How is the portion of unrecognized actuarial losses determined in OCI and NI?
Let’s use the example on page 181 in the FRA book
Plan assets = $4,850,000 PBO = $5,000,000 Actuarial losses = $610,000 Corridor = $500,000 (10% of PBO) Service life of employees = 10 years
The first time I read it, I thought that the only $11,000 goes the NI and the rest ($599,000, calculated as $610,000 - $11,000) goes to OCI.
But is it $500,000 goes to NI and the remaining $110,000 is amortized slowly? So in year 1 we have $511,000 ($500,000 plus the amortized value of $11,000) in NI and $99,000 in OCI?
“Corridor” Approach This approach existed prior to the December 2004 amendments to IAS 19 and still remains available as an option. Under this approach actuarial gains and losses—to the extent that they fall outside a corridor of 10% of the higher of the plan asset or liability value—are recognised through the profit and loss account over a period not exceeding the average expected remaining working life of employees. Thus recognition of gains and losses is deferred. Gains and losses remain unrecognised (i.e. are kept off the balance sheet) until they breach the corridor, and even then are only recognised onto the balance sheet over a number of years. The reasoning is that pension scheme deficits (particularly under the accounting standards) are volatile from year to year and to fully recognise this position each year could have serious implications on the company’s distributable reserves and financial planning, with a knock-on impact on dividend policy. To combat this, any unexpected movements within the corridor are not recognised on the balance sheet and therefore have no impact on distributable reserves.
Before breaching the corridor, it is still in OCI, remember this amount is Actuarial gains/losses accumulated over the years. Under US GAAP, The actuarial gains/losses include gains/losses 1) due to change in actuarial assumptions and 2) the difference between interest expected and actual interest received. So all this will be in OCI. When it becomes too large ie > Max(10% PVBO or Plan assets) part of it goes to P&L and the remaining stays in OCI. (as explained in the video).