Can someone explain the concept of Amortization of acturial gains and losses with the help of example?
say a pension funded in underfunded $10m. net liabilities are $50m with average obligation of 10yrs.
10m is outside of the 10% corridor.
company follows GAAP
therefore $10m is amortised over 10yrs in P&L.
i think that is all you need to know.
With all due respect, amortization of actuarial gains/losses has nothing to do with the pension being underfunded or overfunded; you can’t just amortize away the shortfall.
An actuarial gain/loss is the change in the pension liability resulting from a change in the actuarial assumptions. For example, if the expected growth rate of salaries were changed from 2% per year to 2.2% per year, that would increase the pension liability: that increase is an actuarial loss.
Under US GAAP, that amount is recorded in OCI. If the net amount of actuarial gains/losses in OCI exceeds 10% of the greater of the plan assets or pension liability (at the beginning of the period), then the excess is amortized over the average remaining working lives of the employees.
First of all, components of DBP will affect either Pension cost(i/s) or OCI(b/s).
Now, try to understand that Actuarial G/L are not one figure but combine effects of changes in PBO from the changes in actuarial assumptions, difference between the expected return and actual return on plan assets (termed as Remeasurement.) All these make one actuarial G/L.
Actuarial G/L are recognised in OCI under both IFRS and US
Under IFRS, actuarial G/L won’t be amortised
Under US, actuarial G/L are amortised using Corridor Approach
Corridor approach, When Begining balance of Actuarial G/L exceed 10% of Higher of beg PBO or Plan assets, amortization required. Excess amount is amortised over the remaining life of 'ee.
So Actuarial G/L is basically effects of actuarial assumptions and difference between expected and actual return (remeasurement effect).
Regarding example, better hit the Schweser or Curriculum.
Thanks
fair comment… shortfall has to be triggered buy a change to the actuarial assumptions like you say.
Thanks to all now it is clear.
My pleasure.