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Dear tutor,
I understand that in pension accounting, actuarial gains and losses are taken to SPLOCI through OCI and when calculating cash flow relating to pension liability, we need to take into account figures recorded in OCI to arrive actual net cash flow? as actuarial gains and losses are based on actuarial assumptions rather than actual net cash flow?
What I do not understand is why we need to take into account actuarial gains and losse recorded in OCI to arrive actual net cash flow relating retained earning (dividend paid out)?
Many thanks for your help
Hi,
I’m a bit confused with your question, especially the last part as there is no relation between pension accounting and dividends paid.
In cash flow questions the key considerations are the cash inflows/outflows and any non-cash items.
With regards to non-cash items on pensions the key ones to consider are the service costs, being a non-cash expense.
With regards to cash flows the only one to consider is any investment the company has made in the scheme assets as an outflow, so the contributions paid in.
No adjustment is made for the actuarial gains or losses in the statement of cash flows, although you may need to use it in a T-account reconciliation to arrive at one of the figures above.
Hope this clears up any confusion.
Thanks
Thanks for your answer. I agree that the only cash out flow regarding pension accounting is the contribution paid to the company’s plan asset which is ,generally speaking,held by separate trust. My further question is that apart from aforementioned service cost(current and past) is non cash expense,what about interest cost(the unwounding)? In opinion,it is also non cash expense. Please do correct me when I am wrong. Please allow me to re phase my part 2 question shown as above,when calculating dividend paid to shareholders in retained earnings in my cashflow statement revision, I have always noticed one figure is taken into account in retained earnings t account reconciliation from OCi ( Oci part only includes gain on investment,loss on property revaluation,remeasurement losses on defined benefit plan),the figure is always identical with defined benefit plan , so my instinct is telling me there is something to do with defined benefit plan. After your kind explanation,my instinct could be wrong.
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