Pensions and Other Postretirement Benefits
What this domain tests
This domain tests defined contribution and defined benefit pensions, pension expense components, funded status, OCI recognition, and other postretirement benefits under ASC 715 and IAS 19.
Core rules
A defined contribution plan expense is the required contribution; the employer has no further obligation. A defined benefit plan measures the projected benefit obligation (PBO), the actuarial present value of benefits earned, and plan assets at fair value. Funded status equals plan assets minus the PBO, recognized as a net asset or liability.
Net periodic pension cost includes service cost, interest cost, expected return on plan assets as a reduction, amortization of prior service cost, and amortization of net actuarial gain or loss. Actual return differs from expected return, and the difference is recognized in OCI. Prior service cost from plan amendments is initially recognized in OCI and amortized. Under US GAAP, actuarial gains and losses are amortized when they exceed the corridor of 10% of the greater of the PBO or plan assets. IFRS uses net interest on the net defined benefit liability and recognizes remeasurements in OCI without recycling.
Worked example
Beginning PBO is $1,000,000. Service cost is $80,000; interest cost at 6% is $60,000; benefits paid are $50,000; and an actuarial loss is $30,000. Ending PBO is $1,120,000. Beginning plan assets are $900,000; actual return is $70,000; contributions are $100,000; and benefits paid are $50,000. Ending plan assets are $1,020,000. Funded status is a $100,000 net asset. If expected return is $63,000 and loss amortization is $5,000, pension expense is $80,000 + $60,000 - $63,000 + $5,000 = $82,000.
Traps
Using actual return instead of expected return in pension expense; omitting service cost; expensing prior service cost immediately in full; netting an underfunded liability against an asset; and treating OPEB like a defined contribution plan.