Under IFRS, when the pension asset/liability is shown on the balance sheet, why are the unrecognized losses ADDED whereas unrecognized gains subtracted from the funded status?
Not able to get my head around this.
eg:
Plan Assets at FV 200
PBO (300)
Funded Status (100)
Unrecognized Loss 50
Pension liability (50)
IFRS is smoothing just remember that, it’s a real key point, so in this case amounts that haven’t been recognized in the income statement are eliminated. So in this case you would be adding back in the unrecognized loss because it’s been erased.
An important thing related to this topic is the presentation vs actual PBO. Even this could be used as a trick. Calculating the amount of PBO is the real expense whereas what to present on the balance sheet is something different. US GAAAP says to represent the true information whereas IFRS allows to have smoothing effects like MissCleo said. If in exam the actual expense or benefit is asked then it is something NOT presentation whereas if asked what would be recorded on the Balance sheet, it may differ than actual expense in case of IFRS.
@mohammad.belaal : just to get this clear - in the presentation PBO, the actuarial losses/gains or the other ‘events’ that lead to unrecognized gains/losses have already been incorporated, and in order to remove those effects, the unamortized (after smoothing i.e.allocating a part of this in the income statement) loss is added & the gain is deducted.
Is that correct?
US GAAP says ‘reflect the true position immediately’ whereas IFRS allows the smoothing effect to reduce volatility. There are several assumptions which are involved in deriving the pension expense. For several reasons actuary can propose changes in assumptions which need to be reflected in the pension expense and the funded status. IFRS, to reduce volatility, has given discretion to the corporates to whether recognize actuarial gains and losses immediately or choose the other way round by deffering them. Yes, for losses and gains that have been incorporated, they need to be altered when the assumptions have changed and smoothing is allowed as changing the assumption can lead to variability in presentation.
The easiest way to think of this is: the Funded Status amount includes (i.e., has already been reduced by) the Unrecognized Loss amount of 50. However, if you choose to NOT recognize this loss on your balance sheet, you simply add this 50 to the Funded Status to come up with the balance sheet asset/liability amount.
Plan Assets at FV 200 PBO (300) < already includes the Unrecognized Loss of 50 —————————— Funded Status (100) < already includes the Unrecognized Loss of 50 Unrecognized Loss 50 < add 50 back because you don’t want this to be included in your B/S liability or asset. —————————— Pension liability (50)
+1 for sunny…got it right
This IS difficult. I’ve just watched a video lecture on this topic and am taking a break from the video right now.The lecturer had a funny example with a politician who privately has good and bad character traits, these are only known to him and his loved ones, but he chooses to only show some of these to the public. If he privately has a bad character trait, one that nobody knows about, you have to add it back so to speak, to get to his polished public image. If he has a positive trait that nobody knows about (like giving money to some charity) you have to deduct it to get to the polished public image. The good (positive) trait is only known to those close to him, i.e. his true private self (read: funded status), hence the positive trait must be removed = deducted to get to the polished public image of him (read: balance sheet asset/liability).
It was actually a very good example to help remembering this, I’m not sure I was able to recount it though.
I saw that too and was total lost as to what he was talking about. Why would you have to add a bad trait back to get his polished image. Andy Holmes usually does a good job…here he lost me. Maybe you can help me understand it as it seems like you got what he was saying
I watched last years video with Johnathan Bone. Relative to PBO what he said makes sense. He said that actuarial losses increase PBO so they are added. Actuarial gains reduce PBO so they are subtracted when calculating ending PBO
If I have $20 in my wallet but everybody else thinks I have $15, I would have to remove $5 from my wallet before anybody took a peek, otherwise I would be revealing my true position. If I have $15 plus a note saying I owe you $5, hence in effect having only $10, I would have to remove the note (=obligation) that is add back the liability.
You have a “true” position, $20, but due to various smoothing effects you show only $15, the you have to deduct the difference if your true position is more than what you show, and add back if your true position is less than the $15 you show to the public.
It wasn’t a good explanation, but I’ll post it anyway.
Nice! That makes perfect sense. In fact, your wallet description is exactly what is going on in the financial statements.