Pensions - Logic of US GAAP to IFRS

Hi guys

I generally have a pretty good understanding of this reading however I don’t understand this. Take for example

Funded Status (2586) US.GAAP

Unrecognised net actuarial loss 10,494

Unrecognised past service cost 9

Net amount recognised = 7917 asset (IFRS)

Ok now my question. Notice that the Funded Status (GAAP) is initially a liability. I understand that when calculating PBO (IFRS) you add unrecognised losses and subtract gains. As you add an unrecognised loss essentially you are adding to the obligation.

However i just dont know how the example above makes logical sense. If you initially have a liability under GAAP and then you add unrecognised losses and costs to the liability shouldnt you be increasing the liability in the books?

Thanks in advance

The key is to remember that as soon as you made changes to the actualarial assumption, it is reflected immediately in the PVBO. In this case, you’ve made some actuarial assumption changes that affects everyone and caused the PVBO to go up. BUT, 10,494 of the liability applies to employees that haven’t vested yet, so you need to ADD it back (make the liability smaller)

Basically the point of IFRS is to say, “look, I know you recently made some changes to your benefit plan that affected the future benefits you’re going to pay out - ie you assumed everyone will live until 90 instead of 60 and they all stopped smoking. However, of that actualrial change you just made, 10,494 of extra benefits you’re going to have to pay out applies to people who havent vested yet, so subtract if from the liability”

great explanation. thank you very much

Just be careful with the notation, in this case “adding” means to make the liability smaller, not “add on top of”

@kwalew: can u make clear something about accounting for pension obligation (liabilities side of BS) and pension expense under IFRS for me?

  1. Past service cost of unvested employees is deferred until benefits vest. These costs are amortized over the employees’ service lives. (say, this amount is 100, amortized this year is 10). Unrecognized PSC are not included in determining net pension liab or asset on BS.

the question is: what is unrecognized PSC? Is it unamortized PSC (90 in this case) or something else? And if it is not shown up in BS, where we could find it. footnotes …???

  1. Actuarial G/L can be recogzined in full or deferred then amortized. like above, where we could find data reflecting deferred (unamortized) AG/L.

It also states: IF a company decides to recognize AG/L in OCI, they are never reported in income.

So would we amortize that amount in OCI later if cumulative value of AG/L becomes large?

any illustration would be appreciated. all i want to make sure that BS will be balanced :slight_smile:

Thank you.

I think I answered this on another post (or maybe I didnt submit it). THere is an errata in the curriculum, PSC immediately affects the PBO and is shown in the BS. Ie, it IS on the Balance sheet in the PBO (which is shown as a net asset or liability). At the end of the period, unrecognized PSC will be in OCI and Recognized past service costs are in the IS

As time goes on, it is amortized in pension expense

2.) Generally you dont even recognize a change in AGL UNTIL it becomes too large (outside the corridor, for example). WIth IFRS this will be in notes.