Pensions and Retirement Benefits

A pension plan has a benefit formula, demographic assumptions, salary scale, and discount rate, and you must compute accrued liability and normal cost.

Under projected unit credit (PUC), the accrued liability for an active member is the APV of the benefit earned to date based on projected final pay. Normal cost is the APV of the benefit accrued in the upcoming year. Multiply by survival and decrement probabilities up to retirement, then discount the annuity certain at retirement. Sum across all active members for the plan total.

AL_PUC = APV at valuation of benefit attributed to past service; NC = APV of benefit accrual in next year.

Plan asset value, projected benefit obligation, service cost rate, interest rate, expected return on assets, and gains/losses are given, and you must compute pension expense for the year.

Pension expense = Service cost + Interest cost on PBO - Expected return on plan assets + Amortization of prior service cost + Amortization of net actuarial gains/losses. Build a roll-forward of PBO and plan assets to identify each component. Recognize that under IAS 19 (revised), the discount rate is also used for the expected return, simplifying components.

Pension expense = SC + IC - ERA + Amortization of PSC + Amortization of gains/losses.

A pension plan is reported under both IAS 19 and ASC 715 and you must identify the differences in expense recognition.

ASC 715 (US GAAP): uses expected return on assets, smooths gains/losses with a corridor approach (OCI), amortizes prior service cost. IAS 19 (revised 2011): uses discount rate as expected return, recognizes remeasurements (gains/losses, prior service cost) immediately in OCI without amortization. Identify which items go through P&L vs OCI under each.

IAS 19: discount rate = ERA, immediate OCI recognition. ASC 715: ERA separate, corridor amortization.