ASC 715-30
Defined Benefit Plans—Pension
715 Compensation—Retirement Benefits
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ASC 715-30 governs an employer's accounting for single-employer defined benefit pension plans: it requires the employer to recognize the plan's funded status (projected benefit obligation versus fair value of plan assets) on the balance sheet and to recognize net periodic pension cost made up of service cost, interest cost, actual return on plan assets, and amortization of prior service cost/credit, net gain or loss, and any remaining transition asset or obligation. Gains, losses, and prior service cost are first recognized in other comprehensive income and amortized into net periodic pension cost over time (subject to the 10 percent corridor for net gains and losses). Separate Subsections govern settlements, curtailments, and certain termination benefits, which accelerate recognition in earnings of amounts sitting in accumulated other comprehensive income.
Key points (7)
- An employer recognizes an asset for an overfunded plan and a liability for an underfunded plan equal to the difference between the projected benefit obligation and the fair value of plan assets, aggregating all overfunded plans and, separately, all underfunded plans (715-30-25-1 through 25-2); each plan is accounted for separately and an asset of one plan may not offset a liability of another (715-30-25-6).
- Net periodic pension cost comprises service cost, interest cost, actual return on plan assets, amortization of prior service cost or credit, gain or loss, and amortization of any remaining transition asset or obligation (715-30-35-4), and only the service cost component may be capitalized into inventory or other assets (715-30-35-7A).
- The projected benefit obligation reflects assumed future compensation levels where the benefit formula is pay-related, while the accumulated benefit obligation uses only current and past compensation (715-30-35-1A through 35-2); benefits are attributed to service periods based on the plan's benefit formula (715-30-35-36), with ratable attribution required where the formula back-loads benefits (715-30-35-38).
- Prior service cost from a retroactive plan amendment is charged to other comprehensive income at the amendment date and amortized to net periodic pension cost over the future service periods of active employees expected to receive benefits (715-30-35-11); a retroactive benefit reduction creates a prior service credit applied first against remaining prior service cost (715-30-35-17).
- Gains and losses need not be recognized as they arise; at a minimum, the net gain or loss in accumulated other comprehensive income exceeding 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets must be amortized over the average remaining service period (715-30-35-24), though immediate or other systematic methods are permitted if applied consistently (715-30-35-20, 35-25).
- Assumptions must be explicit best estimates; assumed discount rates reflect the rates at which the pension benefits could be effectively settled and must be reevaluated at each measurement date, and the expected long-term rate of return reflects only existing plan assets and current-year contributions (715-30-35-42 through 35-49).
- On settlement, the maximum gain or loss recognized in earnings is the net gain or loss plus any remaining transition asset in accumulated other comprehensive income, recognized pro rata for a partial settlement (715-30-35-79), and recognition is required only if the cost of all settlements exceeds service cost plus interest cost for the year (715-30-35-82); curtailment losses are recognized when probable and estimable and curtailment gains when employees terminate or the amendment is adopted (715-30-35-94), while special termination benefits are recognized when employees accept the offer (715-30-25-10).
For students. Pension accounting is a classic exam trap because two different numbers move at once: the balance sheet reports the full funded status immediately, while the income statement smooths gains, losses, and prior service cost through OCI amortization, with the difference each period running through other comprehensive income. Students commonly confuse the projected benefit obligation (includes future salary assumptions) with the accumulated benefit obligation (does not), and forget that only service cost is eligible for capitalization after ASU 2017-07.
defined benefit pension planprojected benefit obligationaccumulated benefit obligationnet periodic pension costfunded statusprior service costcorridor amortization of net gain or losssettlement and curtailment
Machine-generated study aid for ASC 715-30. Check the source paragraphs below.
715-30-00Status
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715-30-00-1
The following table identifies the changes made to this Subtopic.
715-30-05Overview and Background
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715-30-05-1
This Subtopic provides guidance on defined benefit pension accounting for an employer that offers pension benefits to its employees. This Subtopic focuses on an employer's accounting for a single-employer defined benefit pension plan.
715-30-05-2
Many of the provisions in this Subtopic are the same as or are similar to the provisions of Subtopic 715-60. Consequently, the guidance provided in that Subtopic may be useful in understanding and implementing many of the provisions of this Subtopic. However, there are differences between the specific requirements of the two Subtopics, and therefore the specific guidance in one Subtopic should not be used to override guidance of the other.
715-30-05-3
The guidance in this Subtopic is presented in the following two Subsections:
- aGeneral
- bSettlements, Curtailments, and Certain Termination Benefits.
715-30-05-4
The General Subsections address the fundamentals of defined benefit pension accounting. A pension benefit is part of the compensation paid to an employee for services. Generally, the amount of benefit to be paid depends on a number of future events that are incorporated in the plan's benefit formula, often including how long the employee and any survivors live, how many years of service the employee renders, and the employee's compensation in the years immediately before retirement or termination.Conceptually, compensation cost should be recognized in the period in which the employee renders services. Although the complexity and uncertainty of the pension arrangement may preclude complete achievement of that goal, a fundamental objective of this Subtopic is to approximate more closely the recognition of the compensation cost of an employee's pension benefits over that employee's service period.
715-30-05-6
The core elements of pension accounting include measurement of net periodic pension cost and benefit obligations (see paragraphs ), assumptions (see paragraphs ), and measurement of plan assets (see paragraphs ).
Settlements, Curtailments, and Certain Termination Benefits
715-30-05-9
The Settlements, Curtailments, and Certain Termination Benefits Subsections establish standards for an employer's accounting for settlement of defined benefit pension obligations, for curtailment of a defined benefit pension plan, and for certain termination benefits, and define the events that require adjustments to assets and liabilities and that require certain amounts previously recognized in accumulated other comprehensive income to be recognized in earnings. The Settlements, Curtailments, and Certain Termination Benefits Subsections provide guidance that results in the net gain or loss and prior service cost, which were previously recognized in accumulated other comprehensive income, being recognized in income in the period when specific conditions are met.
- a
- b
- c
- d
- e
- f
715-30-15Scope and Scope Exceptions
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Overall Guidance
715-30-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 715-10-15, with specific qualifications and exceptions noted below.
715-30-15-2
The General Subsection of this Section establishes the pervasive scope for this Subtopic, with specific exceptions noted in the other Subsections of this Section.
Transactions
715-30-15-3
The guidance in this Subtopic applies to defined benefit pension plans, including but not limited to the following types of arrangements:
- aCash balance plans
- bBenefits provided in the event of a voluntary or involuntary severance of employment (also called termination indemnities) if such an arrangement is in substance a pension plan (for example, if the benefits are paid for virtually all terminations).
715-30-15-4
The guidance in this Subtopic does not apply to the following types of benefit plans or arrangements:
- aLife insurance benefits provided outside a pension plan or other postretirement health and welfare benefits
- bHealth care benefits provided through a pension plan. The accounting for those benefits is set forth in Subtopic 715-60.
Plans with Characteristics of both a Defined Contribution and a Defined Benefit Plan
715-30-15-4A
See paragraph 715-70-15-2 for guidance for plans with characteristics of both a defined contribution and a defined benefit plan.
Settlements, Curtailments, and Certain Termination Benefits
Overall Guidance
715-30-15-5
The Settlements, Curtailments, and Certain Termination Benefits Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Subtopic, see paragraph 715-30-15-1, with specific exceptions noted below.
Transactions
715-30-15-6
The guidance in the Settlements, Curtailments, and Certain Termination Benefits Subsections applies to the following transactions and activities:
- aIf all or part of the plan's pension benefit obligation is settled or the plan is curtailed:
- 1Plan settlements. Examples of transactions that constitute a settlement include making lump-sum cash payments to plan participants in exchange for their rights to receive specified pension benefits and purchasing nonparticipating annuity contracts to cover vested benefits.
- 2Plan curtailments, which include:
- iTermination of employees' services earlier than expected, which may or may not involve closing a facility or discontinuing a component of an entity.
- iiTermination or suspension of a plan so that employees do not earn additional defined benefits for future services. In the latter situation, future service may be counted toward vesting of benefits accumulated based on past service.
- i
- 1
- bTermination benefits provided under an ongoing defined benefit pension arrangement.
- cOther termination benefits not otherwise addressed in the following:
715-30-15-7
The guidance in the Settlements, Curtailments, and Certain Termination Benefits Subsections does not apply to the following transactions and activities:
715-30-25Recognition
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Recognition of Liabilities and Assets
715-30-25-1
If the projected benefit obligation exceeds the fair value of plan assets, the employer shall recognize in its statement of financial position a liability that equals the unfunded projected benefit obligation. If the fair value of plan assets exceeds the projected benefit obligation, the employer shall recognize in its statement of financial position an asset that equals the overfunded projected benefit obligation.
715-30-25-2
The employer shall aggregate the statuses of all overfunded plans and recognize that amount as an asset in its statement of financial position. It also shall aggregate the statuses of all underfunded plans and recognize that amount as a liability in its statement of financial position.
715-30-25-3
The asset or liability that is recognized pursuant to paragraph 715-30-25-1 may result in a temporary difference, as defined in Subtopic 740-10. The deferred tax effects of any temporary differences shall be recognized in income tax expense or benefit for the year and shall be allocated to various financial statement components, including other comprehensive income, pursuant to Section 740-20-45.
715-30-25-4
If a new determination of the funded status of a plan to be recognized as an asset or a liability in the employer's statement of financial position is made (see paragraphs ), or when net gains or losses, prior service costs or credits, or the net transition asset or obligation existing at the date of initial application of this Subtopic are amortized as components of net periodic pension cost, the related balances for those net gains or losses, prior service costs or credits, and transition asset or obligation in accumulated other comprehensive income shall be adjusted as necessary and reported in other comprehensive income.
715-30-25-5
Sometimes, an entity remeasures both plan assets and benefit obligations during the fiscal year. Paragraph 715-30-35-66 provides an example of some events that may require a remeasurement. Upon remeasurement, a business entity shall adjust its statement of financial position in a subsequent interim period to reflect the overfunded or underfunded status of the plan consistent with that measurement date.
715-30-25-6
An employer that sponsors two or more separate defined benefit pension plans shall determine net periodic pension cost, liabilities, and assets by separately applying the provisions of this Subtopic to each plan. In particular, unless an employer clearly has a right to use the assets of one plan to pay benefits of another, a liability required to be recognized pursuant to paragraph 715-30-25-1 for one plan shall not be reduced or eliminated because the employer has recognized an asset for another plan that has assets in excess of its projected benefit obligation.
Participation Rights
715-30-25-7
If an annuity contract with a participation right is purchased, the cost of the participation right shall be recognized at the date of purchase as an asset. To the extent that benefits currently earned are covered by annuity contracts, the cost of those benefits shall be the cost of purchasing the contracts, except for the cost of the participation right.
Settlements, Curtailments, and Certain Termination Benefits
Certain Termination Benefits
715-30-25-8
This Subsection addresses the accounting for termination benefits that are not otherwise addressed in the Subtopic and Topics indicated in paragraph 715-30-15-6c.
715-30-25-9
An employer may provide benefits to employees in connection with their termination of employment. Those benefits may be either special termination benefits offered only for a short period of time or contractual termination benefits required by the terms of a plan only if a specified event, such as a plant closing, causes employees' services to be terminated involuntarily.
715-30-25-10
Termination benefits may take various forms including lump-sum payments, periodic future payments, or both. They may be paid directly from an employer's assets, an existing pension plan, a new employee benefit plan, or a combination of those means. An employer that offers special termination benefits to employees shall recognize a liability and a loss when the employees accept the offer and the amount can be reasonably estimated. An employer that provides contractual termination benefits shall recognize a liability and a loss when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated.
715-30-25-11
The cost of termination benefits within the scope of this Subsection recognized as a liability and a loss shall include the amount of any lump-sum payments and the present value of any expected future payments. The liability and the loss from the acceptance of the offer of special termination benefits is the difference as of the date the employees accept the offer between the actuarial present value of the respective employees' accumulated pension benefits without considering the special termination benefits and the actuarial present value of their accumulated pension benefits considering the special termination benefits.
715-30-25-12
See Example 6 (paragraph 715-30-55-226) for an illustration of the determination of the liability and the losses from employees' acceptance of an offer of special termination benefits.
715-30-25-13
A situation involving termination benefits may also involve a curtailment to be accounted for under paragraphs .
715-30-35Subsequent Measurement
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Use of Reasonable Approximations
715-30-35-1
This Subtopic is intended to specify accounting objectives and results rather than specific computational means of obtaining those results. If estimates, averages, or computational shortcuts can reduce the cost of applying this Subtopic, their use is appropriate, provided the results are reasonably expected not to be materially different from the results of a detailed application.
Benefit Obligations
715-30-35-1A
The projected benefit obligation as of a date is the actuarial present value of all benefits attributed by the plan's benefit formula to employee service rendered before that date. The projected benefit obligation is measured using an assumption as to future compensation levels if the pension benefit formula is based on those future compensation levels. Plans for which the pension benefit formula is based on future compensation are sometimes called pay-related, final-pay, final-average-pay, or career-average-pay plans. Plans for which the pension benefit formula is not based on future compensation levels are called non-pay-related or flat-benefit plans. The projected benefit obligation is a measure of benefits attributed to service to date assuming that the plan continues in effect and that estimated future events (including compensation increases, turnover, and mortality) occur.
715-30-35-2
The accumulated benefit obligation as of a date is the actuarial present value of benefits attributed by the pension benefit formula to employee service rendered before that date and based on current and past compensation levels. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. For plans with flat-benefit or non-pay-related pension benefit formulas, the accumulated benefit obligation and the projected benefit obligation are the same. The accumulated benefit obligation and the vested benefit obligation provide information about the obligation the employer would have if the plan were discontinued.
Components of Net Periodic Pension Cost
715-30-35-3
Net periodic pension cost has often been viewed as a single homogeneous amount, but in fact it is made up of several components that reflect different aspects of the employer's financial arrangements as well as the cost of benefits earned by employees. The cost of a benefit can be determined without regard to how the employer decides to finance the plan.
715-30-35-4
All of the following components shall be included in the net pension cost recognized for a period by an employer sponsoring a defined benefit pension plan:
- a
- b
- cActual return on plan assets, if any
- dAmortization of any prior service cost or credit included in accumulated other comprehensive income
- eGain or loss (including the effects of changes in assumptions), which includes, to the extent recognized (see paragraph 715-30-35-26), amortization of the net gain or loss included in accumulated other comprehensive income
- fAmortization of any net transition asset or obligation existing at the date of initial application of this Subtopic and remaining in accumulated other comprehensive income.
715-30-35-5
Note that both the return on plan assets and interest cost components are in substance financial items rather than employee compensation costs. An employer may have net periodic pension cost that is a net credit (that is, net periodic pension income) as noted in paragraph 715-30-55-3.
715-30-35-6
The service cost component of net periodic pension cost is the actuarial present value of benefits attributed by the plan's benefit formula to services rendered by employees during the period. The service cost component is conceptually the same for an unfunded plan, a plan with minimal funding, and a well-funded plan.
715-30-35-7
The measurement of the service cost component requires use of an attribution method and assumptions. That measurement is discussed in paragraphs .
715-30-35-7A
The service cost component shall be the only component of net periodic pension cost eligible to be capitalized as part of the cost of inventory or other assets.
715-30-35-8
The interest cost component of net periodic pension cost is interest on the projected benefit obligation, which is a discounted amount. Measuring the projected benefit obligation as a present value requires accrual of an interest cost at rates equal to the assumed discount rates.
715-30-35-9
The interest cost component of net periodic pension cost shall not be considered interest for purposes of applying Subtopic 835-20.
715-30-35-10
Plan amendments (including initiation of a plan) often include provisions that grant increased benefits based on services rendered in prior periods. Because plan amendments are granted with the expectation that the employer will realize economic benefits in future periods, this Subtopic does not require the cost of providing such retroactive benefits (that is, prior service cost) to be included in net periodic pension cost entirely in the year of the amendment, absent the conditions addressed in paragraph 715-30-35-16, but provides for recognition during the future service periods of those employees active at the date of the amendment who are expected to receive benefits under the plan.
715-30-35-11
A plan amendment that retroactively increases benefits (including benefits that are granted to retirees) increases the projected benefit obligation. The cost of the benefit improvement shall be recognized as a charge to other comprehensive income at the date of the amendment. Except as specified in paragraphs , that prior service cost shall be amortized as a component of net periodic pension cost by assigning an equal amount to each future period of service of each employee active at the date of the amendment who is expected to receive benefits under the plan. If all or almost all of a plan's participants are inactive, the cost of retroactive plan amendments affecting benefits of inactive participants shall be amortized based on the remaining life expectancy of those participants instead of based on the remaining service period. Other comprehensive income is adjusted each period as prior service cost is amortized.
715-30-35-12
See Example 1 (paragraph 715-30-55-93) for an illustration of this guidance to amortize prior service cost.
715-30-35-13
To reduce the complexity and detail of the computations required, consistent use of an alternative approach that more rapidly amortizes the cost of retroactive amendments is acceptable. For example, a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan is acceptable.
715-30-35-14
In some situations a history of regular plan amendments and other evidence may indicate that the period during which the employer expects to realize economic benefits from an amendment granting retroactive benefits is shorter than the entire remaining service period of the active employees. Identification of such situations requires an assessment of the individual circumstances and the substance of the particular plan situation. In those circumstances, the amortization of prior service cost shall be accelerated to reflect the more rapid expiration of the employer's economic benefits and to recognize the cost in the periods benefited.
715-30-35-15
Once a schedule of amortization of prior service cost from a specific retroactive plan amendment has been established, that schedule generally should not be revised. The initial schedule shall be revised only if a curtailment occurs (see paragraph 715-30-35-92) or if events indicate that the period during which the employer expects to realize future economic benefits from the retroactive plan amendment giving rise to the prior service cost is shorter than originally estimated or the future economic benefits have been impaired. The schedule shall not be revised because of ordinary variances in expected service lives of employees, nor shall the schedule be revised so that the prior service cost is recognized in net periodic pension cost more slowly.
715-30-35-16
Prior service cost is recognized immediately in other comprehensive income, unless, based on an assessment of the facts and circumstances, the employer does not expect to realize any future economic benefits from that retroactive plan amendment (see paragraph 715-30-35-14). However, this Subtopic does not permit an accounting policy to recognize immediately as a component of net periodic pension cost the cost of all plan amendments that grant increased benefits for services rendered in prior periods. Adopting an accounting policy to recognize prior service cost immediately in net periodic pension cost would preclude making that assessment for future plan amendments as they occur.
715-30-35-17
A plan amendment that retroactively reduces, rather than increases, benefits decreases the projected benefit obligation. The reduction in benefits shall be recognized as a credit (prior service credit) to other comprehensive income that shall be used first to reduce any remaining prior service cost included in accumulated other comprehensive income. Any remaining prior service credit shall be amortized as a component of net periodic pension cost on the same basis as the cost of a benefit increase.
715-30-35-18
As established in the definition of the term, a gain or loss results from a change in the value of either the projected benefit obligation or the plan assets resulting from experience different from that assumed or from a change in an actuarial assumption. This Subtopic generally does not distinguish between gains and losses that result from experience different from that assumed or from changes in assumptions. Gains and losses include amounts that have been realized, for example by sale of a security, as well as amounts that are unrealized.
715-30-35-19
Because gains and losses may reflect refinements in estimates as well as real changes in economic values and because some gains in one period may be offset by losses in another or vice versa, this Subtopic does not require recognition of gains and losses as components of net pension cost of the period in which they arise.
715-30-35-20
However, immediate recognition of gains and losses as a component of net periodic pension cost is permitted if that method is applied consistently, and is applied to all gains and losses on both plan assets and obligations.
715-30-35-21
Gains and losses that are not recognized immediately as a component of net periodic pension cost shall be recognized as increases or decreases in other comprehensive income as they arise. Accounting for plan terminations and curtailments and other circumstances in which recognition of gains and losses as a component of net periodic pension cost might not be delayed is addressed in the Settlements, Curtailments, and Certain Termination Benefits Subsection of this Section.
715-30-35-22
Asset gains and losses are differences between the actual return on plan assets during a period and the expected return on plan assets for that period. Asset gains and losses include both changes reflected in the market-related value of plan assets and changes not yet reflected in the market-related value (that is, the difference between the fair value of assets and the market-related value). Gains or losses on transferable securities issued by the employer and included in plan assets are also included in asset gains and losses. Asset gains and losses not yet reflected in market-related value are not required to be amortized under paragraphs .
715-30-35-23
In other words, the expected return on plan assets generally will be different from the actual return on plan assets for the year. This Subtopic provides for recognition of that difference (a net gain or loss) in other comprehensive income in the period it arises. The amount recognized in other comprehensive income is also a component of net periodic pension cost for the current period. Thus, the amount recognized in other comprehensive income and the actual return on plan assets, when aggregated, equal the expected return on plan assets. The amount recognized in accumulated other comprehensive income affects future net periodic pension cost through subsequent amortization, if any, of the net gain or loss.
715-30-35-24
As a minimum, amortization of a net gain or loss included in accumulated other comprehensive income (excluding asset gains and losses not yet reflected in market-related value) shall be included as a component of net pension cost for a year if, as of the beginning of the year, that net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If amortization is required, the minimum amortization shall be that excess divided by the average remaining service period of active employees expected to receive benefits under the plan. The amortization must always reduce the beginning-of-the-year balance. Amortization of a net gain results in a decrease in net periodic pension cost; amortization of a net loss results in an increase in net periodic pension cost. If all or almost all of a plan's participants are inactive, the average remaining life expectancy of the inactive participants shall be used instead of average remaining service.
715-30-35-25
Any systematic method of amortizing gains or losses may be used in lieu of the minimum specified in the preceding paragraph provided that all of the following conditions are met:
- aThe minimum is used in any period in which the minimum amortization is greater (reduces the net balance included in accumulated other comprehensive income by more).
- bThe method is applied consistently.
- cThe method is applied similarly to both gains and losses.
715-30-35-26
The gain or loss component of net periodic pension cost shall consist of both of the following:
- aThe difference between the actual return on plan assets and the expected return on plan assets
- bAmortization of the net gain or loss included in accumulated other comprehensive income.
715-30-35-27
Consequently, as stated in the definition of the term, the gain or loss component is the net effect of delayed recognition of gains and losses in determining net periodic pension cost (the net change in the gain or loss) in accumulated other comprehensive income except that it does not include changes in the projected benefit obligation occurring during the period and deferred for later recognition in net periodic pension cost.
715-30-35-28
See Example 2 (paragraph 715-30-55-101) for an illustration of this guidance on gains and losses.
Measurement of Costs and Obligations
715-30-35-29
Any method of pension accounting that recognizes cost before the payment of benefits to retirees must deal with two problems stemming from the nature of the defined benefit pension contract. First, estimates or assumptions must be made concerning the future events that will determine the amount and timing of the benefit payments. Second, some approach to attributing the cost of pension benefits to individual years of service must be selected. Thus, the assumptions and the attribution of cost to periods of employee service are fundamental to the measurements of net periodic pension cost and pension obligations required by this Subtopic. For example, the service component of net periodic pension cost, the projected benefit obligation, and the accumulated benefit obligation are based on an attribution of pension benefits to periods of employee service and on the use of actuarial assumptions to calculate the actuarial present value of those benefits.
715-30-35-30
Paragraph 715-30-35-42 requires use of explicit assumptions, each of which individually represents the best estimate of a particular future event. This Subtopic also requires use of the terms of the pension plan itself, specifically the plan's benefit formula, as a basis for attributing benefits earned and their cost to periods of employee service.
715-30-35-31
The service cost component of net periodic pension cost and the projected benefit obligation shall reflect future compensation levels to the extent that the pension benefit formula defines pension benefits wholly or partially as a function of future compensation levels (that is, for a final-pay plan or a career-average-pay plan). Future increases for which a present commitment exists as described in paragraph 715-30-35-34 shall be similarly considered. Assumed compensation levels shall reflect an estimate of the actual future compensation levels of the individual employees involved, including future changes attributed to general price levels, productivity, seniority, promotion, and other factors. All assumptions shall be consistent to the extent that each reflects expectations of the same future economic conditions, such as future rates of inflation. Measuring service cost and the projected benefit obligation based on estimated future compensation levels entails considering indirect effects, such as changes under existing law in social security benefits or benefit limitations that would affect benefits provided by the plan, for example, those currently imposed by Section 415 of the Internal Revenue Code. However, possible amendments of the law shall not be considered in determining those pension measurements. Assumed compensation levels shall be consistent with assumed discount rates to the extent that both incorporate expectations of the same future economic conditions. Paragraphs discuss and provide examples of applying this guidance.
715-30-35-32
The accumulated benefit obligation shall be measured based on employees' history of service and compensation without an estimate of future compensation levels. Excluding estimated future compensation levels also means excluding indirect effects of future changes such as increases in the social security wage base. In measuring the accumulated benefit obligation, projected years of service shall be a factor only in determining employees' expected eligibility for particular benefits, such as any of the following:
- aIncreased benefits that are granted provided a specified number of years of service are rendered (for example, a pension benefit that is increased from $9 per month to $10 per month for each year of service if 20 or more years of service are rendered)
- bEarly retirement benefits
- cDeath benefits
- dDisability benefits.
715-30-35-34
In some situations a history of regular increases in non-pay-related benefits or benefits under a career-average-pay plan and other evidence may indicate that an employer has a present commitment to make future amendments and that the substance of the plan is to provide benefits attributable to prior service that are greater than the benefits defined by the written terms of the plan. In those situations, the substantive commitment shall be the basis for the accounting.
715-30-35-35
Automatic benefit increases specified by the plan (for example, automatic cost-of-living increases) that are expected to occur shall be included in measurements of the projected, accumulated, and vested benefit obligations, and the service cost component required by this Subtopic. Also, retroactive plan amendments shall be included in the computation of the projected and accumulated benefit obligations once they have been contractually agreed to, even if some provisions take effect only in future periods. For example, if a plan amendment grants a higher benefit level for employees retiring after a future date, the higher benefit level shall be included in current-period measurements for employees expected to retire after that date.
715-30-35-36
For purposes of this Subtopic, pension benefits ordinarily shall be attributed to periods of employee service based on the plan's benefit formula to the extent that the formula states or implies an attribution. For example, if a plan's formula provides for a pension benefit of $10 per month for life for each year of service, the benefit attributed to each year of an employee's service is $10 times the number of months of life expectancy after retirement, and the cost attributable to each year is the actuarial present value of that benefit. For plan benefit formulas that define benefits similarly for all years of service, that attribution is a benefit-years-of-service approach because it attributes the same amount of the pension benefit to each year of service. For final-pay and career-average-pay plans, that attribution is also the same as the projected unit credit or unit credit with service prorate actuarial cost method. For a flat-benefit plan, it is the same as the unit credit actuarial cost method.
715-30-35-37
Some plans define different benefits for different years of service. For example, a step-rate plan might provide a benefit of 1 percent of final pay for each year of service up to 20 years and 1½ percent of final pay for years of service in excess of 20. Another plan might provide 1 percent of final pay for each year of service but limit the total benefit to no more than 20 percent of final pay. For such plans the attribution called for by this Subtopic will not assign the same amount of pension benefit to each year of service.
715-30-35-38
Some plans may have benefit formulas that attribute all or a disproportionate share of the total benefits provided to later years of service, thereby achieving in substance a delayed vesting of benefits. For example, a plan that provides no benefits for the first 19 years of service and a vested benefit of $10,000 for the 20th year is substantively the same as a plan that provides $500 per year for each of 20 years and requires 20 years of service before benefits vest. For such plans the total projected benefit shall be considered to accumulate in proportion to the ratio of the number of completed years of service to the number that will have been completed when the benefit is first fully vested. If a plan's benefit formula does not specify how a particular benefit relates to services rendered, the benefit shall be considered to accumulate in either of the following manners:
- aFor benefits of a type includable in vested benefits(for example, a supplemental early retirement benefit that is a vested benefit after a stated number of years), in proportion to the ratio of the number of completed years of service to the number that will have been completed when the benefit is first fully vested
- bFor benefits of a type not includable in vested benefits (for example, a death or disability benefit that is payable only if death or disability occurs during active service), in proportion to the ratio of completed years of service to total projected years of service.
715-30-35-39
Under the attribution approach described in paragraphs , the projected benefit obligation will always equal or exceed the accumulated benefit obligation.
715-30-35-40
Under some defined benefit pension plans (typically foreign plans), the actuarial present value of benefits to which an employee is entitled if the employee terminates immediately may exceed the actuarial present value of benefits to which the employee is entitled at the expected date of separation based on service to date. For example, at one point in time, the provisions of one country's severance pay statute required that, in most cases, the benefit an employee had accrued for service to date was payable immediately upon separation. The undiscounted value of that benefit payable currently would exceed the actuarial present value of that benefit if payment was estimated to occur at the employee's expected termination date. Another example arises in another country where legislation required that deferred vested benefits of terminated employees be statutorily revalued from date of separation to normal retirement age. If the vested benefit obligation was determined assuming employee termination at the measurement date, that vested benefit obligation could exceed the accumulated benefit obligation if that obligation was measured giving consideration to a statutory revaluation only after the employee's expected date of termination.
715-30-35-41
The vested benefit obligation in the situations addressed in the preceding paragraph may be determined as either the actuarial present value of the vested benefits to which the employee is entitled if the employee separates immediately or the actuarial present value of the vested benefits to which the employee is currently entitled but based on the employee's expected date of separation or retirement. Either approach is acceptable for situations not otherwise addressed by this Subtopic in which the facts and circumstances are analogous to those in the preceding paragraph.
Assumptions
715-30-35-42
This Subtopic requires an explicit approach to assumptions. That is, each significant assumption used shall reflect the best estimate solely with respect to that individual assumption. All assumptions shall presume that the plan will continue in effect in the absence of evidence that it will not continue. Actuarial assumptions reflect the time value of money (discount rate) and the probability of payment (assumptions as to mortality, turnover, early retirement, and so forth).
715-30-35-43
Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation (including information about available annuity rates published by the Pension Benefit Guaranty Corporation). In making those estimates, employers may also look to rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. Assumed discount rates are used in measurements of the projected, accumulated, and vested benefit obligations and the service and interest cost components of net periodic pension cost.
715-30-35-44
Paragraph 715-30-35-43 permits an employer to look to rates of return on high-quality fixed-income investments in determining assumed discount rates. The objective of selecting assumed discount rates using that method is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. Notionally, that single amount, the projected benefit obligation, would equal the fair value of a portfolio of high-quality zero coupon bonds whose maturity dates and amounts would be the same as the timing and amount of the expected future benefit payments. Because cash inflows would equal cash outflows in timing and amount, there would be no reinvestment risk in the yields to maturity of the portfolio. However, in other than a zero coupon portfolio, such as a portfolio of long-term debt instruments that pay semiannual interest payments or whose maturities do not extend far enough into the future to meet expected benefit payments, the assumed discount rates (the yield to maturity) need to incorporate expected reinvestment rates available in the future. Those rates shall be extrapolated from the existing yield curve at the measurement date. The determination of the assumed discount rate is separate from the determination of the expected rate of return on plan assets whenever the actual portfolio differs from the hypothetical portfolio described in this paragraph. Assumed discount rates shall be reevaluated at each measurement date. If the general level of interest rates rises or declines, the assumed discount rates shall change in a similar manner.
715-30-35-45
Interest rates vary depending on the duration of investments; for example, U.S. Treasury bills, 7-year bonds, and 30-year bonds have different interest rates. Thus, the weighted-average discount rate (interest rate) inherent in the prices of annuities (or a dedicated bond portfolio) will vary depending on the length of time remaining until individual benefit payment dates. A plan covering only retired employees would be expected to have significantly different discount rates from one covering a work force of 30-year-olds. The disclosures required by Subtopic 715-20 regarding components of the pension benefit obligation will be more representationally faithful if individual discount rates applicable to various benefit deferral periods are selected. A properly weighted average rate can be used for aggregate computations such as the interest cost component of net pension cost for the period.
715-30-35-46
An insurance entity deciding on the price of an annuity contract will consider the rates of return available to it for investing the premium received and the rates of return expected to be available to it for reinvestment of future cash flows from the initial investment during the period until benefits are payable. That consideration is indicative of a relationship between rates inherent in the prices of annuity contracts and rates available in investment markets. Therefore, it is appropriate for employers to consider that relationship and information about investment rates in estimating the discount rates required for application of this Subtopic. Thus a current settlement rate best meets that objective and is consistent with measurement of plan assets at fair value for purposes of recognizing as a net asset or a net liability, and disclosing the plan's funded status. Each year the discount rates shall be reevaluated to determine whether they reflect the best estimate of the current effective settlement rates. As established in paragraph 715-30-35-44, if interest rates generally decline or rise, the assumed discount rates shall change.
715-30-35-47
The expected long-term rate of return on plan assets shall reflect the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. In estimating that rate, appropriate consideration shall be given to the returns being earned by the plan assets in the fund and the rates of return expected to be available for reinvestment. The expected long-term rate of return on plan assets is used (with the market-related value of assets) to compute the expected return on assets. In the context of its use in this paragraph, funds to be invested refers only to the reinvestment of returns on existing plan assets.
715-30-35-48
The expected return on plan assets shall take into consideration the availability of all plan assets for investment throughout the year. Therefore, the amount and timing of pension plan contributions and benefit payments expected to be made during the year shall be considered in determining the expected return on plan assets for that year. For example, if the employer's pension plan contribution for the year is expected to be made two months before the next measurement date, then the expected return on plan assets shall include an amount related to the expected return on that contribution only for those two months.
715-30-35-49
However, the expected return on future years' contributions to a pension plan shall not be considered in determining the expected long-term rate of return on plan assets. The expected long-term rate of return on plan assets shall reflect long-term earnings expectations only on existing plan assets and those contributions expected to be received during the current year.
Measurement of Plan Assets
715-30-35-50
For purposes of applying the plan-asset-related provisions of paragraph 715-30-25-1 and for purposes of the disclosures required by paragraphs 715-20-50-1 and 715-20-50-5, plan investments, whether equity or debt securities, real estate, or other, shall be measured at their fair value as of the measurement date. The fair value of an investment shall be reduced by brokerage commissions and other costs normally incurred in a sale if those costs are significant (similar to fair value less cost to sell).
715-30-35-51
For purposes of determining the expected return on plan assets and accounting for asset gains and losses pursuant to paragraphs , a market-related asset value is used.
715-30-35-52
Plan assets used in plan operations (for example, buildings, equipment, furniture and fixtures, and leasehold improvements) shall be measured at cost less accumulated depreciation or amortization for all purposes.
Annuity and Other Contracts
715-30-35-53
Paragraph 715-30-25-7 provides that to the extent that benefits currently earned are covered by annuity contracts, the cost of those benefits shall be the cost of purchasing the contracts, except for the cost of the participation right when participating annuity contracts are used (see paragraph 715-30-35-57). That is, if all the benefits attributed by the plan's benefit formula to service in the current period are covered by nonparticipating annuity contracts, the cost of the contracts determines the service cost component of net pension cost for that period. Benefits covered by annuity contracts shall be excluded from the projected benefit obligation and the accumulated benefit obligation. Except for participation rights, annuity contracts shall be excluded from plan assets.
715-30-35-54
If the insurance entity obligated under an annuity contract is a captive insurer, or if there is any reasonable doubt that the insurance entity will meet its obligations under the contract, the contract is not an annuity contract for purposes of this Subsection.
715-30-35-55
Benefits provided by the pension benefit formula beyond benefits provided by annuity contracts (for example, benefits related to future compensation levels) shall be accounted for according to the provisions of this Subtopic applicable to plans not involving insurance contracts.
715-30-35-56
Some contracts provide for a refund of premiums if an employee for whom an annuity is purchased does not render sufficient service for the benefit to vest under the terms of the plan. Such a provision shall not by itself preclude a contract from being treated as an annuity contract for purposes of this Subtopic.
715-30-35-57
Participating annuity contracts provide that the purchaser (either the plan or the employer) may participate in the experience of the insurance entity. Under those contracts, the insurance entity ordinarily pays dividends to the purchaser, the effect of which is to reduce the cost of the plan. The purchase price of a participating annuity contract ordinarily is higher than the price of an equivalent contract without participation rights. The difference is the cost of the participation right.
715-30-35-58
In subsequent periods, the participation right shall be measured at its fair value if the contract is such that fair value is reasonably estimable. Otherwise, the participation right shall be measured at its amortized cost (not in excess of its net realizable value), and the cost shall be amortized systematically over the expected dividend period under the contract.
715-30-35-59
If the substance of a participating insurance contract is such that the employer remains subject to all or most of the risks and rewards associated with the benefit obligation covered and the assets transferred to the insurance entity, that contract is not an annuity contract for purposes of this Subtopic.
715-30-35-60
Insurance contracts that are in substance equivalent to the purchase of annuities shall be accounted for as such. Other contracts with insurance entities shall be accounted for as investments and measured at fair value. For some contracts, the best available evidence of fair value may be contract value. If a contract has a determinable cash surrender value or conversion value, that is presumed to be its fair value.
715-30-35-61
Paragraph 715-30-35-54 identifies attributes related to the issuers of annuity contracts that preclude accounting for the contracts as annuity contracts. The Settlements, Curtailments, and Certain Termination Benefits Subsections of this Subtopic define attributes related to annuity contracts differently for purposes of accounting for them as annuity contracts. The effect of the difference is that paragraph 715-30-35-85 excludes from settlement accounting those annuity contracts purchased from an entity that is controlled by the employer, whereas this Subsection excludes from annuity contracts those purchased from a captive insurer.
Timing of Measurement
715-30-35-62
The measurements of plan assets and benefit obligations required by this Subtopic shall be as of the date of the employer's fiscal year-end statement of financial position except in both of the following cases:
- aThe plan is sponsored by a subsidiary that is consolidated using a fiscal period that differs from its parent's, as permitted by paragraph 810-10-45-12.
- bThe plan is sponsored by an investee that is accounted for using the equity method of accounting under paragraph 323-10-35-6, using financial statements of the investee for a fiscal period that is different from the investor's, as permitted by that Subtopic.
715-30-35-63
If the exceptions in the preceding paragraph apply, the employer shall measure the subsidiary's plan assets and benefit obligations as of the date used to consolidate the subsidiary's statement of financial position and shall measure the investee's plan assets and benefit obligations as of the date of the investee's financial statements used to apply the equity method. For example, if a calendar year-end parent consolidates a subsidiary using the subsidiary's September 30 financial statements, the funded status of the subsidiary's benefit plan included in the consolidated financial statements shall be measured as of September 30.
715-30-35-63A
If an employer's fiscal year-end does not coincide with a month-end, the employer may measure plan assets and benefit obligations using the month-end that is closest to the employer's fiscal year-end. That election shall be applied consistently from year to year. The election shall be applied consistently to all of its defined benefit plans if an employer has more than one defined benefit plan.
715-30-35-63B
If an employer measures plan assets and benefit obligations in accordance with paragraph 715-30-35-63A and a contribution or significant event caused by the employer (such as a plan amendment, settlement, or curtailment that calls for a remeasurement) occurs between the month-end date used to measure plan assets and benefit obligations and the employer's fiscal year-end, the employer shall adjust the fair value of plan assets and the actuarial present value of benefit obligations so that those contributions or significant events are recognized in the period in which they occurred. An employer shall not adjust the fair value of plan assets and the actuarial present value of benefit obligations for other events occurring between the month-end date used to measure plan assets and benefit obligations and the employer's fiscal year-end that may be significant to the measurement of defined benefit plan assets and obligations, but are not caused by the employer (for example, changes in market prices or interest rates).
715-30-35-64
Requiring that the pension measurements be as of a particular date is not intended to require that all procedures be performed after that date. As with other financial statement items requiring estimates, much of the information can be prepared as of an earlier date and projected forward to account for subsequent events (for example, employee service).
715-30-35-65
Unless an entity remeasures both its plan assets and benefit obligations during the fiscal year, the funded status it reports in its interim-period statement of financial position shall be the same asset or liability recognized in the previous year-end statement of financial position adjusted for both of the following:
- aSubsequent accruals of net periodic pension cost that exclude the amortization of amounts previously recognized in other comprehensive income (for example, subsequent accruals of service cost, interest cost, and return on plan assets)
- bContributions to a funded plan, or benefit payments.
715-30-35-66
Paragraph 715-30-25-5 notes that, sometimes, an entity remeasures both plan assets and benefit obligations during the fiscal year, for example, when a significant event such as a plan amendment, settlement, or curtailment occurs that calls for a remeasurement.
715-30-35-66A
If a significant event caused by the employer (such as a plan amendment, settlement, or curtailment) that requires an employer to remeasure both plan assets and benefit obligations does not coincide with a month-end, the employer may remeasure plan assets and benefit obligations using the month-end that is closest to the date of the significant event.
715-30-35-66B
If an employer remeasures plan assets and benefit obligations during the fiscal year in accordance with paragraph 715-30-35-66A, the employer shall adjust the fair value of plan assets and the actuarial present value of benefit obligations for any effects of the significant event that may or may not be captured in the month-end measurement (for example, if the closest month-end is before the date of a partial settlement, then the measurement of plan assets may include assets that are no longer part of the plan). An employer shall not adjust the fair value of plan assets and the actuarial present value of benefit obligations for other events occurring between the month-end date used to measure plan assets and benefit obligations and the employer's fiscal year-end that may be significant to the measurement of defined benefit plan assets and obligations, but are not caused by the employer (for example, changes in market prices or interest rates).
715-30-35-67
As required by paragraph 715-30-25-5, upon remeasurement, an entity shall adjust its statement of financial position in a subsequent interim period to reflect the overfunded or underfunded status of the plan consistent with that measurement date.
715-30-35-68
Measurements of net periodic pension cost for both interim and annual financial statements shall be based on the assumptions used for the previous year-end measurements unless more recent measurements of both plan assets and obligations are available or a significant event occurs, such as a plan amendment, that would ordinarily call for such measurements.
Employers with Two or More Plans
715-30-35-69
Net periodic pension cost, liabilities, and assets are determined on a plan-by-plan basis. Paragraph 715-30-25-6 requires that an employer that sponsors two or more separate defined benefit pension plans determine net periodic pension cost, liabilities, and assets by separately applying the provisions of this Subtopic to each plan.
Multiple-Employer Plans
715-30-35-70
Some pension plans to which two or more unrelated employers contribute are not multiemployer plans. Rather, they are in substance aggregations of single-employer plans combined to allow participating employers to pool their assets for investment purposes and to reduce the costs of plan administration. Those multiple-employer plans ordinarily do not involve collective-bargaining agreements. They may also have features that allow participating employers to have different benefit formulas, with the employer's contributions to the plan based on the benefit formula selected by the employer. Such plans shall be considered single-employer plans rather than multiemployer plans for purposes of this Subtopic, and each employer's accounting shall be based on its respective interest in the plan.
Cash Balance Plans
Transfer of Excess Pension Assets to a Retiree Health Care Benefits Account
715-30-35-73
The transfer of excess pension assets to a retiree health care account or plan (whether or not the transfer of assets is made pursuant to applicable laws or regulations) shall be recognized as a negative contribution to (withdrawal of funds from) the pension plan and a positive contribution to the retiree health care plan. No gain or loss arises from the transfer of the excess pension assets.
Settlements, Curtailments, and Certain Termination Benefits
Relationship of Settlements and Curtailments to Other Events
715-30-35-74
A settlement and a curtailment may occur separately or together.
715-30-35-75
This Subsection does not establish a proper sequence of events to follow in measuring the effects of a settlement and a curtailment that are to be recognized at the same time. Although the sequence selected can affect the determination of the aggregate gain or loss recognized, the selection of the event to be measured first (settlement or curtailment) is an arbitrary decision and neither order is demonstrably superior to the other. However, an employer shall consistently apply the same sequence of events in determining the effects of all settlements and curtailments that are to be recognized at the same time.
715-30-35-76
If benefits to be accumulated in future periods are reduced (for example, because half of a work force is dismissed or a plant is closed) but the plan remains in existence and continues to pay benefits, to invest assets, and to receive contributions, a curtailment has occurred but not a settlement.
715-30-35-77
If an employer purchases nonparticipating annuity contracts for vested benefits and continues to provide defined benefits for future service, either in the same plan or in a successor plan, a settlement has occurred but not a curtailment.
715-30-35-78
If a plan is terminated (that is, the obligation is settled and the plan ceases to exist) and not replaced by a successor defined benefit plan, both a settlement and a curtailment have occurred (whether or not the employees continue to work for the employer). See Example 1 (paragraph 715-30-55-198) for an illustration of this situation.
Settlements
715-30-35-79
The maximum gain or loss subject to recognition in earnings when a pension obligation is settled is the net gain or loss remaining in accumulated other comprehensive income plus any transition asset remaining in accumulated other comprehensive income from initial application of this Subtopic. That maximum amount includes any gain or loss first measured at the time of settlement. The maximum amount shall be recognized in earnings if the entire projected benefit obligation is settled. If only part of the projected benefit obligation is settled, the employer shall recognize in earnings a pro rata portion of the maximum amount equal to the percentage reduction in the projected benefit obligation. If the purchase of a participating annuity contract constitutes a settlement under the guidance in paragraphs , the maximum gain (but not the maximum loss) shall be reduced by the cost of the participation right before determining the amount to be recognized in earnings.
715-30-35-80
See Example 2 (paragraph 715-30-55-202) for illustrations of the settlement related guidance presented in this Subsection.
715-30-35-81
Plan assets and the projected benefit obligation shall be measured as of the date the settlement occurs (that is, as of the date that the criteria for a settlement are met and settlement accounting becomes appropriate) to determine the maximum gain or loss subject to pro rata recognition in earnings and the percentage reduction in the projected benefit obligation. The effects of a settlement can be reliably measured only if based on measures of plan assets and the projected benefit obligation as of the date of the settlement because intervening events (such as investment gains or losses, or gains or losses from changes in interest rates) after a prior measurement date could change the relevant amounts.
715-30-35-82
Recognition in earnings of gains or losses from settlements is required if the cost of all settlements during a year is greater than the sum of the service cost and interest cost components of net periodic pension cost for the pension plan for the year. However, if the cost of all settlements in a year is less than or equal to the sum of the service cost and interest cost components of net periodic pension cost for the plan for the year, gain or loss recognition in earnings is permitted but not required for those settlements. The accounting policy adopted for recognition in earnings of gains or losses from settlements shall be applied consistently from year to year.
715-30-35-83
The cost of a settlement is determined as follows for each of the different settlement types:
- a For a cash settlement, the amount of cash paid to employees
- b For a settlement using nonparticipating annuity contracts, the cost of the contracts
- c For a settlement using participating annuity contracts, the cost of the contracts less the amount attributed to participation rights. See paragraph 715-30-35-57.
715-30-35-84
The intent of the guidance in this Subsection is that if the substance of an insurance contract is such that the employer remains subject to all or most of the risks and rewards associated with the covered pension benefit obligation or the assets transferred to the insurance entity, the purchase of the contract does not constitute a settlement. The circumstances under which an employer shall recognize in earnings the net gain or loss included in accumulated other comprehensive income are limited and such recognition shall not occur if the settlement transaction is between an employer and an entity that it controls because such a transaction merely shifts the risks from one part of the entity to another part of the same entity.
715-30-35-85
Annuity contracts purchased from an entity that is controlled by the employer are excluded from settlement accounting. Therefore, an employer that purchases annuity contracts from an insurance entity that it controls shall not recognize any settlement gain or loss associated with the transaction (that is, the transaction does not qualify for settlement accounting).
715-30-35-86
If there is any reasonable doubt that the insurance entity will meet its obligations under the annuity contract, the purchase of the contract does not constitute a settlement.
715-30-35-87
If the substance of a participating annuity contract is such that the employer remains subject to all or most of the risks and rewards associated with the benefit obligation covered or the assets transferred to the insurance entity, the purchase of the contract does not constitute a settlement.
715-30-35-88
It may be difficult to determine the extent to which a participating annuity contract exposes the purchaser to the risk of unfavorable experience, which would be reflected in lower than expected future dividends. Additionally, under some annuity contracts described as participating, the purchaser might remain subject to all or most of the same risks and rewards related to future experience that would have existed had the contract not been purchased. Some participating insurance contracts may require or permit payment of additional premiums if experience is unfavorable. Accordingly, if a participating insurance contract requires or permits payment of additional premiums because of experience losses, or if the substance of the contract is such that the purchaser retains all or most of the related risks and rewards, the purchase of that contract does not constitute a settlement.
715-30-35-89
An employer may decide to make up a deficiency in annuity contract payments following a settlement and subsequent insolvency by the insurance entity. The following guidance addresses how the employer shall account for the cost of making up the deficiency in annuity payments to the retirees.
715-30-35-90
The following circumstances identify the fact pattern to which the required accounting would apply. An employer sponsors a defined benefit pension plan. The employer settles its pension obligation through the purchase of insurance annuity contracts from an insurance entity. The employer may or may not terminate the defined benefit pension plan. The employer appropriately applies the guidance in this Subsection. Subsequently, the insurance entity becomes insolvent and is unable to meet all of its obligations under the annuity contracts. The employer decides to make up some portion or all of any deficiency in annuity payments to the retirees.
715-30-35-91
The employer shall recognize a loss in the circumstances described in the preceding paragraph at the time the deficiency is assumed by the employer if any gain was recognized on the original settlement. The loss recognized would be the lesser of any gain recognized on the original settlement or the amount of the benefit obligation assumed by the employer. The excess of the obligation assumed by the employer over the loss recognized shall be accounted for as a plan amendment or plan initiation in accordance with paragraphs . Subsequent accounting shall be in accordance with the provisions of this Subtopic.
Curtailments
715-30-35-92
The prior service cost included in accumulated other comprehensive income associated with years of service no longer expected to be rendered as the result of a curtailment is a loss. For example, if a curtailment eliminates half of the estimated remaining future years of service of those who were employed at the date of a prior plan amendment and were expected to receive benefits under the plan, then the loss associated with the curtailment is half of the prior service cost included in accumulated other comprehensive income related to that amendment that has not been amortized as a component of net periodic pension cost. For purposes of applying the provisions of this paragraph, prior service cost includes the cost of retroactive plan amendments (see paragraphs ) and any transition obligation remaining in accumulated other comprehensive income from initial application of this Subtopic. The calculation of prior service cost associated with services of terminated employees is illustrated in Example 3 (see paragraph 715-30-55-212).
715-30-35-93
The projected benefit obligation, exclusive of increases that reflect termination benefits that are excluded from the scope of this paragraph (see paragraphs ), may be decreased (a gain) or increased (a loss) by a curtailment. To the extent that such a gain exceeds any net loss included in accumulated other comprehensive income (or the entire gain, if a net gain exists), it is a curtailment gain. To the extent that such a loss exceeds any net gain included in accumulated other comprehensive income (or the entire loss, if a net loss exists), it is a curtailment loss. For purposes of applying the provisions of this paragraph, any transition asset remaining in accumulated other comprehensive income from initial application of this Subtopic shall be treated as a net gain and shall be combined with the net gain or loss arising thereafter. See Example 4 (paragraph 715-30-55-216) for an illustration of a curtailment if there is a remaining transition asset included in accumulated other comprehensive income.
715-30-35-94
If the sum of the effects identified in the preceding two paragraphs is a net loss, it shall be recognized in earnings when it is probable that a curtailment will occur and the effects described are reasonably estimable. If the sum of those effects is a net gain, it shall be recognized in earnings when the related employees terminate or the plan suspension or amendment is adopted.
715-30-35-95
If a situation also involves termination benefits, the change in the projected benefit obligation due to the curtailment is the difference between the projected benefit obligation for the respective employees before their acceptance of the offer of termination benefits and the projected benefit obligation determined for those employees by applying the normal pension plan formula and assuming no future service because of their termination. See Examples 5 through 6 (paragraphs ) for an illustration of this guidance.
715-30-35-96
See also Example 7 (paragraph 715-30-55-231) for more illustrations of the curtailment-related guidance presented in this Subsection.
715-30-45Other Presentation Matters
Source downloaded: .Record version 99e5cab3cd42. Effective date must be checked in the source.
715-30-45-1
See paragraph 715-30-25-4 for guidance on reporting changes in a plan's funded status and the effect of certain amortization components of net periodic pension cost in other comprehensive income.
715-30-50Disclosure
Source downloaded: .Record version 040081ac80b3. Effective date must be checked in the source.
715-30-50-1
See Section 715-20-50 for disclosure requirements applicable to matters in the scope of this Subtopic.
Settlements, Curtailments, and Certain Termination Benefits
715-30-50-2
See Section 715-20-50 for disclosure requirements applicable to matters in the scope of this Subtopic.
715-30-55Implementation Guidance and Illustrations
Source downloaded: .Record version cac4fc1378e8. Effective date must be checked in the source.
715-30-55-1
This Subsection is an integral part of the requirements of this Subtopic. This Subsection provides additional guidance and illustrations that address the application of accounting requirements to specific aspects of accounting for matters related to defined benefit pension plans. The guidance and illustrations that follow may be based on provisions of law that are subject to change. These assumptions about the law are for illustrative purposes only.
Implementation Guidance
715-30-55-2
This implementation guidance is organized into the following categories:
- aNet periodic pension cost
- bAttribution
- cSubstantive commitment
- dAssumptions
- eSelection of discount rates
- fPlan assets
- gInsurance contracts
- hAmounts included in accumulated other comprehensive income
- iTiming of measurements
- jMultiemployer, multiple-employer, and single-employer plans
- kPension arrangements outside the United States
- lCombining and dividing plans.
715-30-55-3
Paragraph 715-30-35-4 provides that net periodic pension cost is an aggregation of various pension cost components, some of which are expenses or losses (which increase net periodic pension cost) and some of which are revenues or gains (which decrease net periodic pension cost). It is possible for the revenue or gain components to exceed the expense or loss components, resulting in net periodic pension income. For example, a pension plan may have an expected return on plan assets or amortization of a transition asset remaining in accumulated other comprehensive income that exceeds the other net periodic pension cost components.
715-30-55-4
An employer sponsoring a pension plan that is overfunded may have net periodic pension cost that is a net credit (that is, net periodic pension income) and the employer may make no contribution to the pension plan because it cannot currently deduct that amount for tax purposes. In this situation, the difference between net periodic pension income and the tax-deductible amount is a temporary difference as discussed in paragraphs . The difference between net periodic pension income and the tax-deductible amount represents the origination or reversal of a portion of the overall temporary difference related to a pension plan for which deferred taxes should be provided. Ultimately, the employer's cost of providing pension benefits to employees equals the net amount funded, which is equal to the total benefits paid less earnings on plan assets. Thus, cumulative pension cost for accounting purposes will equal the cumulative amount recognized for tax purposes.
715-30-55-5
The overall temporary difference discussed in the preceding paragraph will reverse in one of two ways. First, at some future time the pension plan may not be so overfunded because of poor investment performance or because of increases in the obligation due to a decline in interest rates, additional pension benefits earned for future years of service, or amendments to the pension plan that increase pension benefits. In this case, net periodic pension cost for future years would eventually exceed amounts funded in those years. Second, if the pension plan remains overfunded and continually generates investment returns in excess of increases in the pension obligation, the employer may terminate the pension plan to recapture excess assets. In this case, the gain for accounting purposes from the pension plan termination would be less than the taxable amount resulting from that event. Although the reversal of the temporary difference may be far in the future and may be somewhat under the employer's control, there is a temporary difference for which deferred taxes should be provided.
715-30-55-6
An employer may withdraw excess plan assets (cash) from a pension plan, not be required to settle a pension benefit obligation as part of an asset reversion transaction, and, as provided for in paragraph 715-30-55-145, no net gain or loss included in accumulated other comprehensive income would be immediately recognized in earnings. However, the withdrawal of excess plan assets shall be recorded as a negative contribution. That is, the employer shall record a debit to cash and a credit to the net pension asset or liability, as appropriate.
715-30-55-7
The following attribution-related implementation guidance illustrates the application of the guidance in paragraph 715-30-35-36 that establishes that pension benefits ordinarily shall be attributed to periods of employee service based on the plan's benefit formula to the extent that the formula states or implies an attribution.
715-30-55-8
Under the paragraph 715-30-35-36 guidance, if a pension plan's formula provides an annual pension benefit equal to 1 percent of each year's salary (that is, it does not base pension benefits for the current year on any future salary level), the projected unit credit method should be used to attribute the service cost component of net periodic pension cost over employees' service periods because a pension plan that describes the pension benefits earned as 1 percent of current pay for each year of service is the same as a pension plan that describes the pension benefits earned as 1 percent of total career pay. Both are, in effect, a career-average-pay pension plan. Because similar pension benefits could be provided by a final-pay pension plan that includes almost the entire service period (for example, service period minus the first year) in determining the average final pay on which pension benefits are based, the line between career-average-pay and final-pay pension plans would need to be an arbitrary one if the two types of formulas were to be treated differently.
715-30-55-9
A career-average-pay pension plan may have a formula that provides pension benefits equal to 1 percent of each year's salary for that year's service with, for example, prospective (flat-benefit) plan amendments granted every 3 years as part of union negotiations (for example, a negotiated increase may provide that additional benefits of $360 per year are earned for each of the following 3 years of service). In such a plan, the projected unit credit method should not be used for both the career-average-pay and the flat-benefit portions of the pension benefits provided under the pension plan. Rather, the projected unit credit method should be used to attribute the career-average-pay portion of the pension benefits over employees' service periods, and the unit credit method should be used for the flat-benefit portion for the limited service period, which, in this example, is three years.
715-30-55-10
In a pension plan that provides a pension benefit of 1 percent of final pay for each year of service up to a maximum of 20 years of service with, for example, final pay frozen at the 20th year, the employer should not attribute the total projected benefits under the pension plan for an employee over the employee's expected service period even if that service period is anticipated to exceed the 20-year limitation. Although total projected benefits ordinarily should be attributed to years of service based on the pension plan's formula, paragraph 715-30-35-38 explains that some pension plans have formulas that attribute a disproportionate share of those pension benefits to later years of service and requires attribution of those pension benefits ratably over the service period (which would be faster than the pension plan formula). However, no basis exists for attribution of pension benefits to years of service more slowly than the pension plan's formula. In this example, the service cost component of net periodic pension cost for the employee should be zero after Year 20. However, interest cost should continue to accrue on the projected benefit obligation. If the pension plan's formula in this example provided a pension benefit of 1 percent of final pay for each year of service up to a maximum of 20 years of service and final pay is not frozen at the 20th year, the result is the same except that gains or losses will occur after the 20-year period if experience is different from that assumed regarding the final level of compensation.
715-30-55-11
A pension plan may have more than one formula with an employee's pension benefits determined based on the formula that provides the greatest pension benefit at the time the employee terminates or retires. For example, if the employee terminates in Year 10, the pension plan's flat-benefit formula provides a greater pension benefit than does the pension plan's pay-related formula, while if the employee terminates in Year 11, the pension plan provides that same employee with a greater benefit under its pay-related formula than under its flat-benefit formula. In a pension plan that effectively has a formula that defines different benefits for different years of service, an attribution approach that does not assign the same amount of pension benefit to each year of an employee's service may be required.
715-30-55-12
If a pension plan has more than one formula, the accumulated benefit obligation shall be based on the greatest of the pension benefits determined by applying each of the plan's formulas to service to date. The projected benefit obligation shall be determined based on the same formula until an allocation of incremental pension benefits for the remaining expected service period using another formula provides a greater pension benefit allocated to service in the current year. As indicated in the preceding paragraph, that may result in differing levels of benefits attributed to different years of an employee's service.
715-30-55-13
See Example 3 (paragraph 715-30-55-108) for an illustration of how an employer would determine the accumulated and projected benefit obligations for a pension plan that has more than one benefit formula.
715-30-55-14
An employer may sponsor both a qualified pension plan (for tax purposes) and an excess benefit plan (sometimes referred to as a top-hat pension plan) during an employee's service period and the employee may be expected to receive a pension benefit under the excess benefit pension plan (that is, the employee's pension benefit at retirement is expected to exceed the limitations imposed by the U.S. Internal Revenue Code). In this situation, the projected benefit obligation should be attributed to the qualified pension plan (for tax purposes) until it equals the assumed benefit limitations imposed by the U.S. Internal Revenue Code. See paragraph 715-30-55-21 for considerations of future changes in limitations. Any incremental projected benefits for subsequent years of service should then be attributed to the excess benefit pension plan. Until an employee's projected benefits for service already rendered reach the benefit limitations of the underlying qualified pension plan, the employee is not eligible for benefits under an excess benefit pension plan and no cost or obligation should be attributed to that pension plan.
715-30-55-14A
In most circumstances involving excess benefit pension plans, the plan assets of a qualified pension plan (for tax purposes) are segregated and restricted to provide pension benefits only under that pension plan. Therefore, unless an employer clearly has a legal right to use the plan assets of the qualified pension plan to pay directly the pension benefits of the nonqualified pension plan (a right that generally does not exist), the determination of net periodic pension cost, including amortization periods and patterns for recognition in earnings of the cost of retroactive plan amendments and gains or losses should be on a plan-by-plan basis. Also, the disclosures required by paragraph 715-20-50-2 may need to be made separately for each plan.
715-30-55-14B
The fact that an employer could fund less to the qualified pension plan and use those withheld funds to pay the benefits of the nonqualified pension plan or engage in an asset reversion transaction of the qualified pension plan and use those withdrawn funds to pay the pension benefits of the nonqualified pension plan does not, in itself, allow the pension plans to be reported as a single pension plan. An additional reason that excess benefit pension plans should be viewed as separate pension plans is that sometimes those pension plans cover employees of several different qualified pension plans, in which case it would not be possible to sustain a one-plan view.
715-30-55-15
See Example 4 (paragraph 715-30-55-118) for an illustration of attribution of pension benefits to a qualified pension plan (for tax purposes) and an excess benefit pension plan.
715-30-55-16
Paragraph 715-30-35-34 describes circumstances under which a substantive commitment is the basis for accounting beyond the written terms of a pension plan.
715-30-55-17
The determination of whether a substantive commitment exists to provide pension benefits for employees beyond the written terms of the pension plan's formula requires careful consideration of all the facts and circumstances surrounding the pension plan. Actions of the employer, including communications to the employees, can demonstrate the existence of that commitment.
715-30-55-18
However, a history of retroactive plan amendments is not enough, in isolation, to establish a substantive commitment. Absent other evidence of a substantive commitment, such a history should be considered in determining the appropriate amortization periods for prior service cost as discussed in paragraph 715-30-35-14. An employer's accounting for its pension plan should not anticipate a retroactive plan amendment that is not part of a series of retroactive plan amendments necessary to effect a substantive commitment to have a formula greater than its written form.
715-30-55-19
An employer may have a substantive commitment to have a formula greater than the pension plan's written formula. There may be a difference between the effects of a retroactive plan amendment that were anticipated as part of that substantive commitment and the effects of the actual retroactive plan amendment. If that difference results from an intended modification of the formula for which there is a substantive commitment, the accounting shall be that prescribed in paragraphs for a retroactive plan amendment. Otherwise, that difference is a gain or loss subject to the accounting specified in paragraphs .
715-30-55-20
Paragraph 715-30-35-31 provides guidance on how the service cost component of net periodic pension cost shall reflect estimates of future compensation levels. It is not always necessary for assumed compensation levels to change each time assumed discount rates (and expectations of future inflation rates inherently contained in the assumed discount rates) change. Rather, that paragraph requires consistency based on the incorporation of expectations of the same future economic conditions. That paragraph does not require that both assumptions contain the same future inflation component unless that would be appropriate under the circumstances to reflect the best estimate of the pension plan's future experience. For example, an employer that competes with significant foreign entities may not increase its assumed compensation levels even though assumed discount rates increase because the employer expects that it could not successfully compete in the future if its labor costs increased at a rate greater than that already assumed. Another employer would increase its assumed compensation levels if assumed discount rates increased because changes in that employer's labor costs over time have been highly correlated with changes in inflation rates and the employer expects that correlation to continue.
715-30-55-21
Changes under existing law in benefit limitations, for example, such as those imposed by Section 415 of the U.S. Internal Revenue Code, that would affect benefits provided by a pension plan should be anticipated in measuring the service cost component of net periodic pension cost and the projected benefit obligation. If the existing law provides for indexing or has a schedule of changes inherent in it, those effects should be considered in determining the service cost component of net periodic pension cost and the projected benefit obligation to the extent consistent with other assumptions (that is, salary and inflation).
715-30-55-22
Provisions of a law, for example, Section 415 of the U.S. Internal Revenue Code, may be incorporated by reference into a pension plan's formula thereby limiting certain participants' accumulated benefits. In such cases, the determination of the pension plan's accumulated benefit obligation should not reflect the current limitation of the law if the pension plan's formula requires automatic increases in accumulated benefits as each change in the limitation under existing law occurs and future service is not a prerequisite for participants to receive those increases. The determination of the pension plan's accumulated benefit obligation should reflect those increases in the limitation under existing law that would be consistent with the pension plan's other assumptions. As described, the pension plan formula incorporates the type of automatic benefit increases addressed in paragraph 715-30-35-35. However, if employees would not automatically receive those pension benefit increases should they retire or terminate their service, then that paragraph would proscribe anticipating those increases and, therefore, the current limitation would be used in determining the accumulated benefit obligation in that situation.
715-30-55-23
Paragraphs establish the requirements for discount rates to be used in measurements of the vested, accumulated, and projected benefit obligations and the service and interest cost components of net periodic pension cost.
715-30-55-24
The assumed discount rates used to discount the vested, accumulated, and projected benefit obligations may be different if the employer can justify such differences in terms of the paragraph 715-30-35-46 requirement to make the best estimate of the assumed discount rates. For example, different rates should be used to measure the pension obligations for active and retired employees if necessary to reflect differences in the maturity and duration of pension benefit payments. The assumed discount rates for pension benefits that mature in a particular year shall not differ, however, regardless of whether the obligation for those pension benefits is presently classified as a vested, accumulated, or projected benefit obligation.
715-30-55-25
An employer shall not select arbitrarily the assumed discount rates from within a range but shall select the best estimate of the interest rates at which the pension benefits could be effectively settled at that point in time.
715-30-55-26
A change in the basis of estimating assumed discount rates, for example, by using high-quality bond rates for one year and annuity rates for the following year, is not a change in method of applying an accounting principle because of the objective of selecting assumed discount rates to determine the interest rates inherent in the price at which the pension benefits could be effectively settled—currently.
715-30-55-27
If an employer that previously used AA bond rates believes in a subsequent year that, in consideration of its pension plan's particular facts and circumstances, the interest rates that would be inherent in an effective settlement of the pension benefits are now more closely reflected by the rates implicit in current prices of annuity contracts, then those rates should be used and the change is viewed as a change in estimate; the estimate being the determination of the effective settlement rates. The key is that the employer is using the rates implicit in current prices of annuity contracts as the basis to determine the best estimate of the effective settlement rates. The decision to use a particular methodology in a particular year does not mean that the employer must use that methodology in subsequent years. A change in the facts and circumstances may warrant the use of a different source that better reflects the rates at which the obligation could be effectively settled—currently. A position that holds such a change as a change in accounting principle would lend credence to the view that there are two or more acceptable alternatives. That is not the case. The objective is to select the best estimate of the effective settlement rates.
715-30-55-28
Another aspect of this estimation issue is determining when to change the basis of estimation from one particular methodology to another, for example, AA bond rates to rates implicit in current prices of annuity contracts. There is no prescribed mathematical formula for making that decision. As indicated in the preceding paragraph, the emphasis in selecting assumed discount rates shall be the use of the best estimate. Changes in the methodology used to determine that best estimate should be made when facts or circumstances change, for example, a general decline or rise in interest rates that has not yet been reflected in the rates implicit in the current prices of annuity contracts. If the facts and circumstances do not change from year to year, it would be inappropriate to change the basis of selection, particularly if the intent in changing the basis is to avoid a change in the assumed discount rates.
715-30-55-29
A pension plan may have a bond portfolio that was dedicated at a yield significantly higher or lower than current interest rates. The historical rates of return as of the dedication date are not acceptable for use in discounting the projected and accumulated benefit obligations to their present value. Although it is acceptable for an employer to look to rates of return on high-quality fixed-income investments in selecting the assumed discount rates, it is the current rates of return on those investments, not the historical rates of return as of the dedication date, that are relevant.
715-30-55-30
Use of assumed discount rates based on historical rates of return is inconsistent with the paragraph 715-30-35-50 requirement to value plan assets at fair value. If interest rates decline or rise, the effect of the requirement to use current rates is to increase or decrease the present value of the projected benefit obligation. That increase or decrease in the obligation is a loss or gain that would be offset to the extent of the gain or loss in the fair value of the plan's dedicated portfolio of fixed-income investments. Any net gain or loss is subject to amortization as a component of net periodic pension cost.
715-30-55-31
Ordinarily, an employer would not want to purchase annuities for that portion of the pension benefit obligation related to future compensation levels and an insurance entity would be unwilling to undertake an unconditional obligation based on future compensation levels without charging increased premiums for the additional risk. Even though a current settlement of the portion of the projected benefit obligation that relates to future compensation levels is unlikely, an employer shall not use those interest rates implicit in current prices of annuity contracts to determine the accumulated benefit obligation, and use interest rates expected to be implicit in future prices of annuity contracts to determine the pension obligation in excess of the accumulated benefit obligation. The use of rates implicit in future annuity prices is not consistent with the requirements of paragraph 715-30-35-46 to use current settlement rates.
715-30-55-32
Those factors that are relevant for determining the timing and amount of estimated future annuity payments shall not be reflected by an implicit approach to selecting discount rates. Once the estimated future annuity payments are determined, the discounting process using an explicit approach does not consider anything other than the time value of money for purposes of determining the single sum that, if invested at the measurement date, would generate the necessary cash flows to pay the pension benefits when due (the sum necessary to settle effectively the pension obligation assuming no future experience gains or losses).
715-30-55-33
As required by paragraph 715-30-35-43, the assumed discount rates used to determine the projected, accumulated, and vested benefit obligations shall reflect the interest rates inherent in the price at which the pension benefits could be effectively settled—currently. However, how the accumulated benefit obligation or the projected benefit obligation (before discounting) is determined, that is, whether assumptions as to future inflation or compensation levels are considered, is not relevant in selecting discount rates.
715-30-55-34
See paragraph 715-60-55-4 for a discussion of the relationship of discount rates used to measure a pension benefit obligation to discount rates used to measure an other postretirement benefit obligation.
715-30-55-35
The definition of plan assets excludes amounts accrued by the employer but not yet paid to the plan if the exclusion is intended to relate to a recognized pension liability. However, if transferable securities issued by the employer are included in plan assets, the measurement of plan assets should also include the interest accrued but not yet received on those securities.
715-30-55-36
An employer may have a nonqualified pension plan (for tax purposes) that is funded with life insurance policies owned by the employer. The cash surrender value of life insurance policies, if the employer is the owner or beneficiary, do not qualify as plan assets and the accounting for those policies should be in accordance with Subtopic 325-30.
715-30-55-37
An employer may have several pension plans with similar plan assets and may elect to use a market-related value approach to value those plan assets. While paragraph 715-30-35-69 provides for the separate application of the guidance in this Subtopic to each plan, an employer should use different asset valuation methods for similar plan assets only if the pension plans' inherent facts and circumstances justify the difference in methodology. Otherwise, the use of a variety of asset valuation methods for similar plan assets is inconsistent with the objective of enhancing the comparability of reported pension information.
715-30-55-38
The asset valuation method selected for each class of plan assets should accomplish the objective of recognizing changes in the fair value of those plan assets in a systematic and rational manner over not more than five years. Once that method is selected, it should be applied consistently for that class of plan assets as should the method for dividing plan assets into classes. There is no limitation on the number of classes into which plan assets may be divided for purposes of selecting asset valuation methods for determining the market-related value of plan assets.
715-30-55-39
The use of a market-related value of plan assets affects the determination of net periodic pension cost in two ways. First, the market-related value of plan assets is the basis on which the expected return on plan assets is computed. Second, to the extent that gains or losses based on the fair value of plan assets are not yet reflected in the market-related value of plan assets, such amounts are excluded from the net gain or loss included in accumulated other comprehensive income that is subject to amortization beginning in the following year. Although those excluded gains or losses eventually affect net periodic pension cost, their impact is delayed through use of a market-related value of plan assets.
715-30-55-40
The definition of market-related value of plan assets contemplates the use of systematic and rational methodology that reflects only the changes in fair value of plan assets between various dates. An example of an unacceptable method for determining the market-related value of plan assets follows. It is not acceptable because it introduces a factor (see layer [b]) that can be unrelated to the change in the fair value of plan assets. This example of an unacceptable market-related value of plan assets is determined with a total return-on-plan asset component consisting of three layers:
- aAn expected return-on-plan asset component based on the beginning-of-year market-related value of plan assets, cash flow during the year, and the expected long-term rate of return on plan assets
- bAn amount equal to the change in the accumulated benefit obligation that resulted from any change during the year in the assumed discount rates used to determine the accumulated benefit obligation (The amount is reduced pro rata if plan assets are less than the accumulated benefit obligation.)
- cA variance component equal to a percentage (for example, 20 percent if a 5-year-averaging period is used) of the difference between the actual return on plan assets based on the fair values of those plan assets and the expected return on plan assets derived from component layers (a) and (b).
715-30-55-41
Paragraph 715-30-35-60 provides guidance on accounting for insurance contracts and distinguishes between insurance contracts that are in substance the equivalent purchases of annuities and other contracts. Paragraph 715-30-35-61 explains that certain attributes of annuity contracts result in accounting that is different in this Subsection from the accounting specified in the Settlements, Curtailments, and Certain Termination Benefits Subsections in this Subtopic.
715-30-55-42
Guaranteed investment contracts are not annuity contracts because they transfer only investment risk to the insurer. The insurer does not unconditionally undertake a legal obligation to provide specified pension benefits to specific individuals. For a guaranteed investment contract with a specified maturity date and for which there is no intent to liquidate the contract before that date, evidence of the fair value of the guaranteed investment contract might be obtained by looking to current yields on fixed-maturity securities having similar risk characteristics and duration.
715-30-55-43
In an immediate participation guarantee investment contract, the market value adjustment should be considered in determining its fair value because, in effect, the contract value adjusted for any such market value adjustment represents the cash surrender value referred to in paragraph 715-30-35-60. If an immediate participation guarantee investment contract can be converted into an annuity contract, the conversion value of the contract should be considered in determining its fair value. The evidence of fair value noted for guaranteed investment contracts in the preceding paragraph should also be considered for immediate participation guarantee investment contracts.
715-30-55-44
The following implementation guidance addresses issues related to amounts that are included in accumulated other comprehensive income.
715-30-55-45
The future service periods of employees expected to receive benefits is one of the inputs into amortization calculations specified in paragraphs .
715-30-55-46
In determining the periods for amortization of prior service cost included in accumulated other comprehensive income, minimum amortization of net gain or loss included in accumulated other comprehensive income, or amortization of the transition asset or obligation remaining in accumulated other comprehensive income, an employer shall not include the service periods of employees who are expected to receive only a return of their contributions (plus interest, if applicable) to a contributory defined benefit pension plan in determining the future service periods of employees expected to receive benefits under that pension plan. Only the future service periods of those employees who are expected to receive an employer-provided benefit shall be included.
715-30-55-47
The service periods of employees expected to terminate before their benefits are vested shall also not be included in the determination of the average remaining service period of employees expected to receive benefits under the pension plan. Only the service periods of those employees working as of the date for which the determination is made and who are expected to actually receive employer-provided benefits are included.
715-30-55-48
If all or almost all of a plan's participants are inactive, paragraphs 715-30-35-11 and 715-30-35-24 provide for the average remaining life expectancy of the inactive participants to be used instead of average remaining service periods. There is no specific threshold for determining if a pension plan has almost all inactive participants for purposes of selecting the amortization period for certain components of net periodic pension cost. The threshold for using the average life expectancy of inactive participants requires judgment based on the facts and circumstances of the particular pension plan.
715-30-55-49
In the event that all or almost all of a pension plan's participants are inactive due to a temporary suspension of the pension plan (that is, for a limited period of time, employees will not earn additional defined benefits), the minimum amortization of a net gain or loss included in accumulated other comprehensive income shall not be determined based on the average remaining life expectancy of the temporarily inactive participants. Instead, the minimum amortization of a net gain or loss included in accumulated other comprehensive income shall be determined based on the average remaining service period of the temporarily inactive participants expected to receive benefits under the pension plan.
715-30-55-50
In the event that all employees covered by a pension plan are terminated but not retired, the minimum amortization of a net gain or loss included in accumulated other comprehensive income shall be determined based on the average remaining life expectancy of the inactive participants. The situation described could arise, for example, if a division with its own pension plan is sold by the employer thus terminating the related employees, but the pension plan remains in existence and it retains the obligation for benefits accrued to the date of sale. In that situation, the minimum amortization of a net gain or loss included in accumulated other comprehensive income should be determined based on the average remaining life expectancy of the inactive participants.
715-30-55-51
Paragraph 715-30-35-14 identifies the need to assess the individual circumstances and the substance associated with regular plan amendments. If an employer has a history of granting retroactive plan amendments every three years, for example, as part of union negotiations, the period benefited may be three years. If employees expect the pattern to continue, the future economic benefits to be obtained from a retroactive plan amendment may not continue if the pattern is broken; effectively, the future economic benefit of each retroactive plan amendment may expire over the period of the union contract (in this case, three years). In that situation, amortization of prior service cost included in accumulated other comprehensive income over a three-year period would be appropriate. Whether three years is the appropriate amortization period for a retroactive plan amendment that is part of a three-year amendment pattern shall be determined based on the facts and circumstances of the particular situation.
715-30-55-52
There may be a transition asset remaining in accumulated other comprehensive income that is reduced when a settlement gain is recognized. Similarly, a transition asset or obligation remaining in accumulated other comprehensive income may be reduced as part of the accounting for a curtailment. The balance of the transition asset remaining in accumulated other comprehensive income after a settlement gain or the balance of the transition asset or obligation remaining in accumulated other comprehensive income after a curtailment, shall be amortized on a straight-line basis over the remainder of the amortization period determined at transition.
715-30-55-53
In the event that a pension plan curtailment occurs causing almost all of the pension plan's participants to become inactive, the employer shall continue to amortize any transition asset or obligation remaining in accumulated other comprehensive income (the amount remaining after the employer accounts for the curtailment as required by paragraphs ) using the same amortization period determined at transition.
715-30-55-54
An employer may grant a retroactive plan amendment that reduces the projected benefit obligation (a negative retroactive plan amendment). Paragraph 715-30-35-17 indicates that the reduction in benefits shall be used first to reduce any prior service cost included in accumulated other comprehensive income. If several prior retroactive plan amendments in the aggregate have resulted in prior service costs included in accumulated other comprehensive income that exceed the effects of the negative retroactive plan amendment, unless the retroactive plan amendment that reduces benefits can be specifically related to a prior retroactive plan amendment, any systematic and rational method (for example, last-in, first-out [LIFO]; first-in, first-out [FIFO]; or pro rata), applied on a consistent basis, is acceptable for use to apply the guidance.
715-30-55-55
An employer may amend a pension plan to delete a provision that a percentage of the employee's accumulated benefits be paid to the employee's spouse upon death of the employee before a specified age. Such a reduction in benefits shall be accounted for as a retroactive plan amendment.
715-30-55-56
Paragraph 715-30-35-68 provides guidance on measuring net periodic pension cost when measurements more recent than the previous year-end are available and establishes that the measurement of net periodic pension cost shall be based on the most recent measurements of plan assets and obligations.
715-30-55-57
It may be necessary to have an actuarial valuation as of the employer's fiscal year-end (for example, December 31) in addition to the actuarial valuation made as of the pension plan's preceding year-end (for example, June 30). In such an example, net periodic pension cost for the year should be the sum of two six-month measurements (January 1-June 30, determined as of the preceding December 31; July 1-December 31, determined as of the preceding June 30).
715-30-55-58
If an employer that has a December 31 financial report date measures its plan assets and obligations as of an interim date during its fiscal year, for example, because of a significant retroactive plan amendment, net periodic pension cost for the remainder of the fiscal year should be based on the most recent pension measurements. Net periodic pension cost for the preceding interim periods should not be adjusted.
715-30-55-59
An employer may use a measurement date of December 31 but not complete the actual measurements until some time later, for example, in January. In this situation, the determination of the pension obligations should not be based on the assumed discount rates and other actuarial assumptions as of January. The employer should use the actuarial assumptions, including assumed discount rates, that were appropriate as of the measurement date of December 31 because the objective is to determine the various pension measurements, including plan assets, as of that date.
715-30-55-60
The projected benefit obligation reflects the actuarial present value of all benefits attributed to employee service rendered before the date of the employer's fiscal year-end statement of financial position, with limited exceptions as addressed in paragraphs . The measurement of that obligation shall be based on actuarial assumptions appropriate for the date of the employer's fiscal year-end statement of financial position (for example, turnover, mortality, discount rates, and so forth) and census data as of that date.
715-30-55-61
If an actuarial valuation is made as of a pension plan's year-end and that date precedes the date of the employer's fiscal year-end statement of financial position, it is, however, not always necessary to have another actuarial valuation made as of that date. If an employer is assured that the reliability of the measurement of that obligation determined by rolling forward data based on a valuation before the date of the employer's fiscal year-end statement of financial position is sufficiently high so that the amount of the pension obligation is substantially the same as would be determined by an actuarial valuation as of that date, then another actuarial valuation is not required. This is analogous to the acceptability of having an annual physical inventory taken as of a date before the financial report date if it has been demonstrated that reliance can be placed on perpetual records or another system that reflects subsequent events.
715-30-55-62
Subtopic 715-80 provides guidance on multiemployer plans. Paragraph 715-30-35-70 provides guidance on multiple-employer plans that distinguishes multiemployer from multiple-employer plans and requires that multiple-employer plans be viewed as in-substance aggregations of single-employer plans. The following example illustrates the guidance in that paragraph.
715-30-55-63
Assume a not-for-profit entity (NFP) has a defined benefit pension plan that covers employees at the national and all local chapters and each chapter is required to contribute to the pension plan based on a predetermined formula (for example, on a percentage-of-salary basis), plan assets are not segregated or restricted on a chapter-by-chapter basis, and if a chapter withdraws from the pension plan, the pension obligations for its employees are retained by the pension plan as opposed to being allocated to the withdrawing chapter. This arrangement should be accounted for as a single-employer pension plan in the NFP's financial statements. However, in each chapter's separate financial statements (if issued) the arrangement should be accounted for as a multiemployer pension plan. It is unclear how an allocation of net periodic pension cost or the overfunded or underfunded status of the defined benefit pension plan would be made if each chapter were to view its respective participation as a single-employer pension plan because the assets are not segregated or restricted by chapter and obligations are not assumed by a withdrawing chapter. Accounting for the pension plan as a multiemployer pension plan requires that a chapter's contribution for the period (in this example, the amount required to be contributed to the pension plan based on a percentage of its employees' salaries) be recognized as net periodic pension cost. A liability would be recognized for any contributions due and unpaid. The disclosures required by Section 715-80-50 do not apply in this situation. Instead, each chapter should disclose the name of the plan in which it participates and the amount of contributions it made in each annual period for which a statement of income (statement of activities for not-for-profit entities) is presented, as well as any related-party disclosures required by Subtopic 850-10.
715-30-55-64
The conclusions in the preceding paragraph would also be true in a similar parent-subsidiary arrangement if the subsidiaries issue separate financial statements. In a similar arrangement, each subsidiary should account for its participation in the overall single-employer pension plan as a participation in a multiemployer pension plan. The disclosures required by Section 715-80-50 do not apply in this situation. Instead, each subsidiary should disclose the name of the plan in which it participates and the amount of contributions the subsidiary made in each period for which a statement of income or statement of activities is presented. The parent entity should, of course, account for the pension plan as a single-employer pension plan in its consolidated financial statements.
715-30-55-65
Paragraphs establish that there are no special provisions applicable to plans or arrangements outside the United States and specifies that, to the extent that those arrangements are in substance similar to plans in the United States, they are subject to the provisions of this Topic.
715-30-55-66
A non-U.S. pension plan may provide death and disability benefits that are greater than the incidental death and disability benefits allowed in U.S. tax-qualified pension plans. The relative level of death and disability benefits paid by a plan that provides primarily pension benefits should not, in itself, cause the pension plan to be in substance different from a U.S. pension plan.
715-30-55-67
Under certain plans (typically non-U.S. plans) the actuarial present value of the benefits to which an employee is entitled if the employee terminates immediately may exceed the actuarial present value of the benefits to which the employee is entitled at the employee's expected date of separation based on service to date. In those situations, to determine the vested benefit obligation, the employer may record either the actuarial present value of vested benefits to which the employee is entitled if the employee separates or the actuarial present value of the vested benefits to which the employee is currently entitled based on the employee's expected date of separation or retirement as provided for in paragraphs .
715-30-55-68
The following guidance addresses the accounting for certain arrangements in Japan and Germany.
715-30-55-69
The following guidance refers to provisions of the Japanese Welfare Pension Insurance Law; however, it shall not be considered a definitive interpretation of that law for any purpose.
715-30-55-70
In Japan, many large entities have Employees' Pension Fund plans, which are defined benefit pension plans established under the Japanese Welfare Pension Insurance Law. These plans are composed of both of the following components:
- a A substitutional portion based on the pay-related part of the old-age pension benefits prescribed by Japanese Welfare Pension Insurance Law (similar to social security benefits in the United States)
- b An entity portion based on a contributory defined benefit pension arrangement established at the discretion of each employer.
715-30-55-71
An employer with an Employees' Pension Fund and its employees are exempted from contributions to Japanese Pension Insurance that would otherwise be required if they had not elected to fund the substitutional portion of the benefit through an Employees' Pension Fund arrangement. The Employees' Pension Fund, in turn, pays both the entity and the substitutional pension benefits to retired beneficiaries out of its plan assets. Benefits of the substitutional portion are based on a standard remuneration schedule as determined by Japanese Welfare Pension Insurance Law, but the benefits of the entity portion are based on a formula determined by each employer or Employees' Pension Fund. The plan assets of an Employees' Pension Fund are managed and invested as a single portfolio for the entire Employees' Pension Fund and are not statutorily attributed to the substitutional and entity portions. The significance of the substitutional portion to the entire Employees' Pension Fund varies. In some plans, the substitutional portion may account for as little as 10 percent of the total projected benefit obligation, while in others it may account for as much as 60 percent of the total projected benefit obligation.
715-30-55-72
Employees' Pension Fund arrangements shall be accounted for as single-employer defined benefit plans using a single plan approach.
715-30-55-73
In June 2001, the Japanese Welfare Pension Insurance Law was amended to permit each employer/Employees' Pension Fund to separate the substitutional portion from its Employees' Pension Fund and transfer the obligation and related assets to the government. Upon completion of the separation, the remaining substitutional obligation and related plan assets, determined pursuant to a government formula, are transferred to a government agency, and the employer/Employees' Pension Fund is released from paying the remaining substitutional portion of the benefits to Employees' Pension Fund beneficiaries. After the separation, both the employer and the employees are required to make periodic contributions to Japanese Pension Insurance, and the Japanese government is responsible for all benefit payments earned under Japanese Welfare Pension Insurance Law. The remaining portion of the Employees' Pension Fund (that is, the entity portion) continues to exist exclusively as a defined benefit pension plan, although, from a legal or regulatory perspective, the Employees' Pension Fund is deemed to have been dissolved and a defined benefit pension plan is deemed newly established when the separation process is completed. After the separation process, an employer may transfer the remaining entity portion of an Employees' Pension Fund into a defined contribution plan.
715-30-55-74
The process of separating the substitutional portion from the entity portion occurs in four phases, but the employer/Employees' Pension Fund may not complete only certain parts of the separation process. Essentially, once an employer/Employees' Pension Fund obtains Phase 2 approval, it must complete the entire separation process. Likewise, assuming the employer/Employees' Pension Fund has obtained the requisite approval from the employees' representative, the separation is subject only to administrative processing by the government. The four phases are as follows:
- a Phase 1—An employer/Employees' Pension Fund makes an application to the Japanese government for an exemption from the obligation to pay benefits for future employee service related to the substitutional portion. As a prerequisite to making that application, the representative of the employees covered by the plan must agree to the separation.
- b Phase 2—On or after April 1, 2002 (when the June 2001 amendment to the Japanese Welfare Pension Insurance Law became effective), the Japanese government gives each employer/Employees' Pension Fund an approval of exemption from the obligation for benefits related to future employee service under the substitutional portion. Once that approval is obtained, the employer begins making Japanese Pension Insurance payments directly to the government.
- c Phase 3—After obtaining an approval of exemption from the obligation for benefits related to future employee service under the substitutional portion, the employer/Employees' Pension Fund must make another application for separation of the remaining substitutional portion (that is, the benefit obligation related to past services).
- d Phase 4—Within two and a half years from the enactment date of the Japanese Welfare Pension Insurance Law amendment (June 15, 2001), the Japanese government will grant each employer/Employees' Pension Fund the final approval of separation. On obtaining that approval, the remaining benefit obligation of the substitutional portion (that amount earned by past services) as well as the related government-specified portion of the plan assets of the Employees' Pension Fund will be transferred to Japanese Pension Insurance.
715-30-55-75
The entire separation process shall be accounted for upon completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets (Phase 4) as the culmination of a series of steps in a single settlement transaction. This guidance is limited to the accounting for the separation of the substitutional portion of the benefit obligation from the entity portion of the benefit obligation in a Japanese Employees' Pension Fund arrangement and the transfer of the substitutional portion and related assets to the Japanese government pursuant to the June 2001 Japanese Welfare Pension Insurance Law amendment.
715-30-55-76
At the time the assets are transferred to the government in an amount sufficient to complete the separation process, the transaction is considered to be complete and the elimination of the entire substitutional portion of the benefit obligation shall be accounted for as a settlement at that time. Immediately before the separation, in accordance with the guidance in the Settlements, Curtailments, and Certain Termination Benefits Subsections in this Subtopic, the entire projected benefit obligation would be remeasured at fair value, including the effects of anticipated future salary increases. That remeasurement would include the effects of any changes in actuarial assumptions as well as actual experience since the previous measurement date. The obligation would be measured at current market rates of interest that could be obtained in a transaction with a third-party, nongovernmental entity to settle the obligation. On the basis that the government had accepted responsibility for all substitutional benefits earned after Phase 2 approval, the remeasurement of the projected benefit obligation shall include only benefits earned under the substitutional arrangement before Phase 2 approval.
715-30-55-77
In accounting for the settlement of the substitutional portion of the obligation, a proportionate amount of the net gain or loss included in accumulated other comprehensive income related to the entire Employees' Pension Fund would be recognized as a settlement gain or loss. The proportionate amount of the net gain or loss to be recognized would be determined based on the proportion of the projected benefit obligation settled to the total projected benefit obligation, both of which would exclude the previously accrued salary progression for purposes of that calculation. After the separation, the remaining assets and obligation of the Employees' Pension Fund, along with the prior service costs included in accumulated other comprehensive income and gains and losses included in accumulated other comprehensive income would continue to be accounted for pursuant to the requirements of this Subtopic.
715-30-55-78
The difference between the obligation settled and the assets transferred to the government, determined pursuant to the government formula, shall be accounted for as a subsidy from the government pursuant to applicable generally accepted accounting principles (GAAP). The derecognition of previously accrued salary progression at the time of settlement, discussed in the preceding paragraph, shall be accounted for separately from the government subsidy.
715-30-55-79
See Example 5 (paragraph 715-30-55-121) for an illustration of the application of this guidance on a transfer to the Japanese government of the substitutional portion of employee pension fund liabilities.
715-30-55-80
The following guidance refers to provisions of German legislation related to an early retirement program; however, it shall not be considered a definitive interpretation of that legislation for any purpose.
715-30-55-81
The Altersteilzeit arrangement is an early retirement program in Germany designed to create an incentive for employees, within a certain age group, to transition from (full- or part-time) employment into retirement before their legal retirement age. The program was created by legislation in 1996 and through subsequent extensions is now scheduled to expire in 2009. Employers taking advantage of this legislation must sign a contract under the legal framework outlined in the legislation with the workers' council or unions or with the individual employees (for employees not within a workers' council or union) to qualify for subsidies from the government. The German government provides a subsidy (reimbursement) to an employer for the bonuses paid to the employee and the additional contributions paid into the German government pension scheme under an Altersteilzeit arrangement for a maximum of six years. To receive this subsidy, an employer must meet certain criteria (typically, an employer must hire replacement employees from currently registered unemployed persons or former trainees).
715-30-55-82
This guidance addresses specific features in Altersteilzeit arrangements. This guidance may also apply to other types of benefit arrangements with the same or similar terms.
715-30-55-83
Typical features of an Altersteilzeit arrangement include the following:
- a To enroll in an Altersteilzeit arrangement, an employee must sign an Altersteilzeit contract with the employer. The employee can sign the Altersteilzeit contract before being eligible to begin working under the Altersteilzeit arrangement. An employee may begin working under the Altersteilzeit arrangement only upon attaining the age such that upon completion of the Altersteilzeit period he or she will be eligible for the normal government retirement benefits (typically 63 years old for men and 62 years old for women). The Altersteilzeit period consists of the period from when the employee begins to work under the Altersteilzeit arrangement until the employee is no longer under a legal work arrangement with the employer (terminated from the entity). This period is generally one to six years, depending on the specific Altersteilzeit arrangement and the age of the participant.
- b An employer is required to allow participation in the Altersteilzeit arrangement without restriction until participation reaches 5 percent of the total work force. After 5 percent participation is achieved, an employer has, at its discretion, the right to determine whether employees are accepted into the Altersteilzeit arrangement. However, in some situations, a lower mandatory participation cap is agreed to between an employer and the workers' council.
- c In most cases, an employee is required to work for a minimum period of time with any employer before being eligible for the Altersteilzeit arrangement; prior employment with the present employer is not necessary.
- d The arrangement typically offers two alternative arrangements for participating employees:
- 1 Type I: participant works 50 percent of the normal full-time schedule for each year of the entire Altersteilzeit period and receives 50 percent of his or her salary each year.
- 2 Type II: participant works full-time for half of the Altersteilzeit period, the active period, and then does not work for the remaining half, the inactive period, and receives 50 percent of his or her salary each year during the entire Altersteilzeit period.
Under both alternatives, participants receive an annual bonus, which varies by employer, but will generally equal 10-15 percent of their most recent regular pay before the start of the Altersteilzeit period; thus, the regular combined paid compensation will normally equal about 60-65 percent of the participant's most recent regular pay before the start of the Altersteilzeit period. The employer also will make additional contributions into the German government pension scheme for participants (to compensate for the fact that the employee has not been working at his or her previous level during the Altersteilzeit period) during the entire Altersteilzeit period. Contributions into the German government pension scheme (as well as length of service) determine the amount of pension benefits the employee will receive from that scheme. Therefore, by making additional contributions into the German government pension scheme during the entire Altersteilzeit period, the pension benefits paid to the employees will be higher than they would have been had the contributions been based solely on the employees' active service during the Altersteilzeit period. - 1
- e Employees must provide service to the employer for the required portion of the Altersteilzeit period (the active period) to receive the full bonus. If a participant dies, voluntarily leaves the entity, or is otherwise terminated before fulfilling the service period requirement, the Altersteilzeit contract will be unwound and the total compensation received by the participant will be adjusted to the amount that the participant would have received if he or she had not participated in the Altersteilzeit arrangement (salary is contractually set at the amount the employee earned just before the Altersteilzeit period). For example, if an employee enters into a four-year Type II Altersteilzeit arrangement and leaves the entity after one year, the employee will receive (for the one year worked) all of his or her pre-Altersteilzeit period annual salary and will not receive any Altersteilzeit bonus.
- f During the inactive period under the Type II Altersteilzeit arrangement, participants are legally under a work contract with the employer (considered employees); however, an employee is not permitted to return to active work. Otherwise, the employer would lose any government subsidy.
- g Under the Type I arrangement, the employer can claim the subsidy for a replacement worker hired during the entire Altersteilzeit period. Under the Type II arrangement, an employer could only claim the subsidy for a replacement worker hired during the inactive Altersteilzeit period. Therefore, under the Type II arrangement, the reimbursement each year during the inactive period would be equivalent to two years of bonus payments and additional contributions made into the German government pension scheme.
715-30-55-84
The salary components of Type I and Type II Altersteilzeit arrangements (excluding the bonus and additional contributions into the German government pension scheme) shall be recognized over the period from the point at which the Altersteilzeit period begins until the end of the active service period. Additionally, the portion of the salary that is deferred under a Type II arrangement shall be discounted if payment is expected to be deferred for a period longer than one year.
715-30-55-85
The bonus feature and the additional contributions into the German government pension scheme (collectively, the additional compensation) under a Type II Altersteilzeit arrangement shall be accounted for as a postemployment benefit under the guidance in Topic 712. An entity shall recognize the additional compensation over the period from the point at which the employee signs the Altersteilzeit contract until the end of the active service period.
715-30-55-86
The employer shall recognize the government subsidy when it meets the necessary criteria and is entitled to the subsidy.
715-30-55-87
The following implementation guidance addresses issues relating to either the combination of two or more of an employer's pension plans into one plan, or the division of one pension plan into two or more separate pension plans.
715-30-55-88
An employer may combine several of its pension plans resulting in the assets of each predecessor pension plan being available to satisfy the previously existing obligations of the other. Except for prior service costs included in accumulated other comprehensive income, similar amounts of the predecessor pension plans shall be aggregated, and a single amortization schedule for each of the combined amounts shall be used in this situation. That is, the amortization of the transition asset or obligation remaining in accumulated other comprehensive income shall reflect a reasonably weighted average of the remaining amortization periods used by the separate pension plans for that item and the minimum amortization of the aggregate net gain or loss included in accumulated other comprehensive income shall reflect the average remaining service period of the combined employee group. The prior service cost included in accumulated other comprehensive income of each pension plan at the time of the combination shall continue to be amortized as previously determined based on specific employee groups covered.
715-30-55-89
See Example 6 (paragraph 715-30-55-122) for an illustration of the accounting when two plans are combined.
715-30-55-90
An employer may divide a pension plan into two or more separate pension plans. Using paragraph 715-30-35-79 as guidance, an employer shall allocate the transition asset or obligation remaining in accumulated other comprehensive income and the net gain or loss included in accumulated other comprehensive income, in proportion to the projected benefit obligations of the two surviving plans. Prior service cost included in accumulated other comprehensive income shall be allocated to the surviving plans based on the applicable individuals included in the employee groups covered.
715-30-55-91
See Example 7 (paragraph 715-30-55-124) for an illustration of the division of one pension plan into separate pension plans.
715-30-55-92
An employer may incorporate a division of its operations, subsequently spin it off to owners of the entity, and transfer to the new entity's pension plan either a pension benefit obligation related to the employees transferred as part of the spinoff or plan assets. Paragraph 845-10-55-1 provides guidance on the accounting for such a transaction in a spinoff of nonmonetary assets to owners.
Illustrations
715-30-55-93
This Example illustrates the prior service cost amortization guidance in paragraphs 715-30-35-11 and 715-30-35-13 and is based on the expected future years of service of participants active at the date of the amendment.
715-30-55-94
The following Cases illustrate:
- aAssignment of equal amounts of cost to future years of service (Case A)
- bUse of straight line amortization to assign costs over average remaining service period (Case B).
715-30-55-95
Cases A and B share all of the following calculations and assumptions.
715-30-55-96
On January 1, 20X0, Entity A grants retroactive credit for prior service pursuant to a plan amendment. The amendment generates prior service cost of $750,000 that is recognized as an increase in the pension liability and a corresponding charge to other comprehensive income. The prior service cost resulting from the plan amendment is subsequently amortized as a component of net periodic pension cost based on the expected future years of service of active participants. Other comprehensive income is adjusted each period as prior service cost is amortized.
715-30-55-97
The following table illustrates the calculation of the expected future years of service for the defined benefit plan of Entity A. At the date of the amendment (January 1, 20X0), the entity has 100 employees who are expected to receive benefits under the plan. Five percent of that group (5 employees) are expected to leave (either retire or quit) in each of the next 20 years. Employees hired after that date do not affect the amortization. Initial estimates of expected future years of service related to each amendment are subsequently adjusted only for a curtailment.
-
Determination of Expected Years of Service Service Years Rendered in Each Year Year Individuals Future Service Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 A1-A5 5 5 B1-B5 10 5 5 C1-C5 15 5 5 5 D1-D5 20 5 5 5 5 E1-E5 25 5 5 5 5 5 F1-F5 30 5 5 5 5 5 5 G1-G5 35 5 5 5 5 5 5 5 H1-H5 40 5 5 5 5 5 5 5 5 I1-I5 45 5 5 5 5 5 5 5 5 5 J1-J5 50 5 5 5 5 5 5 5 5 5 5 K1-K5 55 5 5 5 5 5 5 5 5 5 5 5 L1-L5 60 5 5 5 5 5 5 5 5 5 5 5 5 M1-M5 65 5 5 5 5 5 5 5 5 5 5 5 5 5 N1-N5 70 5 5 5 5 5 5 5 5 5 5 5 5 5 5 O1-O5 75 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 P1-P5 80 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 Q1-Q5 85 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 R1-R5 90 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 S1-S5 95 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 T1-T5 100 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 "1,050" Service Years Rendered 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 Amortization Fraction "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050"
715-30-55-98
Calculation of the expected future years of service considers population decrements based on the actuarial assumptions and is not weighted for benefits or compensation.
715-30-55-99
In this Case, each expected future service year is assigned an equal share of the initially determined prior service cost. The portion of prior service cost to be recognized in net periodic pension cost in each of the future years is determined by the service years rendered in that year.
-
Employers' Accounting for Pensions Amortization of Prior Service Cost Year Beginning- of-Year Balance Amortization Rate Amortization End- of-Year Balance 20X0 " $750,000 " 100/1050 " $71,429 " " $678,571 " 20X1 " 678,571 " 95/1050 " 67,857 " " 610,714 " 20X2 " 610,714 " 90/1050 " 64,286 " " 546,428 " 20X3 " 546,428 " 85/1050 " 60,714 " " 485,714 " 20X4 " 485,714 " 80/1050 " 57,143 " " 428,571 " 20X5 " 428,571 " 75/1050 " 53,571 " " 375,000 " 20X6 " 375,000 " 70/1050 " 50,000 " " 325,000 " 20X7 " 325,000 " 65/1050 " 46,429 " " 278,571 " 20X8 " 278,571 " 60/1050 " 42,857 " " 235,714 " 20X9 " 235,714 " 55/1050 " 39,286 " " 196,428 " 20Y0 " 196,428 " 50/1050 " 35,714 " " 160,714 " 20Y1 " 160,714 " 45/1050 " 32,143 " " 128,571 " 20Y2 " 128,571 " 40/1050 " 28,571 " " 100,000 " 20Y3 " 100,000 " 35/1050 " 25,000 " " 75,000 " 20Y4 " 75,000 " 30/1050 " 21,429 " " 53,571 " 20Y5 " 53,571 " 25/1050 " 17,857 " " 35,714 " 20Y6 " 35,714 " 20/1050 " 14,286 " " 21,428 " 20Y7 " 21,428 " 15/1050 " 10,714 " " 10,714 " 20Y8 " 10,714 " 10/1050 " 7,143 " " 3,571 " 20Y9 " 3,571 " 5/1050 " 3,571 " -
715-30-55-100
To reduce the complexity and detail of the computations shown in Case A, alternative amortization approaches that recognize the cost of retroactive amendments as a component of net periodic pension cost more quickly may be consistently used under the guidance in paragraph 715-30-35-13. In this Case, Entity A elects to use straight-line amortization over the average remaining service period of employees expected to receive benefits (1,050 future service years/100 employees = 10.5 years), resulting in the following amortization.
Amortization of Prior Service Cost Year Beginning-of-Year Balance Amortization (a) End-of-Year Balance 20X0 " $750,000 " " $71,429 " " $678,571 " 20X1 " 678,571 " " 71,429 " " 607,142 " 20X2 " 607,142 " " 71,429 " " 535,713 " 20X3 " 535,713 " " 71,429 " " 464,284 " 20X4 " 464,284 " " 71,429 " " 392,855 " 20X5 " 392,855 " " 71,429 " " 321,426 " 20X6 " 321,426 " " 71,429 " " 249,997 " 20X7 " 249,997 " " 71,429 " " 178,568 " 20X8 " 178,568 " " 71,429 " " 107,139 " 20X9 " 107,139 " " 71,429 " " 35,710 " 20Y0 " 35,710 " " 35,710 " - (a) "750,000 ÷ 10.5 = 71,429"
715-30-55-101
This Example illustrates the guidance in paragraphs applicable to gains and losses. This Subtopic provides for delayed recognition in net periodic pension cost of the effects of a number of types of events that change the measures of the projected benefit obligation and the fair value of plan assets. Those events include retroactive plan amendments and gains and losses. Gains and losses include the effects of changes in assumptions.
715-30-55-102
The following Cases illustrate the accounting for different types of gains and losses:
- aLiability loss (Case A)
- bAsset gain (Case B)
- cAsset loss and liability gain (Case C).
715-30-55-103
Each of the following Cases starts with an assumed beginning-of-the-year funded status and shows how a series of events changes the projected benefit obligation or the plan assets and how the effects of those events are recognized in the financial statements. Any change in the projected benefit obligation or the plan assets (other than contributions and benefit payments) either is initially recognized in other comprehensive income or is included in net periodic pension cost for the period. Employer contributions to a funded plan decrease a recognized pension liability or increase a recognized pension asset. Benefit payments from a funded plan reduce the pension obligation and the plan assets equally, with no effect on the employer's statement of financial position.
715-30-55-104
For simplicity, all illustrations ignore the effects of income taxes, and all contributions and benefit payments are assumed to occur on the last day of the year. Also, assumed discount rates and expected long-term rates of return are included for illustrative purposes only and are not meant to represent assumptions that would be appropriate at any given time. In all Cases, the service cost component is assumed as an input rather than calculated as part of the illustration.
715-30-55-105
When Entity B's plan assets and obligations were measured at December 31, 20X1, the amount of the projected benefit obligation was not equal to the expected amount. Because the discount rate had declined to 9 percent and for various other reasons not specifically identified, the projected benefit obligation was higher than had been projected (a loss had occurred). The results were as follows.
-
Projected for 20X1 Actual for 20X1 and Projected for 20X2 Assumptions: Discount rate 10.00% 9.00% Expected long-term rate of return on plan assets 10.00% 10.00% Average remaining service 10 years 10 years -
Actual 12/31/X0 For 20X1 Projected 12/31/X1 Actual 12/31/X1 For 20X2 Projected 12/31/X2 (Amounts in thousands) Projected benefit obligation " $(1,000)" " $(1,060)" " $(1,200)" " $(1,266)" (a) Plan assets at fair value 800 880 880 968 (b) Funded status and recognized liability $(200) $(180) $(320) $(298) Amounts recognized in accumulated other comprehensive income: Transition obligation $200 $180 $180 $160 Prior service cost - - - - Net (gain) or loss - - 140 138 $200 $180 $320 $298 Service cost component $60 $72 Interest cost component 100 108 Expected return on assets (80) (88) Market-related value of assets $800 $880 "Actual return on assets— (increase) decrease" (80) Amortization of: Transition obligation 20 20 Prior service cost - - Net (gain) or loss - (c) 2 (c) Net periodic pension cost $100 $114 Contribution $100 $114 Benefits paid $100 $114 (a) "(Actual projected benefit obligation at December 31, 20X1) + (service component) + (interest component) − (benefits paid)." (b) "(Actual plan assets at December 31, 20X1) + (expected return on assets) + (contributions) − (benefits paid)." (c) The minimum amortization of the net gain or loss included in beginning accumulated other comprehensive income (see paragraph 715-30-35-24) is calculated as follows. 20X1 20X2 Net (gain) or loss included in beginning accumulated other comprehensive income $- $140 Plus asset gain or less asset loss not yet in market-related value of assets at 1/1--(fair value of plan assets) - (market-related value of plan assets) - - Net (gain) or loss included in beginning accumulated other comprehensive income subject to amortization - 140 Corridor = 10% of the greater of projected benefit obligation or market-related value of assets at 1/1 100 120 Net (gain) or loss included in beginning accumulated other comprehensive income outside corridor - 20 x 1/average remaining service 0.10 0.10 Amortization recognized in net periodic pension cost $- $2
715-30-55-106
When Entity B's plan assets and obligations were measured at December 31, 20X2, the amount of plan assets was not equal to the expected amount because of market performance better than the expected or assumed 10 percent. The results were as follows.
-
Projected for 20X2 Actual for 20X2 and Projected for 20X3 Assumptions: Discount rate 9.00% 9.00% Expected long-term rate of return on plan assets 10.00% 10.00% Average remaining service 10 years 10 years -
Actual 12/31/X1 For 20X2 Projected 12/31/X2 Actual 12/31/X2 For 20X3 Projected 12/31/X3 (Amounts in thousands) Projected benefit obligation " $(1,200)" " $(1,266)" " $(1,266)" " $(1,345)" Plan assets at fair value 880 968 " 1,068 " " 1,167 " Funded status and recognized liability $(320) $(298) $(198) $(178) Amounts recognized in accumulated other comprehensive income: Transition obligation $180 $160 $160 $140 Prior service cost - - - - Net (gain) or loss 140 138 38 38 $320 $298 $198 $178 Service cost component $72 $76 Interest cost component 108 114 Expected return on assets (88) (99) (a) Market-related value of assets $880 $988 (b) Actual return on assets—(increase) decrease (80) (188) Amortization of: Transition obligation 20 20 Prior service cost - - Net (gain) or loss 2 (c) - (c) Net periodic pension cost $114 $111 Contribution $114 $111 Benefits paid $114 $111 (a) "Expected return on plan assets = (expected long-term rate of return on plan assets) × (market-related value of plan assets). If contributions occurred other than at the end of the year, market-related value would consider those amounts." (b) Market-related asset values may be calculated in a variety of ways. This Case uses an approach that adds in 20 percent of each of the last 5 years' gains and losses. The only objective of the market-related calculation is to reduce the volatility of net periodic pension cost. Market-related value of assets at 1/1 $880 Expected return on assets 88 Contributions 114 Benefits paid (114) 20% of last five years' asset gains and (losses) 20 Market-related value of assets at 12/31 $988 (c) The minimum amortization of the net gain or loss included in beginning accumulated other comprehensive income (see paragraph 715-30-35-24) is calculated as follows. 20X2 20X3 Net (gain) or loss included in beginning accumulated other comprehensive income $140 $38 Plus asset gain or less asset loss not yet in market-related value of assets at 1/1--(fair value of plan assets) - (market-related value of plan assets) - 80 Net (gain) or loss included in beginning accumulated other comprehensive income subject to amortization 140 118 Corridor = 10% of the greater of projected benefit obligation or market-related value of assets at 1/1 120 127 Net (gain) or loss included in beginning accumulated other comprehensive income outside corridor 20 - x 1/average remaining service 0.10 0.10 Amortization recognized in net periodic pension cost $2 $-
715-30-55-107
When Entity B's plan assets and obligations were measured at December 31, 20X3, both an asset loss and a liability gain were discovered.
-
Projected for 20X3 Actual for 20X3 and Projected for 20X4 Assumptions: Discount rate 9.00% 9.25% Expected long-term rate of return on plan assets 10.00% 10.00% Average remaining service 10 years 10 years -
Actual 12/31/X2 For 20X3 Projected 12/31/X3 Actual 12/31/X3 For 20X4 Projected 12/31/X4 (Amounts in thousands) Projected benefit obligation " $(1,266)" " $(1,345)" " $(1,320)" " $(1,409)" Plan assets at fair value " 1,068 " " 1,167 " " 1,097 " " 1,206 " Funded status and recognized liability (198) (178) (223) (203) Amounts recognized in accumulated other comprehensive income: Transition obligation 160 140 140 120 Prior service cost - - - - Net (gain) or loss 38 38 83 83 $198 $178 $223 $203 Service cost component $76 $79 Interest cost component 114 122 Expected return on assets (99) (109) Market-related value of assets $988 " $1,093 " (a) Actual return on assets—(increase) decrease (188) (29) Amortization of: Transition obligation 20 20 Prior service cost - - Net (gain) or loss - (b) - (b) Net periodic pension cost $111 $112 Contribution $111 $112 Benefits paid $111 $112 (a) Market-related asset values may be calculated in a variety of ways. This Case uses an approach that adds in 20 percent of each of the last 5 years' gains and losses. The only objective of the market-related calculation is to reduce the volatility of net periodic pension cost. Market-related value of assets at 1/1 $988 Expected return on assets 99 Contributions 111 Benefits paid (111) 20% of last five years' asset gains and (losses) = .20 (100 - 70) 6 Market-related value of assets at 12/31 " $1,093 " (b) The minimum amortization of the net gain or loss included in beginning accumulated other comprehensive income (see paragraph 715-30-35-24) is calculated as follows. 20X3 20X4 Net (gain) or loss included in beginning accumulated other comprehensive income $38 $83 Plus asset gain or less asset loss not yet in market-related value of assets at 1/1— (fair value of plan assets) - (market-related value of plan assets) 80 4 Net (gain) or loss included in beginning accumulated other comprehensive income subject to amortization 118 87 Corridor = 10% of the greater of projected benefit obligation or market-related value of assets at 1/1 127 132 Net (gain) or loss included in beginning accumulated other comprehensive income outside corridor x 1/average remaining service - - 0.10 0.10 Amortization recognized in net periodic pension cost $- $-
715-30-55-108
This Example illustrates the determination of benefits for a pension plan with a flat-benefit and a pay-related formula following the guidance in paragraphs .
715-30-55-109
The following Cases illustrate different assumed service periods:
- a30-year assumed service period (Case A)
- b20-year assumed service period (Case B)
- c40-year assumed service period (Case C).
715-30-55-110
Cases A, B, and C share the following assumptions. An employer has a pension plan that provides a pension benefit that is the greater of two formulas. Formula A provides a flat benefit of $450 for each of the first 20 years of an employee's service, but no additional benefits are earned for years of service beyond 20 years; Formula B provides a benefit equal to 1 percent of final pay for each year of service. It is assumed that an employee starts at a salary of $11,000 in Year 1 and receives a $1,000 increase in salary for each year of service. To simplify the illustration, the actuarial present values of the accumulated benefit obligation and projected benefit obligation have not been determined. Rather, those obligations are expressed in terms of the annual pension benefits that begin when the employee retires.
715-30-55-111
In this Case, it is assumed that an employee will retire at the end of Year 30 with a final salary of $40,000. For that employee, Formula A provides an annual pension benefit of $9,000 for 30 years of service ($450 for each of the first 20 years of service and no additional benefits for Years 21-30); Formula B provides an annual pension benefit of $12,000 for 30 years of service (30 x 1% x $40,000 or $400 for each year of service). The attribution of pension benefits to years of service for Formulas A and B is presented in the following table.
- Chart I
- Attribution
- Formula A versus Formula B
-
715-30-55-112
The following table shows the increase in accumulated and projected benefits for each year of service for the employee under Formulas A and B. As can be seen, Formula A provides a greater accumulated and projected benefit for Years 1-20. In the following table and the table in paragraph 715-30-55-114, ABO depicts the accumulated benefit obligation and PBO depicts the projected benefit obligation.
- Chart II
- Accumulated and Projected Benefit Obligation
- Formula A versus Formula B
715-30-55-113
Beginning in Year 21, no additional pension benefits are provided under Formula A. At that point, Formula B begins to provide a portion of the total projected benefit attributed to Years 21-30. The additional pension benefit expected to be provided under Formula B for service in Years 21-30 is $3,000 ($9,000 accumulated benefit at Year 20 under Formula A as compared with $12,000 accumulated benefit at Year 30 under Formula B); that additional pension benefit is attributed to service ratably over Years 21-30 ($300 per year). Note that although no additional pension benefits are earned in Years 21 and 22 (see projected benefit obligation in the preceding table) because the projected benefit under Formula B in those years is less than $9,000, pension benefits are attributed to those years of service based on the total incremental pension benefit for Years 21-30. Attribution of total projected benefits to years of service is illustrated in the following table.
- Chart III
- Attribution of Benefits over Service
-
715-30-55-114
Thus, while the accumulated benefit obligation at any point in time represents the greater of the pension benefits determined under Formulas A and B, the projected benefit obligation is determined on the basis of the formula providing the greater pension benefit (Formula A) until an allocation of incremental pension benefits for the remaining service period using another formula provides a greater pension benefit allocated to service in the current year. In this Case, the allocation of $3,000 of incremental benefits to Years 21-30 under Formula B provides a greater benefit allocated to service in those years ($300 per year) than Formula A would allocate ($0). The following table presents the increase in the accumulated benefit obligation and projected benefit obligation when the plan benefits are the greater of those determined under Formulas A and B.
- Chart IV
- Accumulated and Projected Benefit Obligation
- Greater of Benefit under Formulas A and B
-
715-30-55-115
The accumulated and projected benefit obligation for Years 1-30 are as follows.
-
Year Accumulated Benefit Obligation Projected Benefit Obligation 1-19 (a) (a) 20 " $9,000 " (a) " $9,000 " (a) 21 " 9,000 " (a) " 9,300 " (b) 22 " 9,000 " (a) " 9,600 " (b) 23 " 9,000 " (a) " 9,900 " (b) 24 " 9,000 " (a) " 10,200 " (b) 25 " 9,000 " (a) " 10,500 " (b) 26 " 9,360 " (c) " 10,800 " (b) 27 " 9,990 " (c) " 11,100 " (b) 28 " 10,640 " (c) " 11,400 " (b) 29 " 11,310 " (c) " 11,700 " (b) 30 " 12,000 " (c) " 12,000 " (b) (a) "$450 × years of service, not to exceed 20 years (Formula A)." (b) Formula A benefits earned through Year 20 plus attribution of additional projected benefits under Formula B (for 21-30 years of service) in proportion to the number of completed years of service to the number of years of service that are expected to be completed for the period during which Formula B is applied. (c) One percent of salary for the year noted for each year of service already rendered (Formula B).
715-30-55-116
In this Case, it is assumed that an employee will retire at the end of Year 20 with a final salary of $30,000. For that employee, Formula A provides an annual pension benefit of $9,000 ($450 for each year of service); Formula B provides an annual pension benefit of $6,000 (20 x 1% x $30,000 or $300 for each year of service). Since Formula A provides the greater benefit in each year, attribution will be determined under Formula A. The accumulated benefit obligation and projected benefit obligation will be equal in Years 1-20 since Formula A is not pay-related.
715-30-55-117
In this Case, it is assumed than an employee will retire at the end of Year 40 with a final salary of $50,000. For that employee, Formula A provides an annual pension benefit of $9,000 for 40 years of service ($450 for each of the first 20 years of service and no additional benefits for service in Years 21-40); Formula B provides an annual pension benefit payable at retirement of $20,000 for 40 years of service (40 x 1% x $50,000 or $500 for each year of service). Since Formula B provides the greater pension benefit in each year, attribution of the projected benefit obligation will be determined under Formula B for all years of service. The accumulated benefit obligation, however, continues to be determined for each year of service by the formula that provides the greater accumulated benefit.
715-30-55-118
This Example illustrates the guidance in paragraph 715-30-55-14 relating to attribution of pension benefits to a qualified and to an excess benefit pension plan.
715-30-55-119
In this Example, a pension plan's formula is an annual pension benefit of 2 percent of final pay for each year of service. It is assumed than an employee starts at a salary of $200,000 in Year 1, receives annual salary increases of $15,000, and retires at the end of 21 years at a salary of $500,000. It is further assumed that the limitation imposed by the tax law for annual pension benefit payments is $90,000 in Year 1 and that the limitation under the existing law will increase to permit annual pension benefit payments of $120,000 for all the years the employee will receive benefit payments.
715-30-55-120
Attribution of the accumulated benefit obligation and projected benefit obligation for the employee is as follows. To simplify the illustration, the actuarial present values of the accumulated and projected benefit obligation have not been determined. Rather, those obligations are expressed in terms of the annual pension benefits that begin when the employee retires.
-
Total Qualified Pension Plan Excess Benefit Pension Plan Year of Service Salary Accumulated Benefit Obligation Projected Benefit Obligation Accumulated Benefit Obligation Projected Benefit Obligation Accumulated Benefit Obligation Projected Benefit Obligation 1 " $200,000 " " $4,000 " " $10,000 " " $4,000 " " $10,000 " 2 " 215,000 " " 8,600 " " 20,000 " " 8,600 " " 20,000 " 3 " 230,000 " " 13,800 " " 30,000 " " 13,800 " " 30,000 " 4 " 245,000 " " 19,600 " " 40,000 " " 19,600 " " 40,000 " 5 " 260,000 " " 26,000 " " 50,000 " " 26,000 " " 50,000 " 6 " 275,000 " " 33,000 " " 60,000 " " 33,000 " " 60,000 " 7 " 290,000 " " 40,600 " " 70,000 " " 40,600 " " 70,000 " 8 " 305,000 " " 48,800 " " 80,000 " " 48,800 " " 80,000 " 9 " 320,000 " " 57,600 " " 90,000 " " 57,600 " " 90,000 " 10 " 335,000 " " 67,000 " " 100,000 " " 67,000 " " 100,000 " 11 " 350,000 " " 77,000 " " 110,000 " " 77,000 " " 110,000 " 12 " 365,000 " " 87,600 " " 120,000 " " 87,600 " " 120,000 " 13 " 380,000 " " 98,800 " " 130,000 " " 98,800 " " 120,000 " " $10,000 " 14 " 395,000 " " 110,600 " " 140,000 " " 110,600 " " 120,000 " " 20,000 " 15 " 410,000 " " 123,000 " " 150,000 " " 120,000 " " 120,000 " " $3,000 " " 30,000 " 16 " 425,000 " " 136,000 " " 160,000 " " 120,000 " " 120,000 " " 16,000 " " 40,000 " 17 " 440,000 " " 149,600 " " 170,000 " " 120,000 " " 120,000 " " 29,600 " " 50,000 " 18 " 455,000 " " 163,800 " " 180,000 " " 120,000 " " 120,000 " " 43,800 " " 60,000 " 19 " 470,000 " " 178,600 " " 190,000 " " 120,000 " " 120,000 " " 58,600 " " 70,000 " 20 " 485,000 " " 194,000 " " 200,000 " " 120,000 " " 120,000 " " 74,000 " " 80,000 " 21 " 500,000 " " 210,000 " " 210,000 " " 120,000 " " 120,000 " " 90,000 " " 90,000 "
715-30-55-121
This Example illustrates the guidance in paragraphs relating to a transfer to the Japanese government of the substitutional portion of employee pension fund liabilities.
Total Employees Pension Fund Before Separation(a) Effect of Separation After Separation Accumulated benefit obligation " $(10,500)" " $5,000 " (b) " $(5,500)" Effects of projected future wage levels " (1,600)" 750 (c) (850) Projected benefit obligation " (12,100)" " 5,750 " " (6,350)" Plan assets at fair value " 6,420 " " (3,000)" (d) " 3,420 " Funded status " (5,680)" " 2,750 " (e) " (2,930)" Changes in plan assets and benefit obligations recognized in accumulated other comprehensive income: Transition obligation 50 - 50 Prior service cost (credit) (540) - (540) Net (gain) loss " 4,405 " " (1,941)" (f) " 2,464 " Total amount recognized in accumulated other comprehensive income " $(3,915)" " $1,941 " " $(1,974)" (a) Employee Pension Fund assets and obligations would be remeasured at fair value immediately before the separation transaction. (b) Assumed value of substitutional accumulated benefit obligation for purposes of illustration. (c) Assumed value of future salary levels (salary progression) related to substitutional benefit obligation at time of settlement for purposes of this Example. (d) Assumed value of assets required to be transferred to the government pursuant to the government formula for purposes of this Example. (e) "Difference between the fair value of the obligation "settled" with the government and the assets required to be transferred to the government. That amount, less the effect of the reversal of future salary progression ($750), is the government subsidy that shall be separately accounted for and disclosed." (f) "Calculated as the ratio of the obligation settled ($5,000) to the total Employees' Pension Fund obligation immediately before settlement ($11,350), both of which exclude the effect of future salary progression related to the substitutional portion, times the net gain or loss included in accumulated other comprehensive income immediately before settlement."
715-30-55-122
This Example illustrates the guidance in paragraph 715-30-55-88 on the combination of two plans.
715-30-55-123
In this Example, an employer has two pension plans (Plan A and Plan B) that are combined at December 31, 20X0. The following shows the assumptions and methods of amortizing pension amounts initially recognized in other comprehensive income and the funded status of each pension plan immediately before and after the combination of Plan A and Plan B.
- December 31, 20X0—Before Combination of Plan A and Plan B
-
Plan A Plan B Assumptions: Weighted-average discount rate 10% 9.25% Expected long-term rate of return on plan assets 10% 10% Average remaining service period 17 years 15 years "Number of employees as of December 31, 20X0 expected to receive benefits under the pension plan" 300 420 Amortization method: Prior service cost Straight-line amortization over average remaining service period of employees expected to receive benefits (17 years) Straight-line amortization over average remaining service period of employees expected to receive benefits (15 years) -
Plan A Plan B Projected benefit obligation $(502) $(640) Plan assets at fair value 804 205 Funded status and recognized asset (liability) $302 $(435) Amounts recognized in accumulated other comprehensive income: Net (gain) loss $(114) $41 Prior service cost (credit) 120 321 $6 $362 - December 31, 20X0—After Combination of Plan A and Plan B
-
Combined Plan AB Assumptions: Weighted-average discount rate 9.6% (a) Expected long-term rate of return on plan assets 10% (b) Average remaining service period 15.8 years (c) "Number of employees as of December 31, 20X0 expected to receive benefits under the pension plan" 720 Amortization method: Prior service cost The existing prior service costs continue to be amortized on the bases applied before the combination Net gain or loss Minimum amortization specified in paragraph 715-30-55-50 (average remaining service period is 15.8 years)(c) Projected benefit obligation " $(1,142)" Plan assets at fair value " 1,009 " Funded status and recognized asset (liability) $(133) Amounts recognized in accumulated other comprehensive income: Net (gain) loss $(73) Prior service (credit) cost 441 $368 (a) "The weighted-average assumed discount rate reflects the rates at which the combined pension benefits could be effectively settled. (For purposes of this Example, 9.6 percent is presumed to be the appropriate rate. It was not actually calculated using any of the data for the previously separate plans.)" (b) The expected long-term rate of return on plan assets does not change because both pension plans used the same rate. (c) The average remaining service period of employees expected to receive benefits under the pension plan is weighted by the number of covered employees from each group as follows: (17 years × 300 ÷ 720) + (15 years × 420 ÷ 720) = 15.8 years (rounded). That should be the same period that would be determined by a new calculation for the combined group.
715-30-55-124
This Example illustrates the guidance in paragraph 715-30-55-90 relating to the division of one pension plan into separate pension plans.
715-30-55-125
In this Example, an employer has a pension plan that covers employees of the parent entity and its consolidated subsidiaries (Subsidiaries B and C). The employer divides its pension plan into three separate pension plans (Plan A, Plan B, and Plan C) that are sponsored by the parent entity and Subsidiaries B and C, respectively.
715-30-55-126
The following shows the funded status of the pension plans immediately before and after the division.
-
Before Division After Division "(Parent) Plan ABC" (Parent) Plan A (Subsidiary B) Plan B (Subsidiary C) Plan C Projected benefit obligation " $(90,000)" " $(54,000)" (a) " $(18,000)" (a) " $(18,000)" (a) Plan assets at fair value " 160,000 " " 132,000 " (b) " 15,000 " (b) " 13,000 " (b) Funded status and recognized asset (liability) " $70,000 " " $78,000 " " $(3,000)" " $(5,000)" Amounts recognized in accumulated other comprehensive income: Net gain " $(55,000)" " $(33,000)" (c) " $(11,000)" (c) " $(11,000)" (c) Prior service cost " 25,000 " " 17,500 " (d) " 5,000 " (d) " 2,500 " (d) Transition asset " (40,000)" " (24,000)" (c) " (8,000)" (c) " (8,000)" (c) " $(70,000)" " $(39,500)" " $(14,000)" " $(16,500)" (a) Allocation based on individual employees covered by each plan. (b) Allocation determined by employer. (Example presumes that no regulatory requirements apply.) (c) "Allocation based on percent of total projected benefit obligation ($90,000) assumed by each pension plan. For Plans A, B, and C, that is 60 percent, 20 percent, and 20 percent, respectively." (d) Allocation based on applicable individual employees covered by each plan. (Example presumes prior service cost not allocable on the same percentage basis as projected benefit obligation assumed by each pension plan.)
715-30-55-127
The journal entries to account for the division of the pension plan follow.
- Parent Entity
-
Pension asset " $8,000 " Accumulated other comprehensive income " 30,500 " Investment in Subsidiary B " $17,000 " Investment in Subsidiary C " 21,500 " - To record the transfer of pension assets, obligations, and amounts included in accumulated other comprehensive income from the parent entity to Subsidiaries B and C.
- Subsidiary B
-
Stockholder's equity (a) " $17,000 " Pension liability " $3,000 " Accumulated other comprehensive income " 14,000 " (a) The accounting within the equity section is not addressed in this Example. - To record the receipt of pension assets, obligations, and amounts included in accumulated other comprehensive income from the parent entity.
- Subsidiary C
-
Stockholder's equity (a) " $21,500 " Pension liability " $5,000 " Accumulated other comprehensive income " 16,500 " (a) The accounting within the equity section is not addressed in this Example. - To record the receipt of pension assets, obligations, and amounts included in accumulated other comprehensive income from the parent entity.
715-30-55-127A
For the purposes of this Example, a cash balance plan has the following characteristics:
- a A defined principal-crediting rate as a percentage of salary
- b A defined, noncontingent interest-crediting rate that entitles participants to future interest credits at a stated, fixed rate until retirement.
Settlements, Curtailments, and Certain Termination Benefits
715-30-55-128
This Subsection is an integral part of the requirements of this Subtopic. This Subsection provides additional guidance and illustrations that address the application of accounting requirements to specific aspects of accounting for matters related to settlements, curtailments, and certain termination benefits related to defined benefit pension plans. The guidance and illustrations that follow may be based on provisions of law that are subject to change. These assumptions about the law are for illustrative purposes only.
Implementation Guidance
715-30-55-129
This implementation guidance is organized in the following categories:
- aRelationship of settlements and curtailments to other events
- bSettlements
- cCurtailments
- dCertain termination benefits
- ePresentation matters.
715-30-55-130
Paragraphs establish general guidance on the relationship of settlements and curtailments to other events. That guidance is affected by whether there is a successor pension plan. A new pension plan that is established by an employer, or one or more existing pension plans that are amended by the employer, to provide for the accrual of defined pension benefits for the future services of present employees that were previously covered by another pension plan (old plan) sponsored by that employer shall be considered a successor pension plan except under any of the following conditions:
- aThe new plan's pension benefit formula or the amendment or amendments to the existing pension plan(s) provide for accrual of only insignificant defined pension benefits for those employees.
- bThe new or existing pension plan or plans cover only an insignificant number of employees previously covered by the old plan.
715-30-55-131
The guidance in the Settlements, Curtailments, and Certain Termination Benefits Subsections of this Subtopic does not apply to an employer's withdrawal from a multiemployer pension plan, and, therefore, if the employer withdraws from a multiemployer pension plan and establishes a pension plan for its employees, that pension plan is not considered to be a successor pension plan.
715-30-55-132
An employer may terminate its pension plan, settle a pension benefit obligation, withdraw excess plan assets, and establish a successor pension plan that has the same pension benefit formula. In this situation, a settlement occurs but a curtailment does not. Although employees no longer accrue pension benefits under the terminated pension plan, they do accrue pension benefits under the successor pension plan. From an accounting viewpoint, those two pension plans are viewed as one pension plan because, in substance, the pension plan has not been terminated. The only transactions requiring accounting recognition in the employer's financial statements are the settlement and the withdrawal of excess plan assets. See paragraphs for guidance on whether a settlement or curtailment has occurred if defined benefits continue to be provided for future services. If the successor pension plan provides (reduced) increased pension benefits for all years of employees' future service, that change in the benefit formula is accounted for as a (negative) pension plan amendment. See paragraph 715-30-55-54 for guidance on negative plan amendments.
715-30-55-133
A settlement of the pension benefit obligation as part of a pension plan termination (with no successor pension plan) may occur in a financial reporting period that differs from the period in which the effects of the curtailment resulting from the pension plan termination ordinarily would be recognized. The effects of the settlement and the effects of the curtailment that result from a pension plan termination shall be recognized in accordance with paragraphs and , respectively, which may result in the effects of those events being recognized in different periods. See Example 8 (paragraph 715-30-55-236) for an illustration of a termination and a settlement recognized in different periods.
715-30-55-134
If an employer's disposal of a component of an entity (see paragraph 715-30-55-193) results in a termination of some employees' services earlier than expected but does not significantly reduce the expected years of future service of present employees covered by the pension plan, the effects of the reduction in the work force on the pension plan should be measured in the same manner as a curtailment (see paragraphs ) to determine the gain or loss on the disposal pursuant to paragraph 205-20-45-3. Although the reduction in the work force does not result in a significant reduction in the expected years of future service of present employees covered by the pension plan and, therefore, a curtailment does not occur, measuring the effects of the reduction in the work force in the same manner as a curtailment (see paragraphs ) is appropriate for purposes of determining the gain or loss on the disposal.
715-30-55-135
As part of the sale of a component of an entity there may be a transfer of a pension benefit obligation to the purchaser (that is, the purchaser assumes the pension benefit obligation for specific employees. Whether both a settlement and a curtailment occur depends on the facts and circumstances.
715-30-55-136
A settlement occurs if the criteria in the definition of the term settlement are satisfied. If there is any reasonable doubt that the purchaser will meet the pension benefit obligation assumed under the sales agreement and the seller remains contingently liable for that pension benefit obligation, a settlement does not occur.
715-30-55-137
A curtailment occurs if the sale significantly reduces the expected years of future service of present employees covered by the employer's pension plan. Even if a curtailment does not occur, the effects of the reduction in the work force should be considered for purposes of determining the gain or loss on the sale.
715-30-55-138
See paragraph 715-60-55-111 for a discussion of the interaction of the termination of a postretirement plan with a related increase in an employer's obligation for pension benefits.
715-30-55-139
The Settlement, Curtailments, and Special Terminations Subsection of Section 715-30-35 provides the general guidance on settlement transactions. The following settlement related implementation guidance is organized in three categories:
- aMeeting the criteria for settlement
- bSettlement measurement issues
- cApplication of accounting policy.
715-30-55-140
A transaction that does not meet all of the criteria in the definition of the term settlement does not constitute a settlement for purposes of applying the guidance in the Settlement, Curtailment, and Certain Termination Benefits Subsections of this Subtopic. One of the criteria is that the transaction is irrevocable. In this context, irrevocable means that a transaction or event cannot be revoked, recalled, or undone; the transaction or event is unalterable.
715-30-55-141
For example, investing in a portfolio of high-quality fixed-income securities with principal and interest payment dates similar to the estimated payment dates of benefits may avoid or minimize certain risks. However, that does not constitute a settlement because the investment decision can be reversed and such a strategy does not relieve the employer or the plan of primary responsibility for a pension obligation, nor does it eliminate significant risks related to the obligation.
715-30-55-142
Another example of a transaction that does not meet the requirements for a settlement involves an employer with a situation in which all of the following occur in a period:
- a The employer decides to terminate a pension plan and establish a successor pension plan.
- b A nonparticipating annuity contract for the vested benefits of all plan participants is purchased but can be rescinded if certain regulatory approvals for the termination of the pension plan are not obtained.
- c It is determined that the regulatory approvals are probable.
715-30-55-143
An employer shall not recognize a settlement gain or loss until all three criteria inherent in the definition of a settlement are satisfied. In the situation described in the preceding paragraph, an irrevocable action has not occurred that relieves the employer or the pension plan of primary responsibility for a pension benefit obligation and eliminates significant risks related to the pension benefit obligation and the plan assets used to effect the settlement. Therefore, recognition of a settlement gain or loss should await completion of the irrevocable action necessary to relieve the employer or the pension plan of the primary responsibility for the pension benefit obligation. The probability of completion of the irrevocable action is not relevant.
715-30-55-144
Another example illustrating the need to meet the criteria inherent in the definition of a settlement is a situation in which an employer decides in 20X1 to terminate its pension plan, withdraw excess plan assets, and establish a successor pension plan, but is unable to effect the transactions, which include the settlement of the vested benefit obligation, until regulatory approval is obtained. The purchase of nonparticipating annuity contracts occurs in January 20X2 after regulatory approval has been obtained and before the 20X1 financial statements have been issued or are available to be issued (as discussed in Section 855-10-25). A settlement gain or loss is not recognized until all three criteria for a settlement are satisfied. That does not occur until January 20X2. In this situation, adjustment of the 20X1 financial statements would not be appropriate, although disclosure of the event may be required.
715-30-55-145
An employer may withdraw excess plan assets (cash) from a pension plan and not be required to settle a pension benefit obligation as part of an asset reversion transaction. Because a settlement has not occurred, none of the net gain or loss included in accumulated other comprehensive income shall be recognized in earnings. See paragraph 715-30-55-6 for guidance on the accounting required in this situation.
715-30-55-146
If individual nonparticipating annuity contracts are to be used to settle a pension benefit obligation, payment of the premium for the purchase of the individual annuity contracts may be necessary before a settlement gain or loss should be recognized. The timing of the payment of the premium is relevant in assessing the critical issue, which is whether a transaction has occurred that irrevocably relieves the employer or the pension plan of primary responsibility for a pension benefit obligation and eliminates significant risks related to the pension benefit obligation and the plan assets used to effect the settlement. For a settlement gain or loss to be recognized, the insurance entity must have unconditionally undertaken a legal obligation to provide the specified pension benefits. If the premium has not been paid, the purchase of the annuity contracts may be revocable. Further, if plan assets have not been transferred by the pension plan to effect the settlement, they may be at risk. If significant risks related to the pension benefit obligation and the plan assets to be used to effect the settlement have not been eliminated, no gain or loss should be recognized.
715-30-55-147
If individual nonparticipating annuity contracts are to be used to settle a pension benefit obligation, issuance of the individual annuity contracts may be necessary before a settlement gain or loss should be recognized. The issuance of individual annuity contracts is not the critical event but is relevant in assessing the critical issue, as stated in the preceding paragraph. However, the absence of individual annuity contracts together with an assessment of other relevant information, for example, payment of the premium as in the preceding paragraph, may indicate that only a commitment has been made to purchase annuity contracts. A commitment does not satisfy the criteria for a settlement and does not result in a settlement gain or loss.
715-30-55-148
If plan participants have agreed to accept lump-sum cash payments in exchange for their rights to receive specified pension benefits and the amounts of the payments have been fixed, payment of the cash to plan participants may be necessary before a settlement gain or loss should be recognized. As noted in paragraph 715-30-55-146, the timing of the payment is relevant in assessing whether the criteria for a settlement have been met. If the cash payments have not been made, the agreement may be revocable. Further, if plan assets have not been transferred by the pension plan to effect the settlement, they may be at risk. If significant risks related to the pension benefit obligation and the plan assets to be used to effect the settlement have not been eliminated, no gain or loss shall be recognized.
715-30-55-149
A settlement does not occur if a contract is entered into with an insurance entity that requires the insurance entity to pay only a portion of specific participants' pension benefits, for example, payments due retirees for the next five years. The contract should provide life annuities, not limited-term annuities, for a settlement to occur. A contract for limited-term annuities does not eliminate significant risks related to the pension benefit obligation for the participants, for example, the duration of their pension benefit payments, and, therefore, it does not satisfy the criteria for a settlement.
715-30-55-150
Another example of a transaction that does not constitute a settlement involves a situation in which all of the following occur:
- a An employer (or the pension plan) irrevocably purchases an insurance contract that guarantees payment of those pension benefits vested as of the date of the purchase.
- b The purchase price of the insurance contract significantly exceeds the purchase price of a nonparticipating annuity contract covering the same pension benefits.
- c The insurance entity receives an annual fee based on a percentage of the actuarial present value of the covered pension benefits to compensate it for the risk of guaranteeing those pension benefits.
- d If a specified ratio of assets to the covered pension benefit obligation is maintained, the employer (or the pension plan) continues to manage the assets used to effect the purchase; however, the insurance contract requires that a certain percentage of the assets be invested in high-quality bonds or a dedicated bond portfolio, depending on the ratio of assets to the covered pension benefit obligation.
- e Upon final satisfaction of all of the pension benefit obligation covered by the insurance contract and payment of all of the contract's administrative fees due to the insurance entity, the insurance entity will remit to the employer (or the pension plan) any amounts remaining in the insurance contract's account balance. Interim withdrawals from the account by the employer (or the pension plan) are also permitted with prior notification to the insurance entity unless a withdrawal causes the ratio of assets to the covered pension benefit obligation to drop below a specified percentage.
715-30-55-151
Under the terms of the contract described in the preceding paragraph, the employer remains subject to those risks and rewards described in paragraph 715-30-35-84. Accordingly, the insurance contract is a participating annuity contract that does not satisfy the criteria in paragraphs for a settlement.
715-30-55-152
Delayed recognition of gains or losses in net periodic pension cost is permitted under the General Subsections of this Subtopic, because, in part, past gains or losses may be offset by future losses or gains. The Settlements, Curtailments, and Certain Termination Benefits Subsections of this Subtopic require recognition in earnings of gains or losses included in accumulated other comprehensive income when a settlement of a pension benefit obligation occurs because the basis for generating offsetting losses or gains has been altered, that is, a pension benefit obligation and the plan assets used to effect the settlement are eliminated.
715-30-55-153
The transaction in paragraph 715-30-55-150 is structured so that the plan assets and the pension benefit obligation have substantially the same ability to generate gains (or losses to the extent of the purchase price for the participation right and the annual fees paid to the insurance entity for the guarantee of the pension benefit obligation) both before and after the insurance contract is purchased. The employer remains subject to significant risks and rewards related to the pension benefit obligation and the plan assets and, therefore, the purchase does not qualify for settlement accounting. That transaction creates, in substance, a deposit administration contract with a guarantee from the insurance entity to provide for certain pension benefits from the insurance entity's general assets, if necessary. Transactions such as those in this example are addressed in the paragraph 715-30-35-87 guidance that prohibits settlement accounting for those transactions for which the basis of generating offsetting losses or gains has not been substantially altered.
715-30-55-154
Paragraph 715-30-35-79 provides accounting guidance on the use of participating annuity contracts in settlement transactions. Under that guidance, settlement accounting is required for only certain participating annuity contracts as determined under the guidance in paragraphs .
715-30-55-155
One reason for requiring settlement accounting for certain participating annuity contracts is to preclude a potential abuse. If settlement accounting was required for only nonparticipating annuity contracts, then an employer could avoid settlement accounting by purchasing what was essentially a nonparticipating annuity contract and paying a small premium for a de minimis participation right.
715-30-55-156
Another reason is that paying a premium for a contract including a participation right rather than purchasing a nonparticipating annuity contract might be a sound economic decision that should not otherwise disqualify a transaction from settlement accounting, providing the transaction transferred the requisite level of risks and rewards from the employer to the insurance entity. However, if the terms of the participating annuity contract are such that the employer has the same or much of the same exposure to gains or losses with regard to the pension benefit obligation or the plan assets before and after the transaction, then settlement accounting is not permitted.
715-30-55-157
Example 2, Case C (see paragraph 715-30-55-209) presents an illustration of a settlement in which participating annuities were concluded to qualify for settlement accounting. The relative cost of the participation right (10 percent) used in that Case is not intended to be an indication of a criterion that could be used to determine whether the purchase of a participating annuity contract qualifies for settlement accounting. Rather, the facts assumed in the Case were selected only to illustrate the application of paragraph 715-30-35-79. No other purpose was intended. There are no quantitative criteria that can be used to determine whether the purchase of a participating annuity contract qualifies for settlement accounting. Whether the purchase of a participating annuity contract qualifies for settlement accounting depends on the particular facts and circumstances. There are no generic, quantitative criteria that can be used. Each transaction shall be evaluated on its own merits given the general criteria provided in paragraphs .
715-30-55-158
A transaction may qualify for settlement accounting in the separately issued financial statements of a subsidiary, yet not qualify in the parent entity's consolidated financial statements. For example, if a parent entity's wholly owned subsidiaries, Subsidiaries A and B, have separate pension plans and Subsidiary B purchases nonparticipating annuity contracts from Subsidiary A (which is an insurance entity) to provide the vested pension benefits under Subsidiary B's pension plan, that transaction does not constitute a settlement in the parent entity's consolidated financial statements. It does not qualify because the guidance in paragraph 715-30-35-84 excludes annuity contracts purchased from an entity that is controlled by the employer from settlement accounting as such a transaction merely shifts the risk from one part of the entity to another part of the same entity. Since significant risks related to a pension benefit obligation and the plan assets remain with the employer, which is the economic entity comprising the parent entity and its subsidiaries, a settlement does not occur.
715-30-55-159
Assuming the other criteria for a settlement are satisfied, the purchase of the nonparticipating annuity contracts discussed in the preceding paragraph does constitute a settlement in the separately issued financial statements of Subsidiary B, because significant risks related to a pension benefit obligation and the plan assets used to effect the settlement have been assumed by another entity that is not controlled by Subsidiary B. Disclosure of the related party nature of the settlement should be made pursuant to Section 850-10-50.
715-30-55-160
A pension plan may use a market-related value of plan assets other than fair value for purposes of determining the expected return on plan assets under the guidance in paragraph 715-30-35-51. That basis shall not be used in determining the maximum gain or loss subject to pro rata recognition in earnings when a pension benefit obligation is settled. The fair value of plan assets as of the date of settlement shall be used.
715-30-55-161
An employer may settle a pension benefit obligation and withdraw excess plan assets as part of terminating its pension plan. The settlement gain or loss determined pursuant to paragraph 715-30-35-79 should not be adjusted to eliminate any gains or losses included in accumulated other comprehensive income relating to securities issued by the employer if those securities are included in the plan assets withdrawn. In this situation, the settlement of a pension benefit obligation, not the withdrawal of plan assets, is the event that requires the employer to recognize in earnings any of the net gain or loss included in accumulated other comprehensive income. Further, withdrawal of plan assets does not affect the determination of the settlement gain or loss. Likewise, the nature of the plan assets withdrawn does not affect that determination. Whether the securities are sold by the pension plan and the employer repurchases them in the market with cash withdrawn from the pension plan or whether the securities are withdrawn should not affect the determination of the settlement gain or loss.
715-30-55-162
If nonparticipating annuity contracts are purchased from a less-than-majority-owned investee that is not controlled by the employer and the criteria for a settlement are satisfied, the resulting settlement gain or loss is not subject to partial recognition (that is, it should not be reduced to reflect the employer's ownership). The employer's noncontrolling ownership interest in the insurance entity that issues the nonparticipating annuity contracts does not affect the accounting for the settlement. Therefore, the entire settlement gain or loss should be recognized in earnings. The treatment of this intra-entity transaction is acknowledged to be a departure from traditional accounting under the equity method and is not intended to be a precedent for nonpension intra-entity transactions.
715-30-55-163
The interest rates implicit in the purchase price of nonparticipating annuity contracts used to effect a settlement may be different from the assumed discount rates used to determine net periodic pension cost. If the rates are different, the employer should measure the portion of the projected benefit obligation being settled and the remaining portion, if appropriate, using the implicit annuity interest rates. Consequently, the measurement of the portion of the projected benefit obligation being settled is the purchase price of the nonparticipating annuity contracts. Any gains or losses resulting from measuring the projected benefit obligation and the plan assets are included in the maximum gain or loss subject to pro rata recognition in earnings before the settlement gain or loss to be recognized is determined. In determining whether it is appropriate to measure the unsettled portion of the projected benefit obligation using the implicit annuity interest rates, consideration should be given to the demographics of the participants related to the settled and unsettled portions of the projected benefit obligation. If the demographics are similar and, therefore, there is a similar length of time until payments are due and the implicit annuity interest rates reflect the best estimate of the rates at which the unsettled portion could be effectively settled (as discussed in paragraphs ), then it is appropriate to measure the unsettled portion of the projected benefit obligation using those rates. If use of those rates is not appropriate, then rates as of the date of the settlement that do satisfy the requirements of those paragraphs shall be used to measure the unsettled portion of the projected benefit obligation.
715-30-55-164
Paragraph 715-30-35-79 provides accounting guidance on the use of participating annuity contracts in settlement transactions. Example 2, Case C (see paragraph 715-30-55-209) illustrates a settlement transaction using participating annuity contracts and a method that determines the maximum gain subject to pro rata recognition in earnings by first reducing the net gain included in accumulated other comprehensive income by the cost of the participation right. The allocation method illustrated in that Case is not the only permitted method that may be used. In determining the maximum gain subject to pro rata recognition in earnings, any of the following alternative methods may be used, provided the approach selected is applied consistently from year to year. An amount equal to the cost of the participation right could be allocated in any of the following ways:
- aInitially to the transition asset remaining in accumulated other comprehensive income
- bInitially to the net gain included in accumulated other comprehensive income
- cOn a pro rata basis to the transition asset remaining in accumulated other comprehensive income and the net gain included in accumulated other comprehensive income.
715-30-55-165
Because the allocation method can affect the determination of subsequent periods' net periodic pension cost, allocation on a pro rata basis (alternative [c] in the preceding paragraph) is recommended because it is an unbiased approach.
715-30-55-166
Paragraph 715-30-35-82 requires recognition in earnings of gains or losses from settlements if the cost of all settlements during a year is greater than the sum of the service cost and interest cost components of net periodic pension cost and permits such recognition if the cost of settlements is less, as long as the policy is applied consistently. As an example of an acceptable accounting policy, an employer may adopt a policy that requires recognition in earnings of gains or losses from all settlements during the year for a pension plan if the cost of those settlements exceeds the service cost component of net periodic pension cost for that pension plan for the year.
715-30-55-167
A settlement gain or loss may need to be recognized as a change in accounting estimate following the guidance in Topic 250 as in the following situation. Assume that an employer's accounting policy is not to recognize in earnings a gain or loss from a settlement if the cost of all settlements during the year does not exceed the sum of the service cost and interest cost components of net periodic pension cost for the pension plan for the year and all of the following occur:
- a It is estimated at the beginning of the year that the cost of all settlements during the year will not exceed the threshold amount described.
- b A pension benefit obligation is settled during the first quarter and a settlement gain or loss is not recognized.
- c In the second quarter and after the issuance of the first quarter's interim report, it is determined that the cost of all settlements during the year will exceed the threshold amount.
715-30-55-168
In the situation described in the preceding paragraph, the settlement gain or loss should be recognized in the second quarter consistent with the accounting for a change in accounting estimate as required by paragraphs 250-10-45-17 and 270-10-45-14.
715-30-55-169
The Settlements, Curtailments, and Special Term Benefits Subsection of Section 715-30-35 provides the general guidance on curtailment transactions. The following curtailment-related implementation guidance is organized in two categories:
- aMeeting the criteria for curtailment
- bCurtailment measurement issues.
715-30-55-170
In the definition of the term plan curtailment, there is no specific threshold for determining if an event results in a significant reduction of expected years of future service of present employees covered by a pension plan or an elimination of the accrual of pension benefits for some or all future services of a significant number of employees covered by a pension plan. Judgment shall be applied to determine what is significant for each pension plan (the unit of accounting) based on the facts and circumstances. For example, an employer may have a pension plan covering employees in several divisions. The employer terminates employees in one of those divisions and the expected years of future service of present employees in that division are reduced significantly, but the reduction is not significant in relation to the expected years of future service of all employees covered by the pension plan. Because the event involves an insignificant reduction of expected years of future service of present employees covered by the pension plan, a curtailment does not occur. The results of the event are a gain or loss as described in paragraphs that is subject to the requirements of paragraphs .
715-30-55-171
If a layoff significantly reduces the expected years of future service of present employees covered by a pension plan, a curtailment occurs even if the layoff is expected to be temporary. For example, a curtailment occurs in both of the following actions:
- a The employer temporarily lays off a significant number of present employees covered by a pension plan.
- b The employer temporarily suspends a pension plan so that employees covered by the pension plan do not earn additional pension benefits for some or all of their future services.
715-30-55-172
Likewise, if a pension plan suspension eliminates significant pension benefit accruals for some or all of present employees' future services, a curtailment occurs even if the pension plan suspension is expected to be temporary. Unrelated, individually insignificant reductions of expected years of future service of employees covered by a pension plan that accumulate over a single year or more than one year to a significant reduction do not constitute a curtailment. However, each of the reductions results in a gain or loss as described in paragraphs that is subject to the requirements of paragraphs . This evaluation is in contrast to the situation in which individually insignificant reductions of expected years of future service of employees covered by a pension plan are caused by one event, such as a strike, or are related to a single plan of reorganization and those reductions accumulate during more than one fiscal year to a significant reduction. The fact that the reductions occur over a period of time in this situation does not affect the determination that an event giving rise to a curtailment has occurred.
715-30-55-173
Paragraph 715-30-55-130 points out that the guidance in the Settlements, Curtailments, and Certain Termination Benefits Subsections of this Subtopic on settlements and curtailments is affected by whether there is a successor pension plan. If an employer terminates a pension plan and establishes a successor pension plan that provides additional but reduced pension benefits for all years of employees' future service, a curtailment does not occur. If the successor pension plan provides incremental but reduced pension benefits for all years of employees' future service, the substance of the transactions is to maintain the same pension plan but with reduced pension benefits. Accordingly, the reduction in pension benefits is accounted for as a negative pension plan amendment. See the guidance in paragraph 715-30-55-54 related to a negative retroactive plan amendment. In this situation, pension benefits are reduced but not eliminated since employees continue to accrue pension benefits for all years of future service.
715-30-55-174
A curtailment can occur if a pension plan is terminated and replaced by a successor pension plan under certain conditions. A curtailment occurs if the successor pension plan eliminates for a significant number of employees the accrual of defined pension benefits for some or all of their future services. Two examples follow:
- a A successor pension plan that covers only half of the employees previously covered by the terminated pension plan. The reference to half of the employees in this example is for illustrative purposes only and is not intended to be indicative of the minimum coverage necessary to qualify a pension plan as a successor pension plan. See paragraph 715-30-55-130.
- b A successor pension plan that does not provide for the accrual of additional defined pension benefits for certain years of future services. To illustrate this situation, assume a pension plan provides a flat benefit of $1,500 per year of service. At the end of 20X0, the employer terminates that pension plan and establishes a successor pension plan that provides a flat benefit of $1,000 per year for all years of service, including service under the terminated pension plan. Pension benefits earned under the successor pension plan are reduced by the pension benefits earned under the terminated pension plan. At the end of 20X0, Employee A with 5 years of service has an accumulated pension benefit of $7,500 per year under the terminated pension plan ($1,500 x 5 years of service). For years 20X1, 20X2, and the first half of 20X3, Employee A will accrue no additional pension benefits. The accrual of additional pension benefits will commence in the second half of 20X3. If a significant number of employees will not accrue additional pension benefits for some or all of their future services (as is the situation for Employee A), a curtailment occurs.
715-30-55-175
An employer is permitted to amortize prior service cost on a straight-line basis over the average remaining service period of employees expected to receive the related pension benefits under the guidance in paragraph 715-30-35-13 in order to reduce the complexity and detail of the computations that would otherwise be required by the guidance in paragraph 715-30-35-11.
715-30-55-176
Paragraph 715-30-35-92 specifies that the prior service cost included in accumulated other comprehensive income associated with years of service no longer expected to be rendered as a result of a curtailment is a loss. Even if the employer uses an amortization method permitted by paragraph 715-30-35-13 (such as straight-line amortization over average remaining service period, as described in the preceding paragraph) rather than the approach described in paragraph 715-30-35-11, the basic approach in paragraph 715-30-35-92 should be retained. In that situation, the ability to associate prior service cost included in accumulated other comprehensive income with years of service no longer expected to be rendered is more difficult and the result may be less precise. Use of the percentage reduction of years of service after the curtailment may be necessary. For example, if the future years of service determined as of the immediately preceding measurement date for those employees covered under a prior pension plan amendment are reduced by 50 percent due to a curtailment, the employer would recognize in earnings 50 percent of the prior service cost included in accumulated other comprehensive income.
715-30-55-177
A curtailment may occur because an employer terminates or suspends a pension plan, so that employees do not earn additional pension benefits for future service, but the employees continue to work for the employer. In such a situation, any prior service cost included in accumulated other comprehensive income associated with the employees affected by the pension plan termination or suspension shall be included in determining the net gain or loss to be recognized for the curtailment.
715-30-55-178
One reason that this Subtopic provides for delayed recognition in net periodic pension cost of prior service cost is the likelihood of future economic benefits to the employer as a result of a retroactive pension plan amendment. Those pension benefits are associated with the future services of those employees at the date of the pension plan amendment who are expected to receive pension benefits under the pension plan. Because a pension plan termination (or suspension) eliminates the accrual of pension benefits for all (or some) of those future services, it raises sufficient doubt about the continued existence of the future economic benefits of the retroactive pension plan amendment to justify recognition in earnings of any prior service cost included in accumulated other comprehensive income. Further, upon termination of a pension plan without the establishment of a successor pension plan, all remaining items included in accumulated other comprehensive income are recognized in earnings.
715-30-55-179
Paragraph 715-30-55-171 provides that a curtailment may result even if a layoff or suspension of benefits is temporary. If a curtailment is due to a pension plan suspension that may be only temporary, for example, the pension plan suspension will end as soon as the employer's financial condition sufficiently improves, the net gain or loss from the curtailment shall be determined based on the probable duration of the pension plan suspension. If that duration is a range of years and no single period in that range is a better estimate than any other period, then the determination shall be based on the estimate of duration within that range that results in the minimum net gain or loss from the curtailment.
715-30-55-180
There may be a balance remaining of the transition asset or obligation included in accumulated other comprehensive income after the employer accounts for a curtailment as required by the Settlements, Curtailments, and Certain Termination Benefits Subsections of this Subtopic. If a curtailment occurs causing almost all of the pension plan's participants to become permanently inactive, the employer shall continue to amortize any transition asset or obligation remaining in accumulated other comprehensive income using the remainder of the amortization period determined at transition.
715-30-55-181
Paragraph 715-30-35-93 describes the determination of any curtailment gain or loss, including the effect of certain amounts in accumulated comprehensive income. It is possible that both a transition asset remains in accumulated other comprehensive income and a larger (smaller) net loss included in accumulated other comprehensive income exists at the date of a curtailment that decreases (increases) the projected benefit obligation. However, the intent of that paragraph is not to provide a mechanism for offsetting a net loss included in accumulated other comprehensive income against any transition asset remaining in accumulated other comprehensive income or increasing a net loss included in accumulated other comprehensive income. Therefore, the decrease (increase) in the projected benefit obligation that is not recognized as a curtailment gain (loss) shall be offset against the net loss included in accumulated other comprehensive income (transition asset remaining in accumulated other comprehensive income). There shall be no further offsetting. See Example 4 (paragraph 715-30-55-216) for an illustration of this guidance.
715-30-55-182
If both a transition asset remaining in accumulated other comprehensive income and a net gain included in accumulated other comprehensive income exist at the date of a curtailment that increases the projected benefit obligation, the effects of the curtailment shall be offset using any one of the following three approaches, provided it is applied consistently from year to year. However, for the reason noted in paragraph 715-30-55-208 on settlement accounting, the recommended approach is to offset both on a pro rata basis (alternative [c]). The three approaches for offsetting the curtailment are as follows:
- a Initially against the transition asset remaining in accumulated other comprehensive income
- b Initially against the net gain included in accumulated other comprehensive income
- c Against both on a pro rata basis.
715-30-55-183
An employer may adopt a plan to terminate employees that will significantly reduce the expected years of future service of present employees covered by a pension plan and the sum of the effects of the resulting curtailment identified in paragraphs may be expected to be a net gain. In this situation, the net gain from the curtailment shall be measured and recognized when the related employees terminate.
715-30-55-184
If an employer amends its pension plan to provide for its termination or suspension and thereby eliminates for a significant number of employees the accrual of all or some of the pension benefits for their future services after a subsequent date (that is, the effective date of the pension plan termination or suspension is after the amendment date) and the sum of the effects of the resulting curtailment identified in paragraphs is a net gain, that gain shall not be recognized in earnings when the pension plan termination or suspension is effective, but rather the net gain from the curtailment should be measured and recognized in earnings when the employer amends its pension plan.
715-30-55-185
Paragraphs provide general guidance on special termination benefits and contractual termination benefits.
715-30-55-186
An employer that offers, for a short period of time, special termination benefits to employees, shall not recognize a loss at the date the offer is made based on the estimated acceptance rate. Paragraph 715-30-25-10 requires offers of special termination benefits to be recognized when the employees accept the offer and the amount can be reasonably estimated.
715-30-55-187
An employer may offer special termination benefits that result in a curtailment. It is possible that the offer of termination benefits could be recognized in a reporting period different from the period in which the curtailment is recognized because a net loss from a curtailment (as defined in paragraph 715-30-35-94) is recognized when it is probable that a curtailment will occur and the effects are reasonably estimable, while as indicated in paragraph 715-30-25-10, the cost of special termination benefits is not recognized until employees accept the offer and the amount can be reasonably estimated.
715-30-55-188
An employer may sponsor a pension plan that provides supplemental early retirement benefits. Such pension benefits shall not be accounted for as contractual termination benefits, rather, supplemental early retirement benefits shall be accounted for as part of net periodic pension cost pursuant to the attribution approach described in paragraphs .
715-30-55-189
Plans providing termination indemnities that are associated with preretirement termination of employment shall be assessed on a case-by-case basis. If benefits are paid only for involuntary termination of employment due to the occurrence of a specific event, they qualify as contractual termination benefits, and a liability and a loss shall be recognized when it is probable that employees will receive benefits and the amount can be reasonably estimated. However, if a plan is, in substance, a pension plan (for example, if benefits are paid for virtually all terminations), the plan is subject to the provisions of the General Subsections of this Subtopic. See paragraphs 420-10-55-1 and 420-10-55-16 for additional guidance in making this determination. However, if payment of the benefits results directly from a sale or disposal of a component of an entity, the cost of those benefits shall be recorded and recognized pursuant to paragraph 205-20-45-3.
715-30-55-190
In connection with terminating its pension plan, an employer may settle the pension benefit obligation and withdraw excess plan assets and then contribute and allocate those assets to participants' accounts in a new defined contribution pension plan. In this situation, an employer shall not combine any net gain or loss from the settlement and curtailment of the terminated plan with the net periodic pension cost from the contribution to the defined contribution pension plan and thereby report both on a net basis for purposes of classification in the income statement or disclosure in accompanying notes to financial statements. Because the following two separate events have occurred that require separate accounting recognition, netting the results of the separate events is inappropriate:
- a A pension plan termination resulting in recognition in earnings of all net pension amounts included in accumulated other comprehensive income
- b A contribution of assets to a defined contribution pension plan resulting in recognition of net periodic pension cost equal to the amount contributed and allocated.
715-30-55-193
An employer may sell a component of an entity and may settle a pension benefit obligation related to the employees affected by the sale. The separate classification of the settlement gain or loss, recognized pursuant to paragraphs , in discontinued operations requires an evaluation of the facts and circumstances.
715-30-55-194
Paragraph 205-20-45-5(c) indicates that a settlement is directly related to the disposal transaction if there is a demonstrated cause-and-effect relationship and the settlement occurs no later than one year following the disposal transactions, unless it is delayed by events or circumstances beyond an entity's control. In a disposal of a component of an entity, the timing of a settlement may be at the discretion of the employer. If the employer simply chooses to settle a pension benefit obligation at the time of the sale, the resulting coincidence of events is not, in and of itself, an indication of a cause-and-effect relationship and, therefore, paragraphs apply. However, a direct cause-and-effect relationship can be demonstrated if, for example, settlement of a pension benefit obligation for those employees affected by the sale is a necessary condition of the sale.
715-30-55-195
A settlement or a curtailment may occur as a direct result of a disposal of a component of an entity or a business or nonprofit activity. Paragraph 715-30-35-94 requires that a curtailment loss be recognized in earnings when it is probable that the curtailment will occur and related amounts are reasonably estimable. Therefore, although a reporting entity may not have satisfied all the criteria in paragraphs necessary to classify the operations of the component or business or nonprofit activity as discontinued operations, a curtailment loss (determined in accordance with paragraphs ) shall be recognized if it is probable that the disposal will occur and the amount of the curtailment loss is reasonably estimable. Furthermore, paragraph 715-30-35-94 requires that a curtailment gain be recognized in earnings when the related employees terminate or the plan suspension or amendment is adopted. The curtailment gain or loss shall be classified in income from continuing operations until the reporting entity satisfies those criteria in paragraphs for reporting discontinued operations.
715-30-55-196
A settlement gain or loss is recognized in earnings at the time that the settlement occurs. If a pension obligation associated with the disposal group is settled upon or after meeting the criteria for reporting discontinued operations in paragraphs , the related gain or loss (determined in accordance with paragraph 715-30-35-79) shall be recognized in earnings in the period in which the settlement occurs and classified in discontinued operations provided that the settlement is directly related to the disposal transaction.
715-30-55-197
If a curtailment loss results from the disposal of a component of an entity, it is likely that the curtailment loss will be recognized earlier than the settlement gain or loss, if any, is recognized. As indicated in paragraph 715-30-55-195, the curtailment loss, if reasonably estimable, shall be recognized when the disposal is probable. The settlement gain or loss, if any, however, shall be recognized when the settlement occurs. See Example 9, Case A (paragraph 715-30-55-247) for an illustration in which the curtailment loss is recognized earlier than the settlement gain. See also Example 9, Case B (paragraph 715-30-55-250), which demonstrates the less likely scenario in which the effects of the curtailment and the settlement are recognized in the same reporting period.
Illustrations
715-30-55-198
This Example illustrates the guidance in paragraph 715-30-35-78 relating to accounting for a plan termination without a replacement defined benefit plan.
715-30-55-199
In this Example, it is assumed that Entity A sponsored a final-pay noncontributory defined benefit plan. On November 16, 20X0, the employer terminated the plan, settled the accumulated benefit obligation of $1,500,000 (nonvested benefits became vested upon termination of the plan) by purchasing nonparticipating annuity contracts, and withdrew excess assets. Defined benefits were not provided under any successor plan. The plan ceased to exist as an entity.
715-30-55-200
As a result, Entity A recognized a gain of $900,000 in earnings, determined as follows.
-
Entity A (in thousands) Before Termination Effect of Termination After Termination Assets and obligations: Accumulated benefit obligation " $(1,500)" " $1,500 " (a) $- Effects of projected future compensation levels (400) 400 (b) - Projected benefit obligation " (1,900)" " 1,900 " - Plan assets at fair value " 2,100 " " (1,500)" (a) (600) (c) - Funded status and recognized asset $200 $(200) $- Amounts recognized in accumulated other comprehensive income: "Transition asset (d),(e)" $(200) $200 $- Net gain (e) (300) 300 - $(500) $500 $- (a) "The accumulated benefits of $1,500 were settled by using an equivalent amount of plan assets to purchase nonparticipating annuity contracts." (b) "The effects of projected future compensation levels ceased to be an obligation of the plan or the employer due to the termination of all plan participants. Paragraph 715-30-35-93 requires that any curtailment gain be first offset against any existing net loss included in accumulated other comprehensive income. Because the existing amount included in accumulated other comprehensive income in this case was a gain ($200 remaining transition asset plus $300 net gain), the $400 gain from the curtailment was recognized." (c) "Plan assets, in excess of the amount used to settle the pension benefits, were withdrawn from the plan." (d) A transition asset remaining in accumulated other comprehensive income is treated as a net gain. (e) "A pro rata amount of the maximum gain (see paragraph 715-30-35-79), which includes the net gain included in accumulated other comprehensive income ($300) and the transition asset remaining in accumulated other comprehensive income ($200), is recognized due to settlement. The projected benefit obligation was reduced from $1,500 to $0 (the curtailment initially reduced the projected benefit obligation from $1,900 to $1,500 as described in footnote [b]), a reduction of 100 percent. Accordingly, the entire amount included in accumulated other comprehensive income of $500 ($300 + $200) was recognized in earnings." The journal entry required to reflect the accounting for the plan termination follows. Cash $600 Other comprehensive income-transition asset 200 Other comprehensive income-net gain 300 Pension asset $200 Gain from plan termination 900 The gain from the plan termination without a replacement defined benefit plan was composed of the following. Gain from curtailment $400 Gain from settlement 500 Total gain $900
715-30-55-201
Paragraph 715-30-35-81 requires that plan assets and the projected benefit obligation be measured as of the date the settlement occurs. The amount of the accumulated benefit obligation settled and the amount of plan assets used to purchase nonparticipating annuity contracts are equal in this, and certain other settlement-related Examples in this Subsection. It is not appropriate to conclude that no gains or losses occurred when the projected benefit obligation and the plan assets were measured as of the date of the settlement. The columns representing amounts before the transactions in the Examples reflect the plan assets and the projected benefit obligation as of the date of the settlement and include any gains or losses that arose from the measurements as of that date.
715-30-55-202
This Example illustrates the accounting for a settlement of a pension obligation in three specific situations following the settlement-related guidance in the Settlements, Curtailments, and Certain Termination Benefits Subsection of Section 715-30-35. The following Cases illustrate situations in which:
- aThe projected benefit obligation exceeds plan assets (Case A).
- bPlan assets exceed the projected benefit obligation (Case B).
- cPlan assets exceed the projected benefit obligation and a participating annuity contract is purchased to settle benefits (Case C).
715-30-55-203
In each Case, the entity settled a portion of the obligation after transition to the requirements of this Subtopic. The Cases differ based on whether they had a retroactive plan amendment after transition or not and whether they had a transition asset or a transition obligation remaining in accumulated other comprehensive income.
715-30-55-204
This Case illustrates the settlement of a pension obligation for a situation in which the projected benefit obligation exceeds plan assets. In this Case, Entity A had a retroactive plan amendment after the transition to the requirements of this Subtopic and also had a transition obligation remaining in accumulated other comprehensive income.
715-30-55-205
Entity A sponsors a final-pay noncontributory defined benefit plan. On December 31, 20X0, the plan settled the vested benefit portion ($1,300,000) of the projected benefit obligation through the purchase of nonparticipating annuity contracts. As a result, Entity A recognized a gain of $195,000 in earnings, determined as follows.
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Entity A (in thousands) Before Settlement Effect of Settlement After Settlement Assets and obligations: Vested benefit obligation " $(1,300)" " $1,300 " (a) $- Nonvested benefits (200) (200) Accumulated benefit obligation " (1,500)" " 1,300 " (200) Effects of projected future compensation levels (500) (500) Projected benefit obligation " (2,000)" " 1,300 " (700) Plan assets at fair value " 1,400 " " (1,300)" (a) 100 Funded status and recognized liability $(600) $- $(600) Amounts recognized in accumulated other comprehensive income: Transition obligation (b) $650 $650 Prior service cost 150 150 Net gain (c) (300) $195 (105) $500 $195 $695 (a) "The vested benefits of $1,300 were settled by using plan assets to purchase nonparticipating annuity contracts." (b) A transition obligation remaining in accumulated other comprehensive income is treated as prior service cost included in accumulated other comprehensive income and therefore is not affected by settlement of the obligation. (c) "A pro rata portion of the maximum gain (see paragraph 715-30-35-79), the net gain included in accumulated other comprehensive income, is recognized due to the settlement. The projected benefit obligation was reduced from $2,000 to $700, a reduction of 65 percent. Accordingly, 65 percent of the maximum gain of $300, a gain of $195, was recognized in earnings. The journal entry required to reflect the accounting for the plan settlement follows." Other comprehensive income-net gain $195 Gain from settlement $195
715-30-55-206
This Case illustrates the settlement of a pension obligation for a situation in which the plan assets exceed the projected benefit obligation. In this Case, Entity B did not have a retroactive plan amendment after the transition to the requirements of this Subtopic but did have a transition asset remaining in accumulated other comprehensive income.
715-30-55-207
Entity B sponsors a final-pay noncontributory defined benefit plan. On December 31, 20X0, the plan settled the vested benefit portion ($1,300,000) of the projected benefit obligation through the purchase of nonparticipating annuity contracts. As a result, Entity B recognized a gain of $325,000 in earnings determined as follows.
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Entity B (in thousands) Before Settlement Effect of Settlement After Settlement Assets and obligations: Vested benefit obligation " $(1,300)" " $1,300 " (a) $- Nonvested benefits (200) (200) Accumulated benefit obligation " (1,500)" " 1,300 " (200) Effects of projected future compensation levels (500) (500) Projected benefit obligation " (2,000)" " 1,300 " (700) Plan assets at fair value " 2,100 " " (1,300)" (a) $800 Funded status and recognized asset $100 $- $100 Amounts recognized in accumulated other comprehensive income: "Transition asset (b),(c)" $(200) $130 $(70) Net gain (c) (300) 195 (105) $(500) $325 $(175) (a) "The vested benefits of $1,300 were settled by using plan assets to purchase nonparticipating annuity contracts." (b) A transition asset remaining in accumulated other comprehensive income is treated as a net gain included in accumulated other comprehensive income. (c) "A pro rata portion of the maximum gain (see paragraph 715-30-35-79), which includes the net gain included in accumulated other comprehensive income ($300) and the transition asset remaining in accumulated other comprehensive income ($200), is recognized due to the settlement. The projected benefit obligation was reduced from $2,000 to $700, a reduction of 65 percent. Accordingly, 65 percent of the maximum gain of $500 ($300 + $200), a gain of $325, was recognized in earnings. The journal entry required to reflect the accounting for the plan settlement follows." Other comprehensive income-transition asset $130 Other comprehensive income-net gain 195 Gain from settlement $325
715-30-55-208
This Case and Case C allocate an amount equal to the settlement gain on a pro rata basis to the transition asset remaining in accumulated other comprehensive income and the net gain included in accumulated other comprehensive income. This is not the only method of allocation permitted under those circumstances by the Settlements, Curtailments, and Certain Termination Benefits Subsections of this Subtopic. An amount equal to the settlement gain could be allocated initially to the transition asset remaining in accumulated other comprehensive income or the net gain included in accumulated other comprehensive income, provided the approach selected is applied consistently from year to year. However, because the allocation method can affect the determination of subsequent periods' net periodic pension cost, allocation on a pro rata basis is recommended because it is an unbiased approach.
715-30-55-209
This Case illustrates the settlement of a pension obligation for a situation in which the plan assets exceed the projected benefit obligation and a participating annuity contract is purchased to settle benefits. In this Case, Entity C did not have a retroactive plan amendment after the transition to the requirements of this Subtopic but did have a transition asset remaining in accumulated other comprehensive income. This Case illustrates the guidance in paragraph 715-30-35-79 relating to accounting for the cost of a participation right if the purchase of a participating annuity constitutes a settlement.
715-30-55-210
Entity C sponsors a final-pay noncontributory defined benefit plan. On December 31, 20X0, the plan settled the vested benefit portion ($1,300,000) of the projected benefit obligation through the purchase of a participating annuity contract at a cost of $1,430,000. The plan could have purchased a nonparticipating contract covering the same benefits for $1,300,000. The participation features of the contract warranted a conclusion that its purchase constituted a settlement. See paragraph 715-30-55-157 for a discussion of this conclusion about the participation features. As a result, Entity C recognized a gain of $240,000, (rounded) in earnings, determined as follows.
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Entity C (in thousands) Before Settlement Effect of Settlement After Settlement Obligations: Vested benefit obligation " $(1,300)" " $1,300 " (a) $- Nonvested benefits (200) (200) Accumulated benefit obligation " (1,500)" " 1,300 " (200) Effects of projected future compensation levels (500) (500) Projected benefit obligation " (2,000)" " 1,300 " (700) Plan assets at fair value: Participation right 130 (a) 130 Other plan assets " 2,100 " " (1,430)" (a) 670 " 2,100 " " (1,300)" 800 Funded status and recognized asset $100 $- $100 "Amounts recognized in accumulated other comprehensive income:" "Transition asset (b),(c)" $(200) $130 (d) $(70) Net gain (c) (300) 110 (d) (190) $(500) $240 $(260) (a) "The vested benefits of $1,300 were settled by using $1,430 of plan assets to purchase a participating annuity contract. However, a nonparticipating contract covering the same benefits could have been purchased for $1,300. The plan paid the additional $130 to obtain the participation right." (b) A transition asset remaining in accumulated other comprehensive income is treated as a net gain included in accumulated other comprehensive income. (c) "A pro rata amount of the maximum gain (see paragraph 715-30-35-79), which includes the net gain included in accumulated other comprehensive income ($300) and the transition asset remaining in accumulated other comprehensive income ($200), was recognized due to the settlement. However, any gain on a settlement that uses a participating annuity contract shall be computed by first reducing the maximum gain by the cost of the participation right [$200 + ($300 - $130) = $370]. The projected benefit obligation was reduced from $2,000 to $700, a reduction of 65 percent. Accordingly, a gain of $240 (rounded) was recognized (.65 x $370). The journal entry required to reflect the accounting for the plan settlement follows." Other comprehensive income-transition asset $130 Other comprehensive income-net gain 110 Gain from settlement $240 (d) The amount of gain from settlement was allocated as follows (rounded). Transition asset (.65 x $200) $130 Net gain [.65 x ($300 - $130)] 110 $240
715-30-55-211
See paragraph 715-30-55-208 for a discussion of the permitted methods for allocating settlement gain amounts.
715-30-55-212
This Example illustrates the calculation of prior service cost associated with the services of terminated employees that would be used to apply the guidance in paragraph 715-30-35-92.
715-30-55-213
Entity A sponsors a final-pay noncontributory defined benefit plan. On January 1, 20X0, the entity had a retroactive plan amendment resulting in prior service cost of $800,000. The prior service cost included in accumulated other comprehensive income that results from the plan amendment is amortized based on the expected future years of service of participants active as of January 1, 20X0, who are expected to receive benefits under the plan. As of January 1, 20X0, the entity had 100 employees who were expected to receive benefits under the plan. Based on the assumption that 5 percent of that group (5 employees) leaves (either quits or retires) in each of the next 20 years, the expected future years of service amounted to 1,050.
715-30-55-214
The amount of prior service cost associated with each expected future year of service is $762 ($800,000 ÷ 1,050). The following table illustrates the originally expected expiration of the anticipated service years.
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Determination of Expected Years of Service Rendered in Each Year Before Curtailment Year Individuals Future Service Years X0 X1 X2 X3 X4 X5 X6 X7 X8 X9 Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 A1-A5 5 5 B1-B5 10 5 5 C1-C5 15 5 5 5 D1-D5 20 5 5 5 5 E1-E5 25 5 5 5 5 5 F1-F5 30 5 5 5 5 5 5 G1-G5 35 5 5 5 5 5 5 5 H1-H5 40 5 5 5 5 5 5 5 5 I1-I5 45 5 5 5 5 5 5 5 5 5 J1-J5 50 5 5 5 5 5 5 5 5 5 5 K1-K5 55 5 5 5 5 5 5 5 5 5 5 5 L1-L5 60 5 5 5 5 5 5 5 5 5 5 5 5 M1-M5 65 5 5 5 5 5 5 5 5 5 5 5 5 5 N1-N5 70 5 5 5 5 5 5 5 5 5 5 5 5 5 5 O1-O5 75 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 P1-P5 80 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 Q1-Q5 85 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 R1-R5 90 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 S1-S5 95 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 T1-T5 100 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 "1,050" Service years rendered 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 Amortization fraction 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" Expected future years of service remaining at year-end 950 855 765 680 600 525 455 390 330 275 225 180 140 105 75 50 30 15 5 0 Prior service cost " $800,000 " Total expected future years of service " 1,050 " Amortization amount per each year of service $762
715-30-55-215
On December 31, 20X2, Entity A terminated 25 employees active at the date of the plan amendment. Immediately before the curtailment, 765 expected future years of service remained (1,050 less 285 years of service rendered in the previous 3 years). The curtailment reduced the total expected future years of service at December 31, 20X2, from 765 to 555 (210) as illustrated in the following table. Therefore, Entity A will recognize $160,020 ($762 × 210) of prior service cost in earnings in conjunction with the curtailment.
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Determination of Expected Years of Service Rendered in Each Year after Curtailment Year Individuals X0 X1 X2 X3 X4 X5 X6 X7 X8 X9 Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 A1-A5 5 B1-B5 5 5 C1-C5 5 5 5 D1-D5 (a) 5 5 5 E1-E5 5 5 5 5 5 F1-F5 5 5 5 5 5 5 G1-G5 5 5 5 5 5 5 5 H1-H5 (a) 5 5 5 I1-I5 5 5 5 5 5 5 5 5 5 J1-J5 5 5 5 5 5 5 5 5 5 5 K1-K5 5 5 5 5 5 5 5 5 5 5 5 L1-L5 (a) 5 5 5 M1-M5 5 5 5 5 5 5 5 5 5 5 5 5 5 N1-N5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 O1-O5 (a) 5 5 5 P1-P5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 Q1-Q5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 R1-R5 (a) 5 5 5 S1-S5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 T1-T5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 Service years rendered 100 95 90 60 60 55 50 45 45 40 35 30 30 25 20 20 15 10 10 5 Adjustment for termination 210 Total 100 95 300 60 60 55 50 45 45 40 35 30 30 25 20 20 15 10 10 5 Amortization fraction 100 95 300 60 60 55 50 45 45 40 35 30 30 25 20 20 15 10 10 5 "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" "1,050" Expected future years of service remaining at year-end 950 855 555 495 435 380 330 285 240 200 165 135 105 80 60 40 25 15 5 0 (a) Terminated group of employees.
715-30-55-216
This Example illustrates the guidance in paragraphs relating to the effects on a curtailment if there is a transition asset remaining in accumulated other comprehensive income at the date of the curtailment. The following Cases present situations where there is also a net loss included in accumulated other comprehensive income at the time of the curtailment:
- aTransition asset remaining in accumulated other comprehensive income is less than net loss included in accumulated other comprehensive income (Case A).
- bTransition asset remaining in accumulated other comprehensive income exceeds net loss included in accumulated other comprehensive income (Case B).
715-30-55-217
Cases A and B share the following assumptions. An employer has a transition asset remaining in accumulated other comprehensive income. On July 1, 20X0, the employer decides to terminate a significant number of employees as part of a plan to reduce its operations. The effects of the terminations are reasonably estimable at that date. The termination of employees occurs on August 29, 20X0.
715-30-55-218
This Case demonstrates the paragraph 715-30-35-94 guidance that requires that, if the sum of the effects resulting from a curtailment is a net gain, that gain be recognized in earnings when the related employees terminate (August 29, 20X0) and be based on plan assets and the projected benefit obligation measured as of that date.
715-30-55-219
In this Case, the transition asset remaining in accumulated other comprehensive income is less than the net loss included in accumulated other comprehensive income. The projected benefit obligation based on future compensation levels and the nonvested accumulated benefit obligation related to the terminated employees decrease by $90,000 and $20,000, respectively. The curtailment is accounted for as of August 29, 20X0, as follows (in thousands).
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"August 29, 20X0" Before Curtailment Effects of Curtailment After Curtailment Assets and obligations: Vested benefit obligation " $(1,550)" " $(1,550)" Nonvested benefits (250) $20 (230) Accumulated benefit obligation " (1,800)" 20 " (1,780)" Effect of future compensation levels (400) 90 (310) Projected benefit obligation " (2,200)" 110 (a) " (2,090)" Plan assets at fair value " 2,100 " " 2,100 " Funded status and recognized asset (liability) $(100) $110 $10 Amounts recognized in accumulated other comprehensive income: Transition asset $(200) $(200) Net loss 300 $(100) (a) 200 $100 $(100) $- (a) "Paragraph 715-30-35-94 requires that any curtailment gain be first offset against any existing loss included in accumulated other comprehensive income. Because that amount is a loss of $100 ($300 net loss included in accumulated other comprehensive income less the $200 transition asset remaining in accumulated other comprehensive income), the $110 decrease in the projected benefit obligation is initially offset against the loss, resulting in a $10 net gain from the curtailment. The journal entry to account for the curtailment follows." Pension asset $10 Pension liability 100 Gain from curtailment $10 Other comprehensive income-net loss 100
715-30-55-220
This Case demonstrates the paragraph 715-30-35-94 guidance that requires that, if the sum of the effects resulting from a curtailment is a net loss, that loss be recognized in earnings when it is probable that a curtailment will occur and the effects described are reasonably estimable.
715-30-55-221
In this Case, the transition asset remaining in accumulated other comprehensive income exceeds the net loss included in accumulated other comprehensive income. The net change in the projected benefit obligation for the terminated employees is an increase of $110,000. There is an increase of $220,000 for supplemental early retirement benefits and a decrease of $110,000 relating to future compensation levels ($90,000) and nonvested accumulated pension benefits ($20,000). As a result, the curtailment is accounted for as of July 1, 20X0, as follows (in thousands).
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"July 1, 20X0" Before Curtailment Effects of Curtailment After Curtailment Assets and obligations: Vested benefit obligation " $(1,550)" $(220) " $(1,770)" Nonvested benefits (250) 20 (230) Accumulated benefit obligation " (1,800)" (200) " (2,000)" Effect of future compensation levels (400) 90 (310) Projected benefit obligation " (2,200)" (110) (a) " (2,310)" Plan assets at fair value " 2,100 " " 2,100 " Funded status and recognized liability $(100) $(110) $(210) Amounts recognized in accumulated other comprehensive income: Transition asset $(200) $100 (a) $(100) Net loss 100 100 $(100) $100 $- (a) "Pursuant to paragraph 715-30-35-94, the loss (that is, the increase in the projected benefit obligation) resulting from the curtailment is first offset against any net gain included in accumulated other comprehensive income. Because that amount is a gain of $100 ($100 net loss included in accumulated other comprehensive income plus the $200 transition asset remaining in accumulated other comprehensive income), the $110 increase in the projected benefit obligation is initially offset against the gain, resulting in a $10 net loss from the curtailment. The journal entry to account for the curtailment follows." Loss from curtailment $10 Other comprehensive income-transition asset 100 Pension liability $110
715-30-55-222
This Example illustrates the guidance in paragraph 715-30-35-95 that addresses a curtailment if termination benefits are also involved.
715-30-55-223
Entity A sponsors a final-pay noncontributory defined benefit plan and has a transition obligation remaining in accumulated other comprehensive income. On May 11, 20X2, the entity offered for a short period of time (until June 30, 20X2) special benefits to its employees in connection with their voluntary termination of employment (special termination benefits). The special termination benefit was a lump-sum payment to be made upon termination, payable in addition to the employee's regular plan benefits. The special termination benefit was paid directly from the employer's assets rather than from the plan assets.
715-30-55-224
On June 30, 15 percent of the employees accepted the offer. The amount of the special termination benefit payment was $125,000. The portion of the projected benefit obligation based on the expected future compensation levels of the terminated employees amounted to $100,000, and all the employees terminated were fully vested in their accumulated benefits. The portion of the transition obligation remaining in accumulated other comprehensive income associated with the years of service no longer expected from the terminated employees was $150,000. As a result, Entity A recognized a loss of $175,000 in earnings that includes the cost of the special termination benefits and the loss, as determined using the guidance in paragraphs , from the curtailment.
715-30-55-225
In this Example, the effects resulting from the curtailment were not reasonably estimable until June 30, 20X2, the acceptance date for the offer of special termination benefits. The loss was determined as follows.
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Entity A (in thousands) Before Curtailment Effect of Curtailment After Curtailment Assets and obligations: Vested benefit obligation " $(1,300)" " $(1,300)" Nonvested benefits (200) (200) Accumulated benefit obligation " (1,500)" " (1,500)" Effects of projected future compensation levels (500) $100 (400) Projected benefit obligation " (2,000)" 100 (a) " (1,900)" Plan assets at fair value " 1,400 " " 1,400 " Funded status and recognized liability $(600) $100 $(500) Amounts recognized in accumulated other comprehensive income: Transition obligation (b) $800 $(150) $650 Net gain (300) (300) $500 $(150) $350 Loss on curtailment $50 Cost of special termination benefits (lump-sum payments to terminated employees) 125 Total loss recognized in earnings $175 (c) (a) "Paragraph 715-30-35-93 requires that any curtailment gain be first offset against any existing loss included in accumulated other comprehensive income. Since there was an existing gain of $300, the $100 gain from the curtailment was recognized in earnings." (b) The portion of the transition obligation remaining in accumulated other comprehensive income associated with the years of service no longer expected from the terminated employees ($150) was recognized in earnings. (c) "The loss Entity A recognized in earnings was $175, which includes the cost of the special termination benefits of $125, the gain related to salary progression of $100 and the reclassification of the transition obligation remaining in accumulated other comprehensive income of $150. The journal entry required to reflect the accounting for this event follows." Loss on employee terminations $175 Pension liability 100 Other comprehensive income-transition obligation $150 Liability for termination benefits 125 "If the entity had paid the termination benefits from the pension plan (by amending the plan and using plan assets), the same loss would have been recognized, but $125 would have been credited to the pension liability due to the decrease in plan assets, instead of credited to the liability for termination benefits."
715-30-55-226
This Example illustrates the guidance in paragraph 715-30-25-11 relating to the determination of the liability and the losses from employees' acceptance of an offer of special termination benefits and the guidance in paragraph 715-30-35-95 relating to the determination of the change in the projected benefit obligation due to the related curtailment.
715-30-55-227
In this Example, an employer's pension plan has a transition obligation remaining in accumulated other comprehensive income, and there are no retroactive pension plan amendments after that date. On May 11, 20X0, the employer offers for a short period of time (until June 13, 20X0) special benefits to its employees in connection with their voluntary termination of employment (special termination benefits). An additional 5 years of service will be credited, and eligibility for early retirement benefits will be granted for employees who are age 50 or older with more than 20 years of service and who elect to retire. Normal early retirement is at age 55. The special termination benefits (increased pension benefits) together with the employee's regular pension benefits will be paid directly from plan assets.
715-30-55-228
On June 13, 20X0, employees representing 15 percent of the work force accept the offer of special termination benefits. For those employees, the actuarial present value of their accumulated pension benefits assuming they terminated at that date without the special termination benefits is $525,000, and the actuarial present value of their accumulated pension benefits with the special termination benefits is $625,000. None of the employees accepting the offer of special termination benefits are otherwise eligible for early retirement benefits under the pension plan.
715-30-55-229
The portion of the projected benefit obligation based on the future compensation levels of the terminated employees is $80,000, and all terminated employees are fully vested in their accumulated pension benefits. The portion of the transition obligation remaining in accumulated other comprehensive income assigned to the years of service no longer expected from the terminated employees is $150,000.
715-30-55-230
Paragraph 715-30-35-94 provides guidance that requires that if the sum of the effects resulting from a curtailment is a net loss, that loss is recognized in earnings when it is probable that a curtailment will occur and the effects described are reasonably estimable. In this Example, the effects resulting from the curtailment are not reasonably estimable until June 13, 20X0, the acceptance date for the offer of special termination benefits. As a result, the employer recognizes as of June 13, 20X0, a loss of $170,000 that includes the cost of the special termination benefits and the net loss from the curtailment determined as follows (in thousands).
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"June 13, 20X0" Before Employee Terminations Effects of Terminations After Employee Terminations Assets and obligations: Vested benefit obligation Employees accepting offer $(525) $(100) (a) $(625) Other employees (775) (775) Nonvested benefits (200) (200) Accumulated benefit obligation " (1,500)" (100) " (1,600)" Effect of future compensation levels (500) 80 (b) (420) Projected benefit obligation " (2,000)" (20) " (2,020)" Plan assets at fair value " 1,400 " " 1,400 " Funded status and recognized liability $(600) $(20) $(620) "Amounts recognized in accumulated other comprehensive income:" Transition obligation $800 $(150) (c) $650 Net gain (300) (300) $500 $(150) (d) $350 (a) The loss from acceptance of the special termination benefits is $100 ($625 - $525). (b) "Paragraph 715-30-35-94 requires that any curtailment gain be first offset against any existing loss included in other comprehensive income. Because that existing amount is a gain of $300 (the net gain included in accumulated other comprehensive income), the $80 gain from the curtailment is recognized in earnings." (c) "Paragraph 715-30-35-93 specifies that a transition obligation remaining in accumulated other comprehensive income is treated as prior service cost for purposes of applying the guidance in the Settlements, Curtailments, and Certain Termination Benefits Subsections of this Subtopic. The reduction of prior service cost included in accumulated other comprehensive income associated with the previously expected years of service of the terminated employees is $150." (d) "The loss recognized in earnings is $170, which includes the cost of the special termination benefits of $100, the gain related to the absence of future compensation of $80, and the recognition of a portion of the transition obligation remaining in accumulated other comprehensive income of $150. The journal entry to account for the employee terminations follows." Loss on employee terminations $170 Other comprehensive income-transition obligation $150 Pension liability 20
715-30-55-231
This Example illustrates the accounting for a curtailment following the guidance in the Settlements, Curtailments, and Certain Termination Benefits Subsection of Section 715-30-35. Each of the two Cases in this Example represents an entity that sponsors final-pay noncontributory defined benefit plans. The Cases differ based on whether there was a retroactive plan amendment after transition to the accounting required under this Subtopic and whether there was a transition obligation or a transition asset remaining in accumulated other comprehensive income at the date of the curtailment as follows:
- a Curtailment with a transition obligation and a retroactive plan amendment (Case A)
- b Curtailment with a transition asset (Case B).
715-30-55-232
This Case illustrates the accounting for a plan curtailment in which there was a transition obligation remaining in accumulated other comprehensive income at the date of the curtailment and there had been a retroactive plan amendment after Entity A adopted the accounting requirements of this Subtopic. On January 1, 20X0, the entity had a retroactive plan amendment resulting in $800,000 of prior service cost. On December 31, 20X1, the management of Entity A committed itself to a formal plan to dispose of a component of an entity. In connection with the disposal, the number of employees accumulating benefits under the plan would be reduced significantly. The portion of the projected benefit obligation based on the expected future compensation levels of the terminated employees was $90,000, and nonvested benefits of the terminated employees amounted to $20,000. The plan also had a transition obligation remaining in accumulated other comprehensive income that is treated as prior service cost included in accumulated other comprehensive income under the guidance in paragraph 715-30-35-92. The remaining expected future years of service associated with those employees present at the date of transition was reduced by 30 percent due to the termination of employees. Accordingly, 30 percent of the transition obligation remaining in accumulated other comprehensive income at December 31, 20X1, was a loss that amounted to $120,000.
715-30-55-233
The prior service cost included in accumulated other comprehensive income (which relates to the plan amendment of January 1, 20X0) associated with the previously expected years of service of the terminated employees that will not be rendered was a loss which amounted to $160,000. The sum of the effects resulting from the plan curtailment was a loss of $170,000 recognized in earnings, determined as follows.
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Entity A (in thousands) Before Curtailment Effect of Curtailment After Curtailment Assets and obligations: Vested benefit obligation " $(1,300)" " $(1,300)" Nonvested benefits (200) $20 (180) Accumulated benefit obligation " (1,500)" 20 " (1,480)" Effects of projected future compensation levels (500) 90 (410) Projected benefit obligation " (2,000)" 110 (a) " (1,890)" Plan assets at fair value: " 1,400 " " 1,400 " Funded status and recognized liability $(600) $110 $(490) "Amounts recognized in accumulated other comprehensive income:" Transition obligation (b) $400 $(120) (b) $280 Prior service cost resulting from plan amendment (c) 651 (160) (c) 491 Net gain (151) (151) $900 $(280) $620 (a) "Under paragraph 715-30-35-94, the gain (that is, the decrease in the projected benefit obligation) resulting from the curtailment is first offset against any existing net loss included in accumulated other comprehensive income. Because the amount included in accumulated other comprehensive income in this Case was a gain of $151, the $110 gain from the curtailment was recognized in earnings." The journal entry required to reflect the recognition of the curtailment gain in earnings follows. Pension liability 110 Curtailment gain 110 (b) "Because the plan had a transition obligation remaining in accumulated other comprehensive income, that amount is treated as prior service cost included in accumulated other comprehensive income for purposes of applying this Subtopic's guidance. The remaining expected future years of service associated with those employees present at the date of transition was reduced by 30 percent due to the termination of employees. Accordingly, 30 percent of the transition obligation included in accumulated other comprehensive income at the date of the curtailment was recognized in earnings, which amounted to $120." The journal entry required to reflect the recognition of the transition obligation in earnings follows. Curtailment loss 120 Other comprehensive income-transition obligation 120 (c) "The prior service cost included in accumulated other comprehensive income (which related to the plan amendment of January 1, 20X0) associated with the previously expected years of service of the terminated employees that will not be rendered was $160. That amount was recognized in earnings." The journal entry required to reflect the recognition of the prior service cost in earnings follows. Curtailment loss 160 Other comprehensive income-prior service cost 160
715-30-55-234
This Case illustrates the accounting for a plan curtailment in which there was a transition asset remaining in accumulated other comprehensive income at the date of the curtailment. In this Case, there had not been a retroactive plan amendment after Entity B adopted the accounting requirements of this Subtopic. On July 27, 20X2, the management of Entity B decided to reduce significantly the operations of a line of business products. Although that decision did not result in closing down any facilities, it required the termination of a significant number of employees. The termination of employees took place on November 1, 20X2.
715-30-55-235
The portion of the projected benefit obligation based on expected future compensation levels of the terminated employees was $90,000, and the portion of nonvested benefits related to the terminated employees was $20,000. As a result, Entity B recognized a gain of $110,000 on November 1, 20X2. Following the guidance in paragraphs , Entity B estimated at July 27, 20X2, that a net curtailment gain would result. Accordingly, the gain was recognized on the date employees terminated (November 1, 20X2) and was based on plan assets and obligations measured as of that date. The gain was determined as follows.
Entity B (in thousands) "As of November 1, 20X2" Before Realization of Curtailment Gain Effect of Curtailment After Realization of Curtailment Gain Assets and obligations: Vested benefit obligation " $(1,300)" " $(1,300)" Nonvested benefits (300) $20 (280) Accumulated benefit obligation " (1,600)" 20 " (1,580)" Effects of projected future compensation levels (400) 90 (310) Projected benefit obligation " (2,000)" 110 (a) " (1,890)" Plan assets at fair value " 2,100 " " 2,100 " Funded status and recognized asset $(100) $110 $(210) Amounts recognized in accumulated other comprehensive income: Transition asset (a) $(200) $- (a) $(200) Net loss 100 - (a) 100 $(100) $- $(100) (a) "Following the guidance in paragraph 715-30-35-94, the net amount included in accumulated other comprehensive income was a gain of $100 (net loss included in accumulated other comprehensive income of $100 plus the transition asset remaining in accumulated other comprehensive income of $200). Because the net amount included in accumulated other comprehensive income was a gain, the $110 gain from curtailment was recognized in earnings. If the previously existing net amount included in accumulated other comprehensive income had been a loss including the transition asset remaining in accumulated other comprehensive income and that loss exceeded the curtailment gain, the curtailment gain would have been offset, and no gain would have been recognized in earnings. The journal entry required to reflect the accounting for the plan curtailment follows." Pension asset $110 Gain from curtailment $110
715-30-55-236
This Example illustrates the guidance in paragraph 715-30-55-133. In this Example there is a termination of a pension plan in one period followed by the settlement of the plan in another period. There is no successor pension plan.
715-30-55-237
On July 20, 20X1, an employer formally amends its pension plan to provide for its termination. Employees cease to accrue additional pension benefits as of November 30, 20X1 (the effective date of the pension plan termination), and pension benefits are not to be provided under a successor pension plan. On January 30, 20X2, upon receipt of the appropriate regulatory approvals for termination of the pension plan, nonparticipating annuity contracts are purchased to settle the accumulated benefit obligation of $1,650,000 as of that date (nonvested pension benefits become vested upon termination of the pension plan), and the employer withdraws excess plan assets. The pension plan ceases to exist.
715-30-55-238
The portion of the projected benefit obligation at July 20, 20X1, based on future compensation levels beyond November 30, 20X1, is $400,000. As a result, the employer recognizes a curtailment gain of $400,000 as of July 20, 20X1, the date of the pension plan amendment. The employer recognizes a settlement gain of $550,000 as of January 30, 20X2, the date of the settlement. The following two tables indicate the determination of the effects of the curtailment and the settlement. Because the effect of the curtailment is a gain, that gain is recognized pursuant to paragraphs and 715-30-55-184 when the pension plan amendment is adopted (July 20, 20X1) and is based on plan assets and the projected benefit obligation measured as of that date.
- Table 1- The Curtailment (in thousands)
-
"July 20, 20X1" Before Curtailment Effect of Curtailment After Curtailment Assets and obligations: Accumulated benefit obligation " $(1,480)" " $(1,480)" Effect of future compensation levels (420) $400 (a) (20) Projected benefit obligation " (1,900)" 400 " (1,500)" Plan assets at fair value " 2,100 " " 2,100 " Funded status and recognized asset $200 $400 $600 Net gain recognized in accumulated other comprehensive income $(500) $(500) (a) "The effect of future compensation levels beyond November 30, 20X1, ceases to be part of the projected benefit obligation when the amendment to terminate the pension plan is adopted. Pursuant to paragraph 715-30-35-94, the gain (that is, the decrease in the projected benefit obligation) resulting from the curtailment is first offset against any net loss included in accumulated other comprehensive income. Because the amount included in accumulated other comprehensive income is a gain in earnings of $500, the $400 gain from the curtailment is recognized in earnings. The journal entry to account for the curtailment follows." Pension asset $400 Gain from curtailment $400 - Table 2- The Settlement (in thousands)
-
"January 20, 20X2" Before Settlement Effect of Settlement After Settlement Assets and obligations: "Projected benefit obligation (equals accumulated and vested benefit obligation)" " $(1,650)" " $1,650 " (a) $- Plan assets at fair value " 2,300 " " (1,650)" (a) - (650) (b) Funded status and recognized asset $650 $(650) $- "Net gain recognized in accumulated other comprehensive income" $(550) $550 (c) $- (a) "The vested benefit obligation of $1,650 is settled by using plan assets of an equal amount to purchase nonparticipating annuity contracts." (b) Plan assets in excess of the amount used to settle the vested benefit obligation are withdrawn from the pension plan. (c) "A pro rata amount of the maximum gain of $550 is recognized in earnings due to a settlement. The projected benefit obligation is reduced from $1,650 to $0, a reduction of 100 percent. Accordingly, 100 percent of the maximum gain is recognized in earnings. The journal entry to account for the settlement and withdrawal of excess plan assets follows." Cash $650 Other comprehensive income-net gain 550 Gain from settlement $550 Pension asset 650
715-30-55-239
This Example illustrates the guidance in paragraph 715-30-55-197 relating to the accounting for a curtailment and a settlement that occur in connection with a sale of a component of an entity. The following Cases present:
- aCurtailment and settlement recognized in different interim periods (Case A)
- bCurtailment and settlement recognized in the same interim period (Case B).
715-30-55-240
Cases A and B initially share the following assumptions.
715-30-55-241
On January 1, 20X1, an employer adopts a retroactive pension plan amendment that results in $800,000 of prior service cost.
715-30-55-242
During the second quarter of 20X2, the employer determines that it is probable that it will sell a component of the entity. The employer estimates that the sale will occur by year-end. However, all the criteria in paragraphs necessary to report discontinued operations are not satisfied during the second quarter. The employer estimates that the prior service cost included in accumulated other comprehensive income related to the pension plan amendment of January 1, 20X1, and associated with the previously expected years of service of the terminated employees that will not be rendered is a loss of $160,000. That estimate needs no revision on December 31, 20X2.
715-30-55-243
During the third quarter of 20X2, the employer enters into an agreement with a December 31, 20X2, closing date to sell the component. On December 31, 20X2 (disposal date), the employer sells the component at a $100,000 profit before considering the following pension-related effects.
715-30-55-244
All of the following occur in connection with the sale:
- a Certain employees cease to be employed by the selling employer, which results in a significant reduction in the number of present employees accumulating pension benefits under the selling employer's pension plan (Plan A).
- b The terminated employees are hired by the acquiring employer.
- c The acquiring employer, through its pension plan (Plan B), agrees to assume the accumulated benefit obligation ($200,000) related to the terminated employees.
- d Plan assets of $250,000 ($200,000 for the settlement of the accumulated benefit obligation and $50,000 as an excess contribution) are transferred from Plan A to Plan B.
715-30-55-245
The portion of the projected benefit obligation based on future compensation levels of the terminated employees is $75,000.
715-30-55-246
The sum of the pension-related effects resulting from the sale is a net loss of $26,000 recognized in earnings as follows.
-
Curtailment net loss (recognized in earnings during second quarter of 20X2): Prior service cost included in accumulated other comprehensive income associated with terminated employees " $160,000 " Reduction in projected benefit obligation " (75,000)" " $85,000 " "Settlement gain (recognized in earnings on December 31, 20X2):" Portion of transition asset remaining in accumulated other comprehensive income " (82,000)" Portion of net gain included in accumulated other comprehensive income " (27,000)" " (109,000)" "Transfer of plan assets in excess of the accumulated benefit obligation (recognized in earnings on December 31, 20X2)" " 50,000 " " $26,000 "
715-30-55-247
This Case illustrates the accounting for the curtailment and the settlement in different interim periods.
715-30-55-248
Because the employer determined in the second quarter of 20X2 that it was probable that the component would be sold, the curtailment loss should be recognized in earnings in that quarter. However, because the employer had not satisfied all the criteria in paragraphs for reporting discontinued operations in that quarter, the curtailment loss would be reclassified to discontinued operations as part of restating the second quarter. Appropriate disclosures should be made regarding the plan curtailment in accordance with Section 715-20-50 on defined benefit plans. The following table presents the determination of the effects of the curtailment.
- Table 1—The Curtailment (in thousands)
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Before Sale Curtailment-Related Effects Resulting from Sale After Curtailment Assets and obligations: Accumulated benefit obligation " $(1,500)" " $(1,500)" Effect of future compensation levels (500) $75 (a) (425) Projected benefit obligation " (2,000)" 75 " (1,925)" Plan assets at fair value " 2,400 " " 2,400 " Funded status and recognized asset $400 $75 $475 Amounts recognized in accumulated other comprehensive income: Transition asset $(790) $(790) Prior service cost 651 $(160) (b) 491 Net gain (261) (261) $(400) $(160) (c) $(560) (a) "Paragraph 715-30-35-94 requires that any curtailment gain be first offset against any existing loss included in other comprehensive income. Because that existing amount is a gain of $1,051 ($261 net gain included in accumulated other comprehensive income plus the $790 transition asset remaining in accumulated other comprehensive income), the $75 gain from the curtailment is recognized in earnings." (b) "The reduction of prior service cost included in accumulated other comprehensive income (which relates to the pension plan amendment of January 1, 20X1) associated with the previously expected years of service of the terminated employees that will not be rendered is $160." (c) The journal entry to account for the curtailment follows. Loss from curtailment $85 Pension asset 75 Other comprehensive income-prior service cost $160
715-30-55-249
Because the settlement occurred on December 31, 20X2, the gain from the settlement is recognized in earnings on that date and classified in discontinued operations. Appropriate disclosures should be made regarding the settlement of the pension obligation in accordance with Section 715-20-50. The following table presents the determination of the effects of the settlement.
- Table 2 -The Settlement (in thousands)
"December 31, 20X2" After Curtailment Settlement- Related Effects Resulting from Sale After Sale Assets and obligations: Accumulated benefit obligation " $(1,500)" $200 (a) " $(1,300)" Effects of future compensation levels (425) (425) Projected benefit obligation " (1,925)" 200 " (1,725)" Plan assets at fair value " 2,400 " (250) (a) " 2,150 " Funded status and recognized asset $475 $(50) $425 "Amounts recognized in accumulated other comprehensive income:" Transition asset $(790) $82 (b) $(708) Prior service cost 491 491 Net gain (261) 27 (b) (234) $(560) $109 $(451) (a) "The accumulated benefit obligation of $200 is settled by transferring plan assets of an equal amount to the acquiring employer. In addition, the selling employer agrees to transfer an additional $50 of plan assets. The journal entry to account for the transfer of plan assets and the accumulated benefit obligation to Plan B as part of the sale follows." Gain on sale $50 Pension asset $50 Plan A's journal entry to account for the transfer of plan assets and the accumulated benefit obligation to Plan B follows. Accumulated benefit obligation $200 Withdrawal of excess plan assets 50 Plan assets $250 (b) "A pro rata amount of the maximum gain of $1,051 ($261 net gain included in accumulated other comprehensive income plus the $790 transition asset remaining in accumulated other comprehensive income) is recognized in earnings due to the settlement. The projected benefit obligation is reduced from $1,925 ($2,000 less the $75 curtailment gain) to $1,725, a reduction of 10.4 percent (rounded) due to the settlement. Accordingly, 10.4 percent of the maximum gain ($109 rounded) is recognized in earnings. The journal entry to account for the settlement follows." Other comprehensive income-transition asset $82 Other comprehensive income-net gain 27 Gain from settlement $109
715-30-55-250
This Case illustrates the accounting for the curtailment and the settlement in the same interim period.
715-30-55-251
For this Case, assume the same facts as Case A except that before the fourth quarter of 20X2, the employer did not expect to sell or otherwise dispose of the component of the entity.
715-30-55-252
In this Case the determination of the curtailment loss and the settlement gain is the same as that presented in Case A, Tables 1 through 2 (see paragraphs ). However, both the curtailment loss and the settlement gain should be recognized in earnings in the fourth quarter of 20X2 and reported in discontinued operations pursuant to Subtopic 205-20.
715-30-60Relationships
Source downloaded: .Record version e2233d951d46. Effective date must be checked in the source.
Comprehensive Income
715-30-60-1
For the required display and reporting in comprehensive income of information about gains or losses associated with pension or other postretirement benefits, prior service costs or credits associated with pension or other postretirement benefits, and transition assets or obligations associated with pension or other postretirement benefits, see Subtopic 220-10.
Inventory
715-30-60-2
For guidance on the capitalization of the service cost component of net periodic pension cost as part of the cost of inventory, see Subtopic 330-10.
Exit or Disposal Cost Obligations
715-30-60-3
For the required accounting associated with one-time termination benefits provided to current employees that are involuntarily terminated under the terms of a one-time benefit arrangement, see Subtopic 420-10.
715-30-60-4
For guidance on whether additional termination benefits should be considered one-time termination benefits and accounted for under Subtopic 420-10 or be considered an enhancement to an ongoing benefit arrangement and, therefore, subject to the provisions of either this Topic or Subtopic 712-10, see Subtopic 420-10.
Income Taxes
715-30-60-5
For guidance on whether an excise tax incurred by an employer on the withdrawal of excess plan assets from its pension plan should be accounted for as an expense in the period of the withdrawal or as an income tax and deferred if there will be related gains (such as a settlement gain) recognized for financial reporting purposes in subsequent periods, see Subtopic 740-10.
Business Combinations
715-30-60-6
For the required pension related accounting for issues arising in connection with a business combination, including plans to terminate certain employees, the measurement of projected benefit obligations and the assignment of the purchase price to individual assets acquired and liabilities assumed, see Subtopic 805-20.
Consolidation
715-30-60-7
For guidance on whether to consolidate an employee benefit plan, see Subtopic 810-10.
Nonmonetary Transactions
715-30-60-8
For the requirements related to gain or loss recognition for the spinoff of pension-related assets or obligations transferred in a spinoff of nonmonetary assets to owners of an entity, see Subtopic 845-10.
Not-for-Profit Entities
715-30-60-9
For the required accounting by a not-for-profit employer for the gains or losses and the prior service costs or credits that would be recognized in other comprehensive income under the guidance in the General Subsections of this Subtopic, see Subtopic 958-715.
Regulated Operations
715-30-60-10
For treatment by rate regulated entities of the possible difference between net periodic pension cost as defined in the General Subsections of this Subtopic and amounts of pension cost considered for rate-making purposes, see Subtopic 980-715.
715-30-65Transition and Open Effective Date Information
Source downloaded: .Record version c8e713865ba0. Effective date must be checked in the source.
715-30-65-1
Paragraph superseded on 03/23/2010 after the end of the transition period stated in FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, and FSP FAS 158-1.
Related subtopics
- 715-60 Defined Benefit Plans—Other PostretirementCompensation—Retirement Benefits
- 960-20 Accumulated Plan BenefitsPlan Accounting—Defined Benefit Pension Plans
- 715-980 Regulated OperationsCompensation—Retirement Benefits
- 965-30 Plan Benefit ObligationsPlan Accounting—Health and Welfare Benefit Plans
- 715-70 Defined Contribution PlansCompensation—Retirement Benefits
- 715-20 Defined Benefit Plans—GeneralCompensation—Retirement Benefits