Does the FASB still allow companies to determine DB pension expense for the period based on the expected (rather than actual) return on plan assets? Is SS 6 totally current?
Is additional liability (excess ABO over market value of plan assets) recognized immediately or gradually? EDIT: immediately on the B/S, both as a liability and contra-equity amount, and in comprehensive income. This doesn’t seem to be in keeping with the concept of limiting volatility in the numbers
2nd question I think is immediately- don’t think the goal there is to limit volatility so much as make sure that a pension is properly funded. as for the 1st one, i want to say it’s still off of expected #'s to get the reported pension expense on the income statement. that’s why we need to check in the footnotes at the assumptions to see if they’re realistic, no? or were those all the old rules and now you use actual returns? funny how it all slips away once you haven’t looked at it for a few weeks!
Hi there, To all sifus in pension accounting, could someone help to simply the meaning of service cost under projected benefit obligation? I’m aware that the change in PBO is made up of service and interest cost. I understand that the interest cost is the charge on the last PBO balance that the company has to bear but what I don’t get is why service cost for various years is still based on the PV of future retirement benefit based on a 1 year service but discounted to various points depending the years of service served. I hope this question is clear enough to warrant some simplified response which will aid my understanding on the matter. Thanks in advance.
I. The FASB still does allow accounting for pension expense using the expected returns for the simple reason of eliminating volatility in the income statements. The reason this volatility may be undesirable is because it does not represent the operational nature of an entities business. Secondly actual asset returns y/y are short term in nature yet pensions are managed with a long term view, hence the matching principle of tryuing to use longterm expected returns. As you will occur, the expected will differ from actual, and the differnec is always amortised over a period of about five years…still in the same spirit of eliminating income statement volatility. 2. ABO excess over assests in the minimum liability that should be reflected on the balance shhet hence it must recognised immediately. However i think this has been overtaken by the December 2006 changes which require that the full liability be reflected including deferred costs, prior service charges, transition charges, etc 3. Service cost is simply the benefit earned by employees for services rendered during the period i n which you are calculating pension cost. Every year a firm incurs this cost which contributes to the future value of pension obligation since the cost is accumulated. So this accumulated FV is discounted to PV, hence PV including the service cost. I hope that helps