Pension Benefits

Question 1

How is total net periodic pension cost calculated?

Answer 1

S Service Cost
I Interest Cost (Beg. PBO * Discount Rate)
R < Expected Return on Plan Assets > (Beg. FV * Expected Rate)
A Amortization of Prior Service Cost
G Amortization of / Losses
E < Amortization of Net Transition Assets > or add Amortization of a Net Transition Obligation

Where Unrecognized Gain or Loss is:
(10% of the greater of the PBO or FMV of plan assets at the beginning of the year) = Excess
/ Average remaining service life = Minimum recognized amount to be reported

Question 2

The actual return on plan assets is calculated as:

Answer 2

Beg. FV of plan assets
\+ Contributions
< Benefits paid > 
\+ Actual return on plan assets  (A SQUEEZE)
= Ending FV of plan assets

Question 3

How is net gain/loss amortization calculated…(One of the components in net periodic pension cost) under US GAAP?

Answer 3

Under U.S. GAAP, unrecognized pension gains or losses are amortized over the average remaining service period if, at the beginning of the year, the gain or loss exceeds 10% of the greater of the beginning of the year PBO or the beginning of the year market related value of plan assets.

The excess is amortized over the average remaining service life.

Question 4

How is unrecognized prior cost amortized under US GAAP and IFRS?

Answer 4

Under U.S. GAAP, the prior service cost is booked to OCI and then amortized to the income statement (net periodic pension cost) by assigning an equal amount to each future period of service of each employee who is active on the date of the amendment.

Note that under IFRS, the prior service cost would be reported on the income statement, not in OCI and therefore would not be amortized.