Module I· Pensions AccountingIntermediate
Question
How is pension expense recognized in the income statement?
Answer
Mechanics
IAS 19 splits pension expense into four components, each shown in a different income-statement or equity category:
| Component | Content | Category | Effect |
|---|---|---|---|
| Service cost | Value of pension benefits earned by employees in the current year | Personnel expense / operating | Reduces EBITDA and EBIT |
| Past service cost | Effects from plan amendments or curtailments, often in restructurings | Personnel expense or separate operating line | Reduces EBITDA and EBIT |
| Net interest expense | Discount rate x (DBO - plan assets) | Finance result | Does not reduce EBITDA / EBIT |
| Remeasurement | Actuarial gains / losses and differences in plan-asset returns | Directly in OCI | No current-year P&L effect |
Deep diveShow more details
Valuation consequence
Reported pension expense is multi-line, not one simple cost item. In adjusted EBITDA, service cost is usually included because it is the true operating cost of current-year pension benefits. Net interest is treated separately as financing expense.
Pitch tip
EBITDA includes pension service cost. In companies with large DB plans, that can be $50-200m p.a. When comparing against companies without DB pensions, use pension-adjusted EBITDA to avoid valuation distortion.