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Lesson details
- Estimated study time
- 135 min
Learning objectives (6)
Cedar Trail has three new changes: a $600,000 prior service cost, a $400,000 obligation loss, and a $150,000 favorable asset return difference. It also amortizes $120,000 of prior service cost and $80,000 of net loss. A single “pension adjustment” line would hide five different events.
Open one layer for each source
| Layer | New loss / (gain) | Reclassified to cost | Net current OCI loss / (gain) |
|---|---|---|---|
| Prior service cost | $600,000 | ($120,000) | $480,000 |
| Obligation actuarial loss | 400,000 | — | 400,000 |
| Asset gain: actual above expected return | (150,000) | — | (150,000) |
| Net gain/loss amortization | — | (80,000) | (80,000) |
| Total | $850,000 | ($200,000) | $650,000 |
The $650,000 net OCI loss increases the accumulated loss layers in AOCI. It is not pension expense this year except for the $200,000 already reclassified into periodic cost.
Reconcile AOCI
If opening pension-related AOCI is a $2.0 million net loss:
Opening AOCI loss $2,000,000
New prior service cost 600,000
Obligation actuarial loss 400,000
Asset gain: actual above expected return (150,000)
Prior-service amount reclassified to cost (120,000)
Net-loss amount reclassified to cost (80,000)
Ending AOCI loss $2,650,000
AOCI is an equity presentation of amounts not yet in periodic cost. It is not a second pension liability. The balance-sheet liability remains the $3.85 million underfunded status.
Apply a supported corridor policy visibly
Suppose opening unrecognized net actuarial loss is $2.6 million, opening PBO is $18.0 million, opening market-related plan assets are $15.0 million, and the supported amortization period is 10 years.
corridor = 10% × greater of $18,000,000 and $15,000,000
= $1,800,000
excess = $2,600,000 - $1,800,000
= $800,000
annual amortization = $800,000 / 10
= $80,000
The engine can recompute this supplied policy. It cannot choose the policy, market-related asset convention, expected service period, or a result that produces smoother earnings. If the entity uses a permitted faster systematic recognition policy, document and apply that policy rather than forcing a corridor result.
Separate three kinds of “gain”
- An obligation gain reduces PBO because assumptions or experience are favorable to the sponsor.
- An asset gain arises when actual return exceeds the amount expected in the periodic-cost bridge.
- A settlement gain can arise from a qualifying event and has its own scope and remeasurement requirements.
Labels do not commute. Keep their sources, dates, and destinations separate.
Treat amortization as reclassification
Prior-service and gain/loss amortization move supported amounts from AOCI into periodic cost. They do not change PBO or plan assets on the amortization date. They do not create a second loss. In the statement of comprehensive income, the current-period OCI presentation should avoid counting the same reclassification inside both new OCI and total comprehensive income.
Repeat the tax and statement tie
The lesson uses pretax benefit amounts. Applicable Topic 740 effects must be measured and allocated to the same statement components before after-tax OCI and AOCI are released. A pretax rollforward that balances is not an after-tax equity rollforward.
The OCI file closes when new economic changes, current cost, reclassifications, tax effects, and ending AOCI are each visible and the funded-status liability remains untouched by obsolete add-on adjustments.