Page 42 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

Corridor Approach (U.S. GAAP only) READING 15: EMPLOYEE COMPENSATION: POST-EMPLOYMENT AND SHARE BASED

For any period, once the beginning balance of actuarial gains and
losses exceed 10% of the greater of the beginning PBO or plan MODULE 15.3: DEFINED BENEFIT PLANS, PART 1—PERIODIC COST
assets, amortization is required. This arbitrary 10% “corridor”
represents a materiality threshold whereby gains and losses should
offset over time.
The excess amount over the “corridor” is amortized as a component of periodic pension cost in P&L over the remaining service life of the employees.
The amortization of an actuarial gain reduces periodic pension cost in P&L and the amortization of an actuarial loss increases periodic pension cost in
P&L. Companies can choose to amortize actuarial gains and losses more quickly than implied by the corridor method. However, the application has to
be consistent for gains as well as losses and over time.

Past (prior) service costs. When a firm adopts or amends its pension plan, the PBO is immediately increased.

• U.S. GAAP: Not immediately expended but reported as a part of other CI and amortized over the remaining service life of the affected employees.

• IFRS: the past service costs are recognized in periodic pension cost in P&L immediately (i.e., they are expensed immediately and not amortized).

• U.S. GAAP: the amortization of actuarial gains and losses and the amortization of past service costs reduces the volatility of periodic pension cost in P&L.
Thus, the amortization process results in periodic pension cost in P&L that is “smoothed.”

• IFRS: there is no amortization. Actuarial gains and losses are not subject to the corridor method and hence never transferred out of OCI into IS.