What exactly is a Net transition Asset/Liability? Why does an actuarial gain have no affect on PBO when actuarial gain/loss is part of PBO? Thanks for any help!
without getting too into the details, the transition assets and liabilities came onto the books when pension accounting standards went into effect way back in the 1980s, and companies were “transitioning” to the new standards. I can’t imagine the CFAI would put a question about them…
One more question - So with the actuarial assumptions - Changes in expected return: the diff between act ret and expected ret are reflected in actuarial G/L as part of PBO and this is stored in S/H EQ and get ammortised into Pension Expense. What about changes in the discount rate and wage increases? Where does that go?
that would be your actuarial “gain or loss”. So when the actuaries were to say, increase the discount rate. This would result in a lower pension liability (PBO). THink about it this way: (1) Step 1 - calculate PBO (2) Step 2- calculate my plan assets - this is actual plan assets, not estimated return. Difference between the 2 gives me either a net asset (if the plan assets exceed the obligation) or a net liability. The year-over-year change in the asset or liability gets charged directly to other comprehensive income, within shareholders equity. The items that give rise to the changes get smoothed out and charged to the income statement via pension expense over time, as opposed to being expensed immediately.
i found this 8 page article to be somewhat useful if you are struggling with pensions - walks you through it… http://www.cluteinstitute-onlinejournals.com/PDFs/694.pdf
smileygladhands Wrote: ------------------------------------------------------- > that would be your actuarial “gain or loss”. > > So when the actuaries were to say, increase the > discount rate. This would result in a lower > pension liability (PBO). > > THink about it this way: > > (1) Step 1 - calculate PBO > > (2) Step 2- calculate my plan assets - this is > actual plan assets, not estimated return. > > Difference between the 2 gives me either a net > asset (if the plan assets exceed the obligation) > or a net liability. The year-over-year change in > the asset or liability gets charged directly to > other comprehensive income, within shareholders > equity. The items that give rise to the changes > get smoothed out and charged to the income > statement via pension expense over time, as > opposed to being expensed immediately. I understand that but isn’t the definition of actuarial G/l = actual return on plan assets - expected return on plan assets. So this explains if the expected returns change it’s reflected in the actuarial gain or loss. But if half way through the discount rate or wage increase rate changes then where is the difference between the new rate assumptions and old rate asummptions reflected?
Another question on the same topic: So let’s say unrecognised actuarial cost was $50 and unrecognised prior service cost was $100. Now let’s say the funded status = $1050 Now under US GAAP $1050 would be reported as an asset on the B/S. Now under IFRS you have $150 coming out of equity out of which $150x(1-t) added to assets and $150 x t reduces deferred tax liability. Is that correct? If so why does it reduce the deferred tax liability?
I think your mixing concepts. Actuarial gain or loss wouldn’t be the difference between actual vs expected return on plan assets. It would be the change in the PBO resulting from changes in actuarial assumptions. So if i were to look at a typical PBO rollforward, it would be: Beginning Value +Service Cost + Interest Cost + actuarial loss (gain) - Benefit payments = ending PBO a rollfwd of assets would look like: Beginning Bal + actual return on plan assets + employer contributions - benefits paid = ending plan assets So the actuarial gain or loss in the PBO has nothing to do with expected vs actual return on plan assets - its your changes in discount rate, compensation rates, expected lives of employees, etc…
I don’t think we are required to adjust for transition assets/liabilities anymore. It didn’t show up in last year’s pension vignette.
Look at this post: http://www.analystforum.com/phorums/read.php?12,1134002,1134002#msg-1134002 that post says actuarial g/l = actual - expected return Also why does an actuarial gain have no effect on PBO?