year projected benefit obligation or the beginning of the year fair value of the plan assets. If amortization is required, the minimum amortization is computed as follows: ¿ MinimumCorridor Amortization = Cumulat ive Net Gain ∨ Lossat beginning of year − Corridor at theb Average remainingservice period of theactive employees expected benefits und - The amortization of a net gain is subtracted in the computation of pension expense, while amortization of a net loss is added in the computation of pension expense. To summarize, the gain or loss component of pension expense generally consists of one of the following two items: o amortization of any net loss from previous periods (added to compute pension expense) o amortization of any net gain from previous periods (deducted to compute pension expense)
19-2d Pension Obligation - In a defined benefit plan, the amounts to be paid to retirees in the future represent an obligation of the company. Because these are future payments, they must be discounted back to the current period using the company's discount rate to obtain the company's current obligation. - The resulting amount, which is based on expected future salary levels, is called the projected benefit obligation . As stated earlier, the projected benefit obligation is the actuarial present value of all the benefits attributed by the pension benefit formula to employee service rendered prior to that date. The change in the projected benefit obligation is determined as follows: TABLE Beginning Projected Benefit Obligation + Prior Service Cost = Adjusted Beginning Projected Benefit Obligation + Service Cost for Period + Interest Cost on Projected Benefit Obligation + Actuarial Losses (or − Actuarial Gains) - Benefit Payments to Retirees = Ending Projected Benefit Obligation - - Companies must also disclose information about their accumulated benefit obligations and vested benefit obligations. The accumulated benefit obligation is the present value of benefits attributed to employee service provided before a specified date based on current salary levels. The vested benefit obligation is the present value of the benefits the employee is entitled to receive even if the employee is no longer employed by the company. The projected benefit obligation will provide
the largest and most conservative measure of the pension obligation while the vested benefit will be the smallest measure. 19-2e Pension Assets - Actuaries develop an actuarial funding method to determine the amounts and timing of employer contributions that will be needed over time to provide for current and future pension benefit payments. - When discussing the valuation of pension assets, GAAP uses the term market-related value to describe the value of plan assets. The market-related value is either the fair market value at the end of each accounting period or a calculated value that recognizes changes in fair value in a systematic or rational manner over not more than 5 years.
- Summer '18
- Corporate Finance