LOS e: Explain the impact on financial statements of International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (U.S. GAAP) for pension and other post-employment benefits that permit items to be reported in the footnotes rather than in the financial statements.

Under current U.S. GAAP, companies are required to report only the net asset or liability amount. They cannot show assets and liabilities separately. Although some smoothing details are still disclosed in the footnotes, all major components of pension assets and liabilities are now required to be shown on the balance sheet.

Changes in the projected benefit obligation (PBO) and plan assets immediately affect the funded status (difference in PBO and plan assets) and the full amount of the changes is reflected on the balance sheet when the change occurs.

Changes in actuarial assumptions and past service costs are recognized in the income statement over time thereby smoothing pension expense.

Since the funded status is equal to the net pension asset (liability) reported on the balance sheet under U.S. GAAP, then no reconciliation is required. Note: However, the reconciliation (as illustrated below) is required under current IFRS.

Funded status (Fair value of plan assets – PBO)
Unrecognized deferred (gains) and losses
+ Unrecognized past service cost
Unrecognized transition (asset) or liability
=Net pension asset (liability) reported on the balance sheet

Neither the PBO nor the plan assets are separately reported on the balance sheet. The funded status is the difference in the PBO and the plan assets. If the PBO exceeds the plan assets, the difference is reported as a liability. If the plan assets exceed the PBO, the difference is reported as an asset. If the amounts are the same, then neither a liability nor asset needs to be reported.

Plan amendments (i.e. additional benefits provided that increase the amount of the employer’s obligation to plan participants) generally result in an increase of the PBO.

The fair value of plan assets at the beginning of the period is increased by the actual return on plan assets as well as any employer contributions. It is reduced by the amount of benefits paid.

The calculation of pension expense is not affected by the new standard. Pension expense still includes the smoothing effects of the amortization of deferred gains and losses and the amortization of past (prior) service costs.

Under current U.S. GAAP, the net pension asset or liability reported on the balance sheet is equal to the funded status, without adjustment for unrecognized items. However, under IFRS, the net pension asset or liability reported on the balance sheet represents the funded status adjusted for unrecognized items.

Under current IFRS, firms are required to provide a reconciliation of the funded status and the reported net pension asset or liability. The reconciliation can be used to make an adjustment to the new standard for comparison purposes.

Under IFRS the pension liability would be lower because of the $39 million in unamortized past service costs. Under IFRS, the balance sheet entry (funded status) excludes amounts that have not been recognized in the income statement (e.g., deferred gains and losses, and past service cost).