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Apologies if this has been asked before, I couldn’t find it via the search box.
I am trying to understand why we consistently add back in the retirement benefit service cost within operating activities.
Is it added back in simply because the expense does not relate to the buying/selling of goods or services?
Thank you for your help.
In the cash flow we have to reflect the contributions paid to the pension scheme
In the profit and loss they will have reflected an accounting charge which is the service cost
So we add back the service cost and deduct the contribution within operating activities
Thank you for your reply Stephen,
The penny hasn’t dropped yet with regards to the service cost. I understand that it needs to be added back in, I just can’t work out why.
If I had a business which had an employee pension scheme, my business would expense a contribution each month – which would go onto increase the pension cost
I would also expense a service cost – this would essentially be an admin fee paid to the pension provider for handling the pension pot.
Have I understood what a service cost is in this context? If so, and it remains an outflow, why would we then add it back in?
I think I’ve got it now. I think I confused myself earlier on.
For other students:
A service cost is charged to P&L and is comprised of three elements:
-Current service cost, which is the increase in the present value of the obligation arising from employee service in the current period.
– Past service cost, which is the change in the present value of the obligation for employee service in prior periods, resulting from a plan amendment or curtailment
-Any gain or loss on settlement.I.e., non-cash.
Thank you for your help, and patience, Stephen.
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