As I am reading through this topic, it says that gains & losses from changes in acturial assumptions should be reported on OCI and then subsequently amortised as pension expense. Same holds for past service costs.
What I fail to understand is that the same gains and losses & past service costs were also considered for PBO and is already a part of funded status, so are we not double counting it this way?
Also how does reporting something in OCI and then amortising it in Income statement satisfy the double entry accounting system as here is no cash involved here.
Accounting isn’t my strongest forte, but let me try and explain this since nobody hasn’t answered it yet. Please feel free to correct me if I’m wrong.
Assumptions in the following example: This hypothetical company reports under US GAAP and chooses to defer recognition of actuarial gains/losses by initially recording the actuarial gains/losses in OCI and amortizing them over time. The application of the corridor method is ignored.
Let’s say this company suffers an actuarial loss: PBO increases, and the plan liability(/asset) increases(/decreases). Now, due to this change, the balance sheet doesn’t balance any more. In order to make the balance sheet balance again, we can decrease OCI by the same amount. The initial journal entry should look like this:
Dr. OCI … $XXX
Cr. Pension Liability/Asset … XXX
When the company subsequently recognizes the amortized amount of this actuarial loss, it increases OCI and increases the Pension Expense by the amount of amortization for the period.
Dr. Pension Expense (from Amort.) … $YYY
Cr. OCI … … YYY
Of course, you can do the reverse of this if the company has an actuarial gain.
You can look at this like “temporarily storing” the actuarial loss/gain in OCI and gradually putting this loss/gain out of OCI and into I/S. Incidentally, this gradual recognition of the gain/loss through I/S results in higher/lower R/E, keeping the amount of Equity constant.