[south0085]

Becker Question –

Thank you in advance for your help. I am having trouble with the “G”and the “E” of SIRAGE. Gain/Loss Amortization and Existing Net Obligation or Asset. I can’t seem to figure out how to calculate these. Can someone clear this up for me? Thank you.

[abnason]

Gain and Loss Amortization is a really interesting area.

First its important to understand why gains and losses are accumulated. FASB has decided to allow companies to smooth pension expense by having to subract out the expected return instead of the actual return. So that means if the market is really bad one year and returns fall way short of expectations it will not have an effect on pension expense. This means that the difference between actual and expected is taken to OCI-Gains and Losses and amortized, which leads us to your first question. (actuarial gains and losses based on assumptions are also lumped into this account)

From here the accumulated Gains and Losses are amortized using the corridor approach.

Lets take a simple example of this to walk our way through it.

Example:

Projected Benefit Obligation — As of January 1 = 100

Fund Assets — As of January 1 = 80

Unrecognized Gains and (Losses) — As of January 1 = 20

Average Remaining Service Life = 10

Step 1. Find the BEGINNING balance of the Projected Benefit Obligation and Fund Assets.

Ex: PBO = 100 Fund Balance = 80

Step 2. Multiply the larger of the two balances (in this case the PBO) by 10%.

Ex: 100 x 10% = 10

Step 3. Compare the number derived in step 2 (in this case 10) with the BEGINNING balance of Unrecognized Gains or Losses

a) If number derived in step 2 is larger than Unrecognized Gains or Losses (use absolute value of gain or loss) than no amortization is necessary

b) If number derived in step 2 is smaller than Unrecgonized Gains or Losses (use absolute value of gain or loss) than amortization is necessary.

Ex: 10 < 20

Step 4. Since the number dervied in step 2 (10) is smaller than the unrecognized gain, amortization is necessary. Now take the difference between the number derived in step 2 and the unrecognized gain.

Ex: 20-10 = 10

Step 5. Take the difference derived in step 4 and divide by the average remaining service life.

Ex: 10 / 10 years = 1 per year

Conclusion: $1 per year needs to be amortized. Since it is a gain the amortization will lead to a decrease in pension expense (credit) and a decrease in the OCI account (debit)

Other Comprehense Income 1

Pension Expense 1

FAR - 93
REG - 93
BEC
AUD

[abnason]

The “E” portion should not really even be tested anymore as almost all companies have fully amortized this difference already, but here is the explanation for that.

Ex:

PBO as of implemenation date – 100

Fund Assets as of implemenation date — 85

Average Employee job life — 10

Step 1. Find the PBO and Fund Assets as of implemenation of FASB 87.

Ex: PBO 100 Fund assets 85

Step 2. Find unfunded balance by subtracting the Fund Assets from the PBO

Ex: 100 – 85 = 15

Step 3. Divide the number derived in step 2 by the greater of the average employee job life or 15.

Ex: 15 > 10 so use 15

15 / 15 years = 1 per year

Journal entry would be a debit to Pension expense for 1, and a Credit to Other Comprehensive Income for 1.

***Please remember that there are also journal entries for tax effects of these two examples. But for simplicity I did not include them. There are good examples of these tax effect entries on page F6- 17.

Goodluck on FAR. I am really excited as I take it this Thursday. Hoped this helped.

FAR - 93
REG - 93
BEC
AUD

[Author]

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