Amortization of Unrecognized GainsLosses for Pensions Vickie

Amortization of Unrecognized Gains/Losses for Pensions Vickie Plato, accounting clerk in the personnel office of Streisand Corp., has begun to compute pension expense for 2019 but is not sure whether or not she should include the amortization of unrecognized gains/losses. She is currently working with the following beginning-of-the-year present values for the projected benefit obligation and market-related values for the pension plan Projected Benefit Obligation ar 2016$2,200,000 20172,400,000 20182,900,000 20193,900,000 $1,900,000 2,500,000 2,600,000 3,000,000 The average remaining service life per employee in 2016 and 2017 is 10 years and in 2018 and 2019 is 12 years. The net gain or loss that occurred during each year is as follows 2016$280,000 loss 201785,000 loss 201812,000 loss 201925,000 gain Answer the following questions in the Discussion Board You are the manager in charge of accounting. Write a memo to Vickie Plato, explaining why in some years she must amortize some of the net gains and losses and in other years she does not need to. In order to explain this situation fully, you must compute the amount of net gain or loss that is amortized and charged to pension expense in each of the 4 years listed above Include an appropriate amortization schedule, referring to it whenever necessary Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Accounting for pensions and postretirement benefits. Intermediate accounting (16th ed.). (p. 1177). New York, NY: John Wiley & Sons, Inc

Solution

To: Vickie Plato , Accounting clerk

From: (Your Name)

Date :

Subject: Amortization of gains and losses in pension expense

Pension expense includes several components one occasionally included in the amortization of cumulative gains/losses. These gains/losses occur for two reasons. First, the plan assets may provide a return that is either greater or less than what was expected .Second, changes in actuarial assumptions may create increases or decreases in the pension liability. If these gain/losses are small in relation to the projected benefit obligation (PBO) or the market related value of plan assets (PA), then do not include them in annual pension expense

If , in any given year, the gains or losses become too great , then at least a portion must be included in pension expense so as not to understate or overstate the annual obligation. This is done through a process called amortization.

To decide whether or not you should include gains/losses in annual pension expense calculate 10 percent of either PBO or the PA opening balance (whichever is greater) as a “corridor”. Amortize the amount of any gain or loss falling outside the average remaining service life of the active employees.

Thus , in the attached schedule , no amortization of the $280,000 loss in 2016 was required because the balance in the gain/loss account at the beginning of that year was zero. However , at the beginning of 2017 , the balance in that account was $280,000.The 10 % corridor is $250,000 , so the loss exceeds this corridor by $30,000. Since the remaining service life of employees is 10 years , you derive the amortized portion by dividing $30,000 by 10:$3,000

Note that the amortized portion of the gain/loss from the previous year is combined with the current gain/loss. Check this new sum against a newly calculated 10 percent corridor.If the sum exceeds this corridor then amortize the excess.

In the attached schedule , the unamortized loss from 2017 ($277,000) was added to the 2017 loss of $85,000 , resulting in a cumulative loss of $362,000 .this amount exceeds the new corridor ($290,000) by $72,000.However the remaining service life has been changed to 12 years , resulting in annual amortization of only $6,000

Finally , if the losses form 2018 are added to the unamortized portion of the loss from prior years , the sum ($368,000) falls within the 2019 corridor ($390,000) and does not need amortization at all

Corridor and Minimum Loss Amortization Schedule

Year

PBO(a)

PA(a)

10% Corridor

Accumulated OCI(G/L)(a)

Minimum Amortization of Loss

2016

$2,200,000

$1,900,000

$220,000

0

0

2017

2,400,000

2,500,000

250,000

280,000

3,000(b)

2018

2,900,000

2,600,000

290,000

362,000(‘c)

6,000(d)

2019

3,900,000

3,000,000

390,000

368,000(e)

0

a.As of the beginning of the year

b.($280,000-$250,000) / 10YEARS =$3,000

c.$280,000-$3000+$85000=$362,000

d.($362,000-$290,000) /12 YEARS = $6,000

e.$362,000 - $6,000 + $12,000 =$368,000

Corridor and Minimum Loss Amortization Schedule
Year	PBO(a)	PA(a)	10% Corridor	Accumulated OCI(G/L)(a)	Minimum Amortization of Loss
2016	$2,200,000	$1,900,000	$220,000	0	0
2017	2,400,000	2,500,000	250,000	280,000	3,000(b)
2018	2,900,000	2,600,000	290,000	362,000(‘c)	6,000(d)
2019	3,900,000	3,000,000	390,000	368,000(e)	0