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Do you think it is appropriate for some of the gains and losses on defined benefit...

Do you think it is appropriate for some of the gains and losses on defined benefit pension plans to avoid the income statement and instead be reported as other comprehensive income?

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Answer #1

Please note: Some extracts of this answer are taken from the accounting standards....

Under U.S. GAAP, in the period that a pension plan is initiated or amended, the resulting prior service cost increases the PBO and is recorded as unrecognized prior service cost in other comprehensive income. The unrecognized prior service cost in accumulated other comprehensive income is amortized to net periodic pension cost over the plan participant's remaining years of service. The amortization is calculated using the unrecognized prior service cost balance at the beginning of the period.

Accounting for Gains and Losses: Under U.S. GAAP, entities have two choices when accounting for gains and losses:

1. Recognize gains and losses on the income statement in the period incurred; or

2. Recognize the gains and losses in other comprehensive income in the period incurred and then amortize the unrecognized gains and losses to net periodic pension cost over time using the corridor approach. Most companies choose this option to smooth earnings.

The Corridor Approach: Under the corridor approach, an entity's net unrecognized gain or loss is amortized over the employees' average remaining service period if, as of the beginning of the year, this amount exceeds 10 percent of the greater of the beginning of the year balances of:

  • Market related value of plan assets = Assets or
  • Projected benefit obligation (PBO) = Liabilities

Thus, it is appropriate for some of the gains and losses on defined benefit pension plans to avoid the income statement and instead be reported as other comprehensive income.

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