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CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity

Under IFRS, a company has a net defined benefit liability of 200 million at the start of the year, with a discount rate of 6%. Current service cost is 30 million, and employer contributions are 50 million. Ignoring other items, the pension expense recognized in profit or loss is closest to:

The pension expense in profit or loss is closest to 42 million. It equals current service cost of 30 million plus net interest of 12 million, which is 6% of the 200 million net liability. Employer contributions are cash funding that reduce the liability, not an expense component.

  1. A30 million
  2. B42 millionCorrect
  3. C92 million

Explanation

Profit or loss includes current service cost plus net interest on the net liability: 30 + (6% × 200 = 12) = 42 million. Contributions of 50 million reduce the liability but are not an expense. Remeasurements go to other comprehensive income. Adding contributions gives the 92 distractor.

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