FAR Exam Review – BECKER F6 – Pensions (OCI/AOCI Amortization)

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    JimmySungChen
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    Hey guys, FAR has been very difficult. Trying to grasp the concept has been REALLY difficult and time consuming. My exam is one month away and I am having a pretty hard time with Pensions ESPECIALLY the Amortization to Pension Expense…it’s like a big ball of riddles to me right now. Please help. I am going to write out what I know (or what I think I know) and hopefully you guys can let me know if I’m right or hopefully let me know where I am getting tripped up on? Thank you

    So Pension costs changes every year, and their use S-I-R A-G-E tip to help us remember.

    S – Service Cost (current)

    I – Interest Cost

    R – Return on Plan Assets (which decreases the net pension expense)

    A – Amortization of Prior Service Cost

    G – Gains (which decreases net pension expense) And Losses

    E – Existing Net Obligation or Net Asset Amortization

    These 6 (S-I-R A-G-E) which then gives your the Net Periodic Pension Cost (NPPC). NPPC to my understanding, is the ultimate goal for the company that’s paying out benefits to their employees, to calculate so they can accurately report it on their Financial Statements regarding their Pension Plans.

    Ok, now Becker broke it down and tells us how each part is calculated which I am not going to go into detail because it’s pretty long. Now the 2 elements that’s giving me the MOST problems are “G” and “E” due to their amortization characteristic and their relations to OCI and AOCI. (Other Comprehensive Income and Accumulated Other Comprehensive Income).

    I always thought, OCI is the Income Statement account, that when you include OCI with Net Income it then gives you the Comprehensive Income. At the end of the year, OCI is then closed out into AOCI, which is a Balance Sheet account. AOCI is the perpetual account that reflects on the changes of OCI year in and year out like how Retained Earnings reflects the Net Income/Loss. So OCI, like Net Income has a credit balance. And whenever you close out from OCI to AOCI it’s Debit OCI (decreases) and Credit AOCI (increase).

    Now, here’s the first part of my confusion… why IN THE WORLD, does your OCI gets Credited when there is a debit in Net Period Pension cost???? I am not really getting Becker’s explanation and they kept saying when this happens, you are “taking it out of AOCI.” Now the ONLY explanation I can come up with is that when they say when there is a Net Periodic Pension Cost and you put it into OCI…are you crediting into OCI as a “negative” value that decreases the positive value of OCI? Like selling expenses to Income? So we are taking this Negative Value or Expense which is out of AOCI and put it back into OCI because it is NOW being Amortized so it is finally being reflected on the Income Statement???

    Now the 2nd part of my confusion, is in the Balance Sheet side.

    Prior Service Cost and Pension Losses, when they happen… it decreases OCI and it increases Pension Benefit asset/liability. This decrease in OCI ultimately gets closed out into AOCI. Now the thing is, again, when there is an amortization to Pension Expense…they debit Net Period Pension Cost, and then they credit OCI and Becker again states that this is taking it out of AOCI. Which leads back to the same problem above… and the only way to explain it to myself is it is going in an Expense item.

    OR maybe I just had it all wrong… that OCI is NOT actually a credit balance account and it’s not even part of the Income Statement???

    Please help… and excuse me for my LONG post… I am just really desperate…I tried searching this topic in other threads and websites and none of it are helping me with my confusion.

    Thank you.

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