In Wiley,it states that under US GAAP , difference between actual return on plan assets and expected return on plan assets has no effect on funded status. Can anyone please explain why? Isn’t the difference included in other comprehensive income and amortised over time as a pension expense which is a part of total periodic pension cost which affects net pension asset/liability . Thanks in advance for helping
Funded status = PV(pension obligation) – fair value of pension assets
Actual return on plan assets affects the fair value of plan assets but does not affect the present value of the pension obligation; therefore, it affects the funded status.
Expected return on plan assets does not affect the fair value of the plan assets and does not affect the present value or the pension obligation; therefore, it doesn’t affect the funded status.
Under U.S. GAAP :
Periodic pension cost = Current service costs + Past service costs + Interest costs + Actuarial losses − Actuarial gains − Expected return on plan assets
Actuarial gains and losses under U.S. GAAP include the impact of changes in various assumptions on the pension obligation and the difference between the actual and expected return on plan assets. If the actual return on plan assets exceeds (is less than) the expected return, it gives rise to an actuarial gain (loss).
Periodic pension cost = Current service costs + Past service costs + Interest costs + Actuarial losses (gains) other than those arising from differences between the expected and actual return on plan assets − (Actual return on plan assets − Expected return on plan assets) – Expected return on plan assets
Periodic pension cost = Current service costs + Past service costs + Interest costs + Actuarial losses (gains) other than those arising from differences between the expected and actual return on plan assets − Actual return on plan assets + Expected return on plan assets – Expected return on plan assets
Periodic pension cost = Current service costs + Past service costs + Interest costs + Actuarial losses – Actuarial gains – Actual return on plan assets
As you can see in the above equation that the Periodic Pension Cost, does not depend on the difference between Expected & Actual Return on plan assets. So the Funded status (which is calculated as shown below) does not depend on the the difference between Expected & Actual Return on plan assets.
Net periodic pension cost = Ending funded status - Beginning funded status + Employer contributions
sydneyguy:
While that’s impressive (especially if you did that from memory!), it’s not on point: the question was why expected return has no effect on funded status, which you don’t address.
hahaha. Chukled
With all due respect, the question posted above is NOT why expected return has no effect on funded status.
The question was why under US GAAP, the difference between expected return and actual return on assets has no effect on funded status.
However, apologies if I have not addressed this in my answer.
ARoPA only effects the Plan Asset not the PBO, and neither of them is anyway affected by ExRoPA. Hence no matter what is the value of ExRoPA ( so the difference between ARoPA and ExRoPA) the funded status will not be affected by the difference. The value is only impacted by ARoPA.
You’re correct; my apologies.
The question was why the difference between expected return and actual return has no effect on funded status. And the answer is that expected return itself has no effect on funded status.
I need some caffeine. 
No issue. Thanks a million for all you do for this forum.
My pleasure.
Thanks for your understanding.
Thanks everyone.I get it now