Core Earnings

4/14/2003

Questions on Pension Accounting and Pension Interest Costs

•How does FASB treat interest costs?

–FASB looks to the pension plan first to cover interest costs, as Standard & Poor’s Core Earnings does. Then FASB uses expected returns rather than actual returns. While the expected returns eliminate the volatility, they also obscure the true impact of pensions on earnings. An important note: Pension interest charges this year can be a warning that a company’s cash flow and net earnings next year could be reduced by a required contribution to its pension fund.

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