19831985

we can just save ourselves a lot of time by accepting the following as IFRS's formula for a Defined Benefit Asset:

Fair Value of Plan Assets
+ unrecognized actuarial losses (or less unrecognized gains)
+ unrecognized past service cost
+ unrecognized transition liabilities (or less gains)
– Defined Benefit Obligation from B.S.
= Defined Benefit Asset (negative value is a DB Liability)

If the figure is indeed an Asset, IFRS requires the company to report the lower of that item, or this one here:

Unrecognized net actuarial losses
+ unrecognized past service cost
+ PV of any economic benefits available in the form of refunds or plan reductions in future contributions to the plan (from what I understand, this = Plan Assets - DBO)
= DB Asset

IFRS further states that if the bottom thing is the lower item, you have to post the difference between this item and the upper item in the footnotes, though the text doesn't say explicitly what you post it as, only that the difference is posted there.

GAAP seems easier to me in this topic by just not allowing the unrecognized losses/gains to be deferred. the key to me understanding what is going on with this stupid formula has something to do with deferring those expenses and that somehow being an asset (I think, obviously not too sure tho).

I know what to do, I'm just not sure why it's being done.

ryanlb

CP, I realize it was strange of me to give the formula in such a way that makes a negative value an asset, and a positive value a liability, but that's how they did it in the example. Hendriar14 has put it in terms of a positive being an asset, but he had the signs wrong on it unfortunately, which is my dilemma; it seems more right the way he's put it, but the text says otherwise. Here's the same formula to solve having a positive be an asset, and a negative be a liability:

Fair value of Plan Assets
– Unrecognized actuarial gains (or plus losses)
+ unrecognized past service cost
+ unrecognized transition (assets) or liabilites
– Defined Benefit Obligation
= Defined Benefit Asset (negative value is a liability)

So in my example, world 1 (high service cost) still gives:
50 + 700 – 500 = $250 Asset (overfunded position)

and world two
50 + 25 – 500 = -$425 Liability (underfunded position)

note that I made a mistake when I calculated world 2 in my initial post, the figure for the net underfunded position should have been a liability of 425, not 375, idk why I thought $500 - 25 - 50 = $375, it's not, it's 425 (ie liability of 425)

To see more specifically what I'm talking about, look at examples one and two on pages 199-201 of the CFAI readings (reading 24).

here are the figures for example 1:
DBO = 5485
unrec. transition liability = 50
unrec. actuarial losses = 59
unrecognised past service cost = 70
fair value of plan assets = 5798

they solve for a liability as a positive value, asset value as negative, but I'll do it so that an asset is positive here:

Fair value of Plan Assets 5798
– Unrecognized actuarial gains (or plus losses) +59
+ unrecognized past service cost +70
+ unrecognized transition (assets) or liabilites +50
– Defined Benefit Obligation -5485
= Defined Benefit Asset (negative value is a liability) =492 Asset

They are clearly showing that having more unrecognized costs/losses makes the fund's asset position greater (or liability position smaller) which seems counter intuitive to me.
If anyone understands that and can explain it, I'm all ears! for now, i'm gonna go robot on the formula!

tianxin

Simply put, the reason why it seems counter intuitive is because we're dealing with "unrealized gains and loses. If we didn't add back loses and subtract gains it would through off our accounting equation. Does this help?

scarecrow

if you started with a sign on the DBO - it is a liability - so it has to be negative...

so -500 -725 = -1225 (a bigger liability).

CP

MiniMe7

Here's another way to look at it

Funded Status (FV plan assets- PBO)

+/- Unrecognized deferred (gains) and loses
+ unrecognized past service cost
+/- unrecognized transition (assets) or liabilites
= Net Pension asset(liabilites) reported on balance sheet

losses are added and gains are subtracted because G/L are not recognized immediatley. This will keep the accounting equation in balance.