Expected return-actual return

CFA Level II
#1

2 short pension questions: When expected return on plan assets>actual return, for smoothing reasons, we place the spread between the two under equity; I get this. But when it accrues enough that it is added to or subtracted from pension expense, when do we add and when do we subtract? In other words, if it comes time for 10% of the total deferred gains/losses to be amortized (per GAAP), and if that portion=$500, do we add or subtract $500 from pension expense? Note: Am I right in thinking that when sum of 1) Changes in PBO due to changing actuarial assumptions and 2) Expected-actual ROPA are accrued in equity, until it equals 10% of either PBO or plan assets (whichever is greater) and then it is amortized?

#2

yes that is correct let’s assume your actual returns are 100 and expected return are 150…there is $50 in OCI you would subtract 50 from the pension expense on the I/S…caveat that 50 is >10% corridor threshold (deferred gains and losses) also, intuitively…the balance sheet is already balanced as the OCI has a negative 50 balance…thus when you remove from OCI and put in income statement…it flows into Retained Earnings and basically you have just switched accounts within equity… thus, on the exam if there is a negative OCI balance you know it has to be subtracted…and if it positive then it has to be added…also the entire OCI balance could be different depending upon the other adjustments within it…I am just talking about the deferred gains and losses account within OCI

#3

Wait so you subtract gains and add losses on the pension expense account, right? So the excess of expected over actual return on plan assets is a loss because you were expecting to make more than you actually made, so you add it to pension expense after reaching the 10% corridor threshold and then add it to retained earnings as an offset?

#4

you add the 50 to pension expense (or effectively decrease net income) because: expected return > actual return

#5

But a little bit at a time… it’s amortized, right? This is a good clarification thread.

#6

I just want to make sure I have the whole thing right. The excess of expected over actual return on plan assets is a loss because you were expecting to make more than you actually made, so you add it to pension expense after reaching the 10% corridor threshold and then add it to retained earnings as an offset. TheAliMan says you do a little bit at a time. How much do you do per year? How long a period do you amortize it over?