The implementation of Accounting Standards Codification 715 (ASC 715) in 2006 moved pension economics out of the footnotes and directly onto the financial statements of corporate America. The goal was to incorporate the net assets and liabilities of defined-benefit plans onto corporate balance sheets so that a company's investors could gain a more transparent view of the financial impact associated with its pension plan. However, under the current Generally Accepted Accounting Principles (GAAP), plan sponsors can use a variety of techniques to smooth out that impact.
GAAP rules allow for delayed recognition on the income statement of gains or losses on pension plans' assets and liabilities. Plan sponsors use an expected return figure that reflects their long-term expected returns on their current portfolio. Annual variances between expected and actual market returns are accrued in "accumulated other comprehensive income" (AOCI) on the balance sheet. Likewise, deviations from expected liability growth are accrued in AOCI. The AOCI amount is then amortized over time on the income statement, usually over the expected future working lifetime of plan participants. Plan sponsors are, in effect, shielded from a significant portion of the actual volatility of their pension assets and liabilities.
Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.
Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Critical Treasury & Risk information including in-depth analysis of treasury and finance best practices, case studies with corporate innovators, informative newsletters, educational webcasts and videos, and resources from industry leaders.
- Exclusive discounts on ALM and Treasury & Risk events.
- Access to other award-winning ALM websites including PropertyCasualty360.com and Law.com.
*May exclude premium content
Already have an account? Sign In
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
