Pension Assumptions - Extract from Financial Statements Pepsi co. 2010

The above snapshot is from the Financial Statements of Pepsi Co. for the year 2010 throwing light on the Assumptions which are used by the company in measuring Plan obligations. Below is an extract from the CFA Curriculum.

"1. Service Cost: It is the present value of new benefits earned by the employee working in the current year. In case of PBO, service cost includes an estimate of future salary increases (compensation growth). Current service cost increases the PBO.


2. Interest cost: Interest expense is the increase in the liability due to the passage of time. Interest cost = Discount Rate x Pension liability at the beginning of the period. Note that the interest cost increases every year regardless of whether the employee works another year or not.


3. Prior service cost: It is the cost or increase in the PV of a company's pension liability that results from changes to the terms of a pension plan applicable to employees' service during previous periods.


4. Actuarial gains & losses: Actuarial gains & losses can occur when changes are made to the assumptions on which a company's estimated pension obligation has been based e.g.

• Employee turnover
• Mortality ages
• Retirement ages
• Compensation increases

Alternatively, actuarial gains/losses arise when there is a difference between actual and expected return on plan assets.

5. Losses on curtailments & settlements

• Curtailments occur when number of employees covered by a plan is reduced. They may result from events like restructuring, plant closing etc.
• Settlements could be making a lump sum payment to plan participants in exchange for their rights to receive specific post-employment benefits."

The relevance of the material present in the CFA curriculum and narrated by the Actual Financial Statements can be seen.