I am finding it extremely difficult to understand the idea of Actuarial gains/losses impacting Pension liability and pension expenses. Can someone help me understand this by providing an example ? I understand that Actuarial gains/losses arise out of changing the assumptions in the pension benefit plan. However, does an actuarial gain mean that the firm has lesser pension liability and expense ? Your explanation would truly help me.
Both a gain or a loss are deferred items… over and above the corridor limit. they do either increase (loss) or decrease (gain) the pension liability. They arise because of the changes in the actuarial assumptions on the plan. Immediately taking the expense / increase on the income statement will cause wild fluctuations and extreme volatility. So the corridor is used as a threshold for the amount that can be expensed vs. what can be deferred and slowly amortized. amount within the corridor are charged to the income statement immediately. That amount which is above the corridor limit is slowly amortized into the income statement. corridor = 10% * Max(PBO, Plan Assets) at the beginning of the period. HTH.
CP - I thought the amount above the corridor is expensed immediately, where as if its below the corridor then you can amortize. I guess I need to reread this section.
let me read up again as well… if corridor was 15 - upto 15 was expensed immediately, above 15 was amortized slowly… is my understanding.
CP - You’re mostly correct (my bad). The changes in actuarial assumptions are accumulated in Other Comprehensive Income (SE). Once the accumulation exceeds the corridor, then the amount over the corridor is amortized. Do you agree?
I had a similar question and CPK gave a batter explanation for that question. http://www.analystforum.com/phorums/read.php?12,1112581,1112771#msg-1112771 FYI, the only amount that goes through the income statement is the amount amortised, which is determined by the 10% corridor test.