given)

Net interest income/expense = net pension liability or asset × interest rate = (140 – 120) x 10% = 2

Remeasurements:

Net return on plan assets = actual return – (plan assets × interest rate) = 15 – (120 x 10%) = 3

Actuarial gains and losses = 4 (given)

Remeasurements = – 3 + 4 = 1 (3 is subtracted as it will reduce the pension obligation)

Total periodic pension cost = 7 + 2 + 1 = 10