For the residual income model: The clean surplus relationship may not hold when items are charged directly to shareholders’ equity. Therefore, we have to adjust net income for these items if they are not expected to reverse in the future. --> Effect of violation is that Net income is not correct but book value is correct. Items that can bypass the income statement include: - Foreign currency translation gains and losses that flow directly to retained earnings under the all current method. - The minimum liability adjustment in pension accounting - Changes in the market value of debt and equity securities classified as available for sale All above is understood except for ‘- The minimum liability adjustment in pension accounting’ . What exactly do they refer to when talking about minimum liability adjustment in pension accounting? P.289 from Equity schweser book
adjustment of the funded status. So if at 12/31/2008, my PBO is 10, and my plan assets is 5, i have underfunded status (and a liability) of $5. At 12/31/2009, my PBO is 15, and my plan asets is still 5. i have an underfunded status (and a liability) of $10. So, i must post an adjustment at 12/31/09 for $5 to increase the liability from 5 to 10. THis adjustment is recorded through OCI (directly through equity)
PUFE pneumonic. Pensions Unrealized gains or loses on AFS Foreign Exchange translations (All Current method) Effective portion of a cash flow hedge
So basically, instead of writing: - The minimum liability adjustment in pension accounting They could have said --> Change in funded status reported in OCI. Correct?