Under the new defined benefit pension rules, how are the unrecognized items accounted for? I know that under the old rules they were held off balance sheet and then slowly amortized and there was a reconciliation between funded status and net pension liability. I says under the new standard the funded status is reported on the balance sheet without the unrecognized items like prior service cost. So how are prior service cost and actuarial gains/losses accounted for? For example, if the benefits change from 2% of final salary to 5%, how would that be shown under the new standards? In a somewhat unrelated question, which financial ratios do we need to memorize? There are a lot of LOS that say to understand the effect on financial ratios. Do we only need to know the ones in the LOS example in the text, or should we know all the ratios from Lv1?
What unrecognized items are you referring to?
I think under new standard. The pension expense is still calculated in the same manner. So prior service cost and actuarial gains/losses accounted etc are still reflected in pension expense which is part of income statement. It is just on balance sheet, funded status needed to use with new standard. And to compensate it we need to adjust deferred tax and equity. I hope I am correct, had a hard time on this chapter as well.
Bradleyz Wrote: ------------------------------------------------------- > Under the new defined benefit pension rules, how > are the unrecognized items accounted for? I know > that under the old rules they were held off > balance sheet and then slowly amortized and there > was a reconciliation between funded status and net > pension liability. > > I says under the new standard the funded status is > reported on the balance sheet without the > unrecognized items like prior service cost. So > how are prior service cost and actuarial > gains/losses accounted for? For example, if the > benefits change from 2% of final salary to 5%, how > would that be shown under the new standards? > > In a somewhat unrelated question, which financial > ratios do we need to memorize? There are a lot of > LOS that say to understand the effect on financial > ratios. Do we only need to know the ones in the > LOS example in the text, or should we know all the > ratios from Lv1? I am still working on this chapter - and having a hard time with it, plz correct me if i am wrong … My understanding is There are 3 types of unrecognized items for which GAAP allows smoothing by Amortization 1)Amortization of Prior Service Cost/Benefit - Resulting from Plan amendments that have to be applied retroactively. In your example, change from 2% to 5% would be a Prior Service Cost 2)Amortization of Net Gains/Losses - due to change in actuarial assumptions/difference between the Expected Return and Actual return of Plan Assets - amortized when it exceeds some threshold/corridor amt greater of 10%PBO/FMVPA, i think 3)Amortization of Transition Amt - this is pretty much a non-issue now since it relates to the current GAAP std adopted 20 yrs ago, most companies have already transitioned. Under PRe-SFAS 158 (prior to Dec 15, 2006) The PBO used to calculate the funded status(PBO - FMVPA) did not include these unamortized amounts- hence the Net Pension Liability did not reflect the economic reality. The unamortized amounts, PBO, funded status, etc were in footnotes info which was used to reconcile the true funded status. However companies did record a Min Pension liability for underfunded plans - ABO-FMVPA. Under the new SFAS 158, the PBO and hence the funded status PBO-FMVPA includes these amounts. Min Pension Liablility is non issue as the funded status indicates the true economic reality. The Prior Service Cost is recorded net of tax in Other comprehensive income, a deferred tax asset is also recorded.If there is a Net Gain, or Prior service benefit, the govt will want a piece of the good news so a deferred tax liability will be recorded.
What’s confusing me is that in the Schweser notes it says on page 200 under the professors note section that “Under the new standards, the pension liability or asset is equal to the funded states, NOT ADJUSTED FOR UNRECOGNIZED ITEMS.” Also, in the example on page 203 it shows a reconciliation between funded status and pension liability, and it say’t s that under the new standard only the fair value of plan assets and PBO are considered, and that you don’t use unrecognized prior service cost or actuarial losses. It says under the old standard the unrecognized items would have been included with the same PBO What I thought at first was that the PBO was immediately adjusted because of the new economic realities of the pension plan, but I’m confused by the fact that the same PBO is used with both the old and new standards and the unrecognized items are simply added to or removed from them with offsetting entries in other comprehensive income and defferred income taxes. What am I missing here?
Yes you are correct - PBO is the same for Old and New Standard. Whenever there is a plan amendment causing Prior Service Cost/Benefit to be amortized the amount is included in the PBO. Same for Net Gains/Losses due to differences in Expected versus Actual returns, actuarial assumption changes, etc. When amortized, they come out of PBO into Pension expense. The CFAI book has an example of this on Pages 137-138 Say PBO is = $2525 Fair Market Value of Plan assets = $1625 Assume ABO is not underfunded … Unrecog prior service cost = 375 Unrecog net loss = 240 Unrecog transition oblig = 240 ------------------------------------------ Total unrecog = 855 Under NEW Standard ---------------------------- Funded status reported on Face of BS = 2525-1625 = liability of 900 which represents true economic reality Under OLD Standard --------------------------- The unrecognized items were off the Balance sheet So the Net pension liability reported on BS was 900-855= $45 This $45 is refered to as " Funded status adjusted for defered items" - pretty confusing wording huh ??? The funded status of $900 was buried in the footnotes. So analyst would see a $900 liabilty off books and $45 liability on the books and would have to figure that there was an unrecognized loss 855.
The CFAI Volume II on page 3 - lists 31 ratios - may be helpful to review those to begin with and then deal with any ratios that we dont remember in the process of doing QBank or sample exams.