Can someone help with pension accounting? =)

Hi Guys,

Just in the midst of studying this section… I am a bit confused regarding the balance sheet presentation for some items in this section:

It is understood that both under IFRS and GAPP pension liability is represented by a single line , net amount.

However, IFRS’ net amount of pension liability (or DB) consist of adjustment to deferred Actuarial Gains/Losses, or deferred Unvested Past Service Cost. Therefore, the net amount is less than GAAP.

My question is, do the deferred AGL and PSC show up anywhere on the balance sheet? I just can’t get a clear understanding from reading the txt over n over…

What would the entries look like?

Thanks Kindly.

Give me a day or two time. I will come for your rescue.


Yes, they show up in other comprehensive income on the balance sheet. they are amortized to the income statement using the corridor approach

but by having them there, wouldn’t it throw the equation off balance? since we took them out to reach net pension liability, putting them under other comprehensive income (same side as liability on the BS) under equity would not be balanced !

no, they are just categorized as OCI. I don’t see how that would put the equation out of balance. If I had 10K in cash and then bought a fixed asset for 5K cash. I still have 10k in assets

Hi Thecodont, thanks for the quick reply, I will put my question in 2 points:

  1. Let’s say the net pension liability is $1000, it of course goes to the libaility side of the BS. What entry will be recorded in opposite of this to make the equation balance?

  2. Let’s say PBO is 2000 and asset in the plan is 1000. Under US GAAP the net pension liability is $1000 (2000-1000). If there is deferred AGL of -$200, the net pension liability becomes $800 only.

We will record 800 pension liability on the liability section of the BS. What entry will be recorded in opposite of this to make the equation balance? If 200 goes in OCI, it is still unbalanced.

Thanks, really hoping you could clear this up for me…

now you have me thinking hard since i have not reviewed this material since jan. question 1 i understand is no offsetting entry since the value reported is a net number. I went back and looked at page 200 in CFAI FRA and it says that unrecognized prior service costs ae only shown in the notes under IFRS but under US GAAP they hit OCI. Now AGL for IFRS can be recognized immediately in income or OCI or they may be deferred. So it sounds like if they are deferred then they may only show in the notes (i did not see where it said this specficly except for prior service costs but that is the only choice). sorry for typos…i am on a droid

@davidkcfaprep There is more to it then simply following the balance sheet equation for pension accounting.

To start with, in the ideal world (where beer sells for free), you should never have to report anything on the balance sheet for pension accounting, meaning your return of assets will be equal to PBO. It’s like DC plan , company spends 100 bucks employee gets 100 bucks, all set and done, like wages. Now if there is discrepency between your PBO and returns, it must be because of something either the assumptions would have wrong or some planned change from the management. In either of these cases, you will either have asset or liability which is supposed to be very minimal (again ideally) if you were recording expenses in each period, of course this doesn’t happen.

Now what these guys want is to do is not record everything in one period, because that will fluctuate earning big time. For example, in the begining of year 2011, company announces that from now on company will be contributing 3% rather than 2% earlier. Now since announcement is made in 2011, ideally all expenses should have been recorded right then. But if that happens, in 2011 earnings would have been negative but in the next period it will be positive so in the past as well. Who will buy stock of this company if earnings vary to this extent? To avoid, this discrepency, what these guys do is defer the expenses. It’s exacly like you would do in case of any deferred expenses, the only difference is that this time it is recorded in OCI, rather than recording in the balance sheet account.

So in your 1st example, let’s say net pension liability is $1000. This must be becasue of either the changed assumption or planned change. If any of this happens, ideally you should record expense in income statement right then. But under IFRS, you have an option to defer(or bypass) the unrecognized expenses, so rather than recording this in IS, this liability will be balanced out with OCI.

2nd one should be failry easy for you to figure out now. Please let me know if you still need help on the second one.

the book says that AGL go to either IS, OCI OR they are deferred. When discussing prior service costs the book says that they can be deferred and just show up in the notes. what is unclear to me then is whether deferred AGL is like an off balance sheet item and only referrenced in the notes

Yes that is correct. Under IFRS, AGL can be kept off balance sheet. And in case of prior service cost, only unvested portion is kept off-balance sheet and amortized over the vesting period. However, I don’t fully understand what is vested and unvested portion with respect to the pension.

vested = folks who have been with the company long enough and hence qualify for the payments from the plan. So prior service cost of the folks who have been “vested” in the plan is recorded in the BS.

lets say that the pension plan says that you have to provide 10 years of service to be able to claim your pension. if the company made a change to the plan but you had only worked there 9 years, they could defer the expense associated with you since you are unvested

@Thecodonta and @cpk123, Thanks for the explanation! now it makes sesne why unvested portion is allowed to keep off balance sheet, but vested is not.

Hi guys ! thanks for the feedback and discussion. It helped me understanding more but still didn’t quite answer my question.

I realized what I am really asking is…the journal entries of the pension liability, that affect balane sheet accounts. Its probabaly not covered…but kills me not to know.

I been reading a lot of material online… and there are items such as Intangie Pension Asset ( which is = or < than unrecognized PSC) , or Charge to Equity accounts.

For example… if PBO is 1000, MV of fund is 500, unrecognized PSC is 200, meaning the net liability (1 line) is 300.

Journal entries would be: Debit 200 Intangible asset, Debit 100 to Charge to Equity, Credit 300 Pension Liability …

That’s my mindframe. Because I keep thinking… 'YES, OK, we record 1 line liability on the BS, but there’s gotta be a corresponding entry somewhere in the BS to keep the equation balanced !! ’

As I already said, there are three ways to do this.

  1. Recognize the expense in the income statment. Becasue of this expense, NI is reduced, and in turn, retained earnings reduced which is nothing but equity (reduced in this case). L increased, E reduced. A=L+E balaced.
  2. Recognize gain or loss in OCI, L increased, corresponding entry in equity, in this case, equity reduced. Again A=L+E balanced.
  3. Keep it off balance sheet. Don’t record anything in the balance sheet. Still, balanced.

Now can you tell us where exactly you are struggling to understand this?

thanks so much…i read through your last post and then again your previous post…everything clicked…!!

I was totally messed up in the most basic concept of accounting… Balance sheet is end of a reporting period, so yes everything would balance out like you said. I was thinking if we realize a liability right away, there should be a entry involving an account on the BS and affect should be seen right away. Yet forgettin the expense account would have that affect on Equity in the very end…

Appreciate time spent on this sgupta. Shows who will pass and who wont lol.

Dude one topic is not going to make or break the deal for sure. I need a “white knight” to rescue me. I am lagging behind big time :slight_smile: