Under current GAAP rules: Funding Status is reported on the Balance sheet and unrecognized items in the equity / Accumulated Other comprehensive income account ( AOCI). What happes under IFRS? Are the unrecognized items completely off balance sheet? They are certainly not in the Defined Benefit Liability on B/S. Are these items not in the AOCI also? If so, how is the A=L+E balanced? Thanks
I thought that unrecognized items were fully included in the liability under IFRS PV of Obligation -unrecognized items -plan assets =liability GAAP is a bit better in this respect because those unrecognized items are in OCI giving you a better idea of the underfunded or overfunded status. CFAI - Page 90 in volume 2
They have designed B/S reporting for Pension a little difficult to comprehend. First, we need to appreciate 2 key points. 1. Any reporting on Balance Sheet is NET reporting for Pensions. That is, Pension Liability (DBO / PBO) are not reported separately as Liability and Plan assets are not reported separately as Asset. Instead, what is reported is a single line with a net of these 2 figures. (both under US GAAP and IFRS) 2. Pension Obligation (PBO / DBO) already includes any UNrecognized plan costs/losses/benefits/gains. Then the rest of them: 3. Now under US GAAP, it is easy. Unrecognized costs/losses/… are already part of liability. The net of this liability (swelled by any unrecognized costs or reduced by any unrecognized gains) and plan assets is reported on the B/S as a single line item. Also, because liability part has increased due to the ‘unrecognized cost’ component, Equity is reduced by reporting these unrecognized costs in OCI to balance the equation A = L + E. Subsequently, in later periods, when these unrecognized costs are gradually recognized thru amortization, they will be reported as part of Pension Expense in I/S, removed from Equity (OCI) and come back to Equity thru the Income Statement. 4. For IFRS, they dont like unrecognized costs to be part of Liability somehow. So, they want us to reduce the Liability (i.e DBO) by these unrecognized costs first, before calculating that NET Asset/Liability figure. These unrecognized costs are reported nowhere, neither as part of Liability nor anywhere in Equity. They just become off-balance-seet item. Only place they are disclosed are in the footnotes. Since they are taken totally off from the balance sheet, there is no need for balancing them in the A = L + E equation. Hope this helps. We can discuss further if something is not correct or clear.
^ You completely lost me dude. haha!!
rus1bus Wrote: ------------------------------------------------------- > They have designed B/S reporting for Pension a > little difficult to comprehend. > > First, we need to appreciate 2 key points. > > 1. Any reporting on Balance Sheet is NET reporting > for Pensions. That is, Pension Liability (DBO / > PBO) are not reported separately as Liability and > Plan assets are not reported separately as Asset. > Instead, what is reported is a single line with a > net of these 2 figures. (both under US GAAP and > IFRS) > > 2. Pension Obligation (PBO / DBO) already includes > any UNrecognized plan > costs/losses/benefits/gains. > > Then the rest of them: > > 3. Now under US GAAP, it is easy. Unrecognized > costs/losses/… are already part of liability. > The net of this liability (swelled by any > unrecognized costs or reduced by any unrecognized > gains) and plan assets is reported on the B/S as a > single line item. Also, because liability part has > increased due to the ‘unrecognized cost’ > component, Equity is reduced by reporting these > unrecognized costs in OCI to balance the equation > A = L + E. Subsequently, in later periods, when > these unrecognized costs are gradually recognized > thru amortization, they will be reported as part > of Pension Expense in I/S, removed from Equity > (OCI) and come back to Equity thru the Income > Statement. > > 4. For IFRS, they dont like unrecognized costs to > be part of Liability somehow. So, they want us to > reduce the Liability (i.e DBO) by these > unrecognized costs first, before calculating that > NET Asset/Liability figure. These unrecognized > costs are reported nowhere, neither as part of > Liability nor anywhere in Equity. They just become > off-balance-seet item. Only place they are > disclosed are in the footnotes. Since they are > taken totally off from the balance sheet, there is > no need for balancing them in the A = L + E > equation. > > Hope this helps. We can discuss further if > something is not correct or clear. This explanation from rus1bus helps me. It may be clear once you understand what is the difference between recognised and unrecognised. When you calculate Present Value of DBO and you say that you dont want to report part of it (you call this part as unrecognised) you need to substract part of this obligation from Balance sheet either through Liability - Defined Benefit Obligation (IFRS) or OCI in Equity (US GAAP).
Oh man…i got lost in all this too. Let me know if I am grossly incorrect anywhere here… When computing the DBO liability under IFRS, UNrecognized items (primarily deferred gains and losses & past service cost) are adjusted for IN THE NET PENSION LIABILITY. (they are backed out). this is the primary dif between fas 158 and IFRS. Present Value of Obligation -unrecognized items -Fair value of plan assets =net liability on BS I believe the footnotes must include a reconciliation detailing unrecognized items.
Here is a simple example and the way I understand it: Under US GAAP, pension liability or asset is equal to: PV of Pension Benefit Obligation (PBO/DBO) less: fair value of plan assets In Accumulated Other Comprehensive Income (equity), under US GAAP, would be reported any unrecognized actuarial losses and unrecognized past service costs. Under IFRS, pension liability or asset is equal to: PV of PBO/DBO less: unrecognized actuarial losses less: unrecognized past service costs less: fair value of plan assets However, if the Company chooses to recognize actuarial gains and losses immeditately, the Company would not subtract the amount of actuarial losses to determine pension asset/liability. Insead, the Company would report actuarial losses in Accumulated Other Comprehensive Income (Recognized Income and Expense under IFRS).
…and boom goes the dynamite… thats how i understand it too
OK Let me see whether I can summarize this mess a bit. BALANCE SHEET As mentioned earlier, both methods report only NET liabilities on the balance sheet (from now on, I only assume underfunded plan thus NET liabilities, while you will have NET assets if you have overfunded plan) USGAAP: NET = PBO - Fair value of Plan assets. IFRS: NET = PBO - Fair value of Plan assets - UNRECOGNIZED actuarial - UNRECOGNIZED past service costs. The consequence for this is for USGAAP for the balance sheet: 1. the unrecognized prior service costs and actuarial gains and losses that are off-balance sheet and relegated to the disclosure in IFRS (and previously in old USGAAP) in are now recognized on the balance sheet in USGAAP, with an offsetting amount in accumulated other comprehensive income under shareholders’ equity. 2. All additional actuarial gains or losses and prior service costs that arise during the period MUST be recognized/updated in the accumulated other comprehensive income under shareholders’ equity (as well as updated in the NET liabilities as mentioned above). This recognition is shown in the Other comprehensive income in the income statement, but as you know, it is not part of regular earnings calculation. 3. When those actuarial gains or losses and prior service costs are finally recognized in the (regular) INCOME STATeMENT, one needs to ‘Recycle equity’; i.e., INCREASE comprehensive income with the RECOGNIZED amount (here assuming a loss), recognize it in the PL as net periodic benefit cost and DECREASE retained earnings (as a consequence) with similar amount. The term RECYCLE means that one essentially reclassifies the cost from ‘accumulated other comprehensive income’ to ‘retained earnings’ all within the shareholder’s equity accounts. REGULAR INCOME STATEMENT Both plans allow recognizing pension expense: The pension expense is a function of service cost, interest cost, expected return on pension plan assets, and amortization of unrecognized items. In recognizing/amortizing gains and losses of actuarial cost (NOT prior service cost), IFRS and USGAAP allows the so called corridor method and Faster recognition method. Corridor method means that portion of the gains or losses is recognized in earnings when the cumulative amounts exceed 10% of benefit obligation. Faster recognition method could mean immediate recognition of gains and losses in earnings in the fiscal year in which they occur. In short, there is essentially no difference between IFRS and USGAAP in the treatment of regular income statement. Hope it helps. PS: In mentioning this, I have intentionally left out some details like tax consequences and SORIE method in IFRS to simplify the explanation, for those who know more about this.
Thanks for your explanations elcfa, you have an excellent way of explaining this complex material. I thank you for taking the time to make this stuff a little bit more manageable for all of us. My question: You said and I quote, “IFRS: NET = PBO - Fair value of Plan assets - UNRECOGNIZED actuarial - UNRECOGNIZED past service costs” But then you go on to say, “the unrecognized prior service costs and actuarial gains and losses that are off-balance sheet and relegated to the disclosure in IFRS…” To me, the unrecognized prior service costs and actuarial gains are not off balance sheet under IFRS because they are part of your net liability calculation above under IFRS…" What I think you mean is that the unrecognized prior service costs and actuarial gains and losses that were previously off-balance sheet in US GAAP are now recognized on the balance sheet in US GAAP, with an offsetting amount in accumulated other comprehensive income under shareholders’ equity. Is this what you meant? Thanks much,
thommo77 You are certainly welcome and thank you for your kind words. I guess the term “off-balance sheet”, just conventionally mean that you don’t show it net. Let me give you an example, just for sure. Your PBO is 1000 fair value plan asset 1500 Net liabilities = 500 as shown in USGAAP. In IFRS (and previous USGAAP), If you have an accumulated UNrecognized liability of 200, you would keep it ‘off balance sheet’ and show net liabilities (or the right term is ‘minimum pension liability’) in the balance sheet to be ONLY 500-200 = 300. so the unrecognized liabilities is ‘off balance sheet’. Again, I ignore the effect of deferred tax here for simplicity. In case you don’t know, previous USGAAP (pre 2006, if I recall correctly) is essentially identical to IFRS. Hope it helps.