How is pension expense calculated under SFAS No. 87, and when is pension liability recognized?
What will be an ideal response?
ANSWER:
SFAS No. 87 requires the use of one actuarial method, the benefits/years-of-service approach using projected future salaries, and calculates accrued pension expense as the sum of:
(1) Service cost for the year using the accrued benefit actuarial method
(2) Interest cost for the year relating to the actuarial present-value increase in accumulated benefits
(3) A reduction for the effect of the expected return on plan assets
(4) Systematic amortization of unrecognized prior service cost arising from plan adoptions and amendments, with such costs allocated over the remaining period of employee service
(5) Corridor amortization, whereby actuarial gains/losses are amortized if the cumulative amount of such gains/losses exceed 10 percent of the greater of plan assets at fair value or the projected benefit obligation
(6) Straight-line amortization of a transitional “net unrecognized obligation/asset” at the time of adopting SFAS No. 87
A pension liability is recognized if yearly funding is less than periodic expense and a pension asset is recognized if yearly funding exceeds the periodic expense.
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