Pensions and Postretirement Benefits
Pension accounting under ASC 715 requires employers to recognize the funded status of defined benefit pension plans on the balance sheet and allocate pension cost across service cost, interest cost, return on assets, and amortization components.
Explanation
The funded status of a defined benefit plan is the difference between the projected benefit obligation (PBO) and the fair value of plan assets. If the PBO exceeds plan assets, a net pension liability is recognized; if plan assets exceed the PBO, a net pension asset is recognized. Net periodic pension cost includes service cost, interest cost, expected return on plan assets, and amortization of prior service cost and actuarial gains/losses.
Actuarial gains and losses and prior service costs are initially recognized in other comprehensive income (OCI) and amortized to pension expense over time using the corridor approach or other systematic methods. Only the service cost component is reported as an operating expense; all other components are reported below operating income.
Key Points
- •Funded status = fair value of plan assets minus PBO
- •Service cost is the only component in operating income
- •Actuarial gains/losses recognized in OCI, amortized via corridor approach
- •PBO uses projected future salary levels; ABO uses current salary levels
Exam Tip
The pension funded status calculation and the components of net periodic pension cost are heavily tested. Know the difference between PBO and ABO.
Frequently Asked Questions
Related Topics
Balance Sheet (Statement of Financial Position)
The balance sheet reports an entity's assets, liabilities, and equity at a specific point in time, following the fundamental accounting equation: Assets = Liabilities + Equity.
Comprehensive Income
Comprehensive income includes all changes in equity during a period except those from owner transactions, encompassing net income plus other comprehensive income (OCI) items.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities represent the future tax consequences of temporary differences between the book and tax bases of assets and liabilities.
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