Adjusting for Pension Expenses
Hi All
Was hoping I could get some help regarding adjusting EBITDA for pension expense.
I have look everywhere for a clear and accurate answer, and have yet to find a decent answer.
I am wondering on what the best way is to calculate EBITDAP, stating from EBIT.
The Company I am dealing, lumps up pension expense in SG&A, but it is not clear if the interest component is lumped up in SG&A, or the interest expense line. So, when calculating EBITDAP, do I start with EBIT and add back net periodic pension costs, which include, interest cost, expected return on plan assets, and amortization of unrecognized losses, or do I not add back the interest cost line as it is include in the interest expense line? Any ideas? Would appreciate any help, even if there are some guides you are aware of on how to model out pension expenses would help
Thank you!
Sounds like you have a footnote breaking down plan expenses. You basically want to add back mandatory expenses associated with the pension (i.e. service fees, required catch-up if underfunded) but not the other stuff (i.e. unrecognized loss amort) as the idea of EBITDAP is to get a better picture of cash flow than EBITDA if pension is material. Then you want your adjusted TEV to include pension liabilities for the multiple.
GAAP requires that the interest on the pension obligation be included in pension expense and not reported separately as part of interest expense (this is permitted under IFRS, however). This, combined with the fact that it says "net" periodic pension expense, leads me to believe that the interest portion is indeed included. You would need to find EBITDA including the whole periodic pension expense as a SG&A expense, then find out the interest portion of pension expense (should be in the notes) and add that to EBITDA.
Thanks a lot guys for the information. Zzari, my understanding, based on your answer, is to add back the net periodic pension expense back to my EBITDA since the net periodic pension expense includes the aforementioned. Am I correct? Thanks again for the time
Not quite. When you're calculating EBITDA, include net periodic pension expense like you would any other SGA expense. Once you have EBITDA, add the "interest portion" of the "net periodic pension expense" (found in the disclosure notes) to give you the "right EBITDA."
Everyone, I took the convo between Zzari offline, but figured I would fill everyone in to hear other feedback...
my response to Zzari's previous message:
Hey, why do I add back the interest component back to EBITDA? It is already included in the net periodic pension cost. It would be double counting if I add back the net periodic pension cost and then add back the interest cost, no? If it makes it easier to explain, an example, I am looking at motorola solutions recent 10-k and for its U.S. plans, net periodic pension cost is $188, comprised of the following: $349 interest, -$421 expected return in assets, and $260 amortization of unrecognized loss. What I did, was that I took $188 and added it back to EBITDA. Sorry if I am confusing you? Thanks a lot for the help again.
Zzari's response:
So I could be wrong here, but your initial EBITDA (before adding back net periodic pension expense) would be including interest on the pension obligation and the amortization of the unrecognized loss, both of which theoretically shouldn't be included in EBITDA, correct?
To "correct" the EBITDA you do not add back the net periodic pension expense, but would instead add back the $349 interest and $260 amortization (but not the $421 expected return on assets, which should be included in EBITDA, if I'm not mistaken).
I appreciate your response Zzari, but I think it is most accurate to add back the entire net peridic pension expense, including the $421 expected return on asset (which really reduces pension expense)
Any thoughts?
I agree with the OP that he should simply take EBITDA and add back net pension expense (as detailed in the notes). No reason to disaggregate the different expense components. Net pension expense is intended to approximate cash contributions to the pension assets using an accrual/smoothed methodology.
I like replying to old threads.
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