Amortization of Unrecognized Gains/Losses for Pensions

Vickie Plato, accounting clerk in the personnel office of Streisand Corp., has begun to compute pension expense for 2019 but is not sure whether or not she should include the amortization of unrecognized gains/losses. She is currently working with the following beginning-of-the-year present values for the projected benefit obligation and market-related values for the pension plan:

Projected Benefit obligation Plan Assets Value

2016 $2,000,000 $1,900,000

2017 2,400,000 2,500,000

2018 2,900,000 3,000,000

The average remaining service life per employee in 2016 and 2017 is 10 years and in 2018 and 2019 is 12 years. The net gain or loss that occurred during each year is as follows.

2016 $280,000 Loss

2017 85,000 Loss

2018 12,000 Loss

2019 25,000 Gain

You are the manager in charge of accounting. Write a memo to Vickie Plato, explaining why in some years she must amortize some of the net gains and losses and in other years she does not need to. In order to explain this situation fully, you must compute the amount of net gain or loss that is amortized and charged to pension expense in each of the 4 years listed above. Include an appropriate amortization schedule, referring to it whenever necessary.

Just do response each posted # 1 to 3 down below only.

Posted 1

Year

Projected benefit obligation

Plant Asset value

10% Corridor

OCI

Minimum amortization of loss

2016

2200000

1900000

220000

0

0

2017

2400000

2500000

240000

280000

3000

2018

2900000

2600000

290000

362000

6000

2019

3900000

3000000

390000

368000

0

In this situation the OCI amount of gains/losses does not grow too fast, as the asset and liabilities of gains and losses offset (balance). The corridor approach is a technique used to reduce the amounts of gains/losses to be recognized as an adjustments. “It requires recognition of certain gains and losses in excess of 10 percent of the greater of the projected benefit obligation or the market-related asset value.” this is to prevent the OCI accounts from getting to large. If this is exceed this the account of gains/losses must be amortized.

Posted 2

When the amortization balance exceeds the corridor balance, which is set at 10% of the greater of projected benefit obligation or plan assets’ market-related value, then amortization must occur. In 2019 the $368,000 accumulated OCI fell in between the 10% corridor of $390,000 and no amortization was needed. 2017 & 2018 Accumulated OCI exceeded Corridors 10% for each of the years and there for had to report amortization.

Year Projected Benefit Obligations Plants Assets Corridor Accumulated Minimum OCI(G/L) Amortization of loss

2016 $2,2000,000 1,900,000 220,000 0 0

2017 2,400,000 2,500,000 250,000 280,000 3,000

2018 2,900,000 2,600,000 290,000 362,000 6,000

2019 3,900,000 3,000,000 390,000 368,000 0

Posted 3

Year

Projected Benefit Obligation (PBO)

Plan Assets Value

10% Corridor

Accumulative Other Comprehensive Income (G/L)

Minimum Amortization of Loss

2016

2,200,000

1,900,000

220,000

0

0

2017

2,400,000

2,500,000

250,000

280,000

3,000

2018

2,900,000

2,600,000

290,000

362,000

6,000

2019

3,900,000

3,000,000

390,000

368,000

0

The corridor rule requires to disclose the gain/ loss that exceeds 10% the larger of the pension projected benefit obligation (PBO) or the fair value of the plan assets. Follow that, this actuarial gain/ loss can be amortized over the periods of time of the service life and displayed on the income statement. Reversely, if the actuarial gain/ loss is less than 10% of the PBO or the market value of the plan assets, do not include them in annual pension expense. Also please note, if there was a gain, subtract it from the unamortized balance; and oppositely if there was a loss, you need to add it to the unamortized balance instead. From the above schedule, you do not need to amortize the $280,000 loss in 2016 because at the beginning year, the balance of the gain/ loss account was $0 and the loss of $280,000 was not recorded until the end of the year.

Therefore, at the beginning of 2017, the balance of accumulated other comprehensive income G/L (OCI) was $280,000; 10% corridor was $250,000 = $2,500,000 * 10% which led the loss exceeded the corridor by $30,000 = $280,000 – $250,000.

Also, the remaining service life was 10 years, so you should amortize $30,000/ 10 yrs. = $3,000 in 2017.

In addition, the previous year’s amortization normally is combined with the current year gain/ loss. Then again, apply the corridor rule of 10% of this new amount. If it was more than 10% of the PBO or the market value of the plan assets, do the same as in 2017 to amortize the excess amount dividing by the remaining years.

So, in 2018, the unamortized loss amount from 2017 was $280,000 – $3,000 = $277,000 would need to be added to the $85,000 loss in 2017:

$277,000 + $85,000 = $362,000 which was exceeded the new corridor $290,000 by $72,000 = $362,000 – $290,000.

Since the new remaining life changed to 12 years in 2018 and 2019, the new amortization would be $72,000 / 12 yrs. = $6,000.

Now, in 2019, the loss from 2018 for $12,000 was added to the unamortized amount from the prior year:

$362,000 – $6,000 + $12,000 = $368,000 which was less than the corridor of $390,000 which resulted in no amortization.

 

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