Module 15.6 LOS 15.e and 15.f: Analyst Adjustments for Evaluating a Pension Plan

To make comparative financial statement analysis easier, analysts can make several adjustments to pension accounting.

Using net pension assets and liabilities instead of gross values, which affects certain ratios because the firm’s total assets and total liabilities are both less than if the firm reported the gross amounts. For example, return on assets (ROA) would likely be lower if the gross amounts were reported on the balance sheet (higher denominator). In addition, leverage ratios would likely be higher with the gross amounts.

Analysts can adjust pensions assumptions like the discount rate and adjust for accounting standards (GAAP vs. IFRS), in particular, for differences in income statement reporting.

If the firm’s contributions exceed its total periodic pension cost, the difference can be viewed as a reduction in the overall pension obligation, similar to an excess principal payment on a loan. Conversely, if the total periodic pension cost exceeds the contributions, the difference can be viewed as a source of borrowing.

If the difference between cash flow and total periodic pension cost is material, the analyst should consider reclassifying the difference from operating activities to financing activities in the cash flow statement.

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