The Elan 11th Hour Guide mentions that, under US GAAP expected return on Plan Assets has no impact on a company’s funded status.
Until now I thought that, under US GAAP, Expected - Actual return on plan assets is considered an actuarial gain/loss, hence included in PBO hence affecting funded status…
Please help… Every time I read this section I find that my previous understanding lacks…
EDIT: I am rewording this question because people seem to miss the point and answer hastily. Please make sure you understand what the problem is before responding.
Fact 1: PBO is reconciled with actuarial gain or losses.
Fact 2: Fair Value of Plan Assets - PBO = Funded Status
Dubious Claim 1*: Under US GAAP, the difference between Expected and Actual Returns on Plan assets is consideredanother actuarial gain or loss.
Dubious Claim 2*: Expected Returns have no impact on a company’s Funded Status.
THE CONFLICT: Under Facts 1 and 2, one can easily see that we can either accept the Dubious Claim 1 OR the Dubious Claim 2.
* As stated in Elan’s 11th Hour Guide (see posts below)
Funded status = PBO - Fair Market Value of plan assets,
If you look into the Fair MV of plan assets, it includes ACTUAL return, not expected return. In other words, you want your balance sheet to report how the assets actually performed, not what you expected.
I think the Actual - expected return is realized somewhere on the Income Statement, but that calculation depends on whether its IFRS or GAAP.
The Company’s funded status is the difference between the PBO and plan assets.
PBO is impacted by:
current service cost
interest cost
actuarial g/l (change in discount, compensation, mortality, retirement dates, etc.)
past service cost
benefits paid
Plan assets are affected by:
Contributions
Actual return on plan assets
benefits paid
Notice the common element is benefits paid.
The difference between expected and actual g/l on plan assets is not one of the actuarial assumptions included in PBO. Expected expected return on plan assets DOES impact periodic pension cost under GAAP (it reduces it).
Forgive me, I stand corrected - this IS an actuarial gain/loss under GAAP. I’m sorry (going to delete my prior comment to eliminate confusion). The difference between actual and expected return is recognized in OCI as actuarial g/l and is subject to the corridor (or faster) approach. I’ve never encountered a question where this impacted the PBO, usually it’s actuarial assumptions like the discount rate, compensation growth rate, mortality rate, retirement date, etc. I’m sorry to lead you astray.
suppose Fair value of assets= 830. Pv of pension obligations= 820. Now these are not taken when we have calculated debt/assets ratio. Now we want to adjust debt to asset ratio by inlcuding these. So in we will increase assets by 820 or 830 ?
Right, in the context of pension cost - but I think OP’s confusion was how it contributed to PBO and funded status. To the best of my knowledge from everything I read, although it’s an actuarial g/l, it only impacts pension cost and not the actuarial g/l component of PBO. Now I’m confused and would like to know why this is.
Schweser mock makes the same claim as Elan. A change in the expected return has no effect on the funded status. I’m confused just the rest of you.
My only logic is that actuarial G/L will be affected ONLY by the difference b/t actual and expected return. So simply increasing the expected return, without any information on what happens to actual return, does not by itself change the PBO.
I don’t know though. would like to hear from more people on this one.
I think many have lost sight of where OP is seeking clarification.
The difference between expected and actual return is classified as an “actuarial G/L” (we understand that it is recognized in OCI). Where the confusion lies is in why we don’t include this “actuarial G/L” in the PBO calculation while other actuarial G/L’s (like change in discount rate, comp rate, mortality rate, etc.) ARE factored into PBO.