While calc . periodic pension cost in IFRS, net int. cost = Beginning Funded status x Disc. rate
But why they are adding past service cost in Beginning funded status
And also, while calc. interest cost component of periodic pension cost in USGAAP, the formula is
Int cost = Beginning PBO x Disc. rate ( but in core i am finding that they are also adding past service cost in PBO)
Someone please explain, I am confused
XYZ SA, a hypothetical company, offers its employees a defined benefit pension plan. Information on XYZ’s retirement plans is presented in Exhibit 1. It also grants stock options to executives. Exhibit 2 contains information on the volatility assumptions used to value stock options.
Exhibit 1:
XYZ SA Retirement Plan Information 2009
Employer contributions | 1,000 |
Current service costs | 200 |
Past service costs | 120 |
Discount rate used to estimate plan liabilities at beginning of year | 7.00% |
Benefit obligation at beginning of year | 42,000 |
Benefit obligation at end of year | 41,720 |
Actuarial loss due to increase in plan obligation | 460 |
Plan assets at beginning of year | 39,000 |
Plan assets at end of year | 38,700 |
Actual return on plan assets | 2,700 |
Expected rate of return on plan assets | 8.00% |
Exhibit 2:
XYZ SA Volatility Assumptions Used to Value Stock Option Grants
Grant Year | Weighted Average Expected Volatility |
2009 valuation assumptions | |
2005-2009 | 21.50% |
2008 valuation assumptions | |
2004-2008 | 23.00% |
Question
The amount of periodic pension cost that would be reported in P&L under IFRS is closest to:
- 28.
- 538.
- 1,020.
Solution
B is correct. Under IFRS, the components of periodic pension cost that would be reported in P&L are the service cost (composed of current service and past service costs) and the net interest expense or income, calculated by multiplying the net pension liability or net pension asset by the discount rate used to measure the pension liability. Here, the service costs are 320 (= 200 + 120) and the net interest expense is 210 [= (42,000 + 120 − 39,000) × 7%]. Thus, the total periodic pension cost is equal to 538.
Under IFRS, the periodic pension cost has three components
Whereas under US GAAP periodic pension cost has 5 components
Hi, Shubham, calculation of Int cost = (Beginning PBO + Past service) x Disc. rate (they are using this formula in USGAAP ), it’s mentioned in the ERRATA