Expected long-term return rate has one role in the employer's benefit accounting. The expected long-term return rate is a supported assumption about returns over the life of the obligation. Apply it to the policy's asset base to compute expected return in periodic cost.
Apply it
A six-percent rate applied to a supported $15 million market-related asset base gives $900,000 expected return. The current year's $1.05 million actual return does not reset that calculation.
Common mistake
Do not assume that management can select the expected return rate to reach a desired pension cost. The rate must be a supportable long-term assumption for plan assets and current-year contributions. That error would allow a desired accounting result to replace evidence about the plan's asset strategy.
Keep the boundary clear
Accounting reviews consistency with asset allocation and documented expectations but does not select the rate or promise that the trust will earn it.
Authority
Read ASC 715-20-50-8 for the expected long-term return rate used in net benefit cost.
Put the concept to work
Apply this concept
- Explain and apply expected long-term return rate within a reconciled employer benefit-plan workpaper using supplied authoritative and actuarial facts.
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Build on these ideas
- Pension plan assets — Apply
To apply this concept: Required. This prior schedule supplies a required amount or classification.
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- Expected return on plan assets — Apply
Required level here: apply. Required. This prior schedule supplies a required amount or classification.