We conduct simulations on the value of the project to the claimants of the firm while varying the amount of financial leverage, the size of the projected benefit obligation
, and the asset allocation of the pension fund.
Amortization under the corridor approach is required "if, as of the beginning of the year, that net gain or loss exceeds 10 percent of the greater of the projected benefit obligation
or the market-related value of plan assets.
In addition, for each year presented and each benefit plan, companies must show reconciliations of the beginning and ending balances of the plan assets and the projected benefit obligation
, as well as detail of the calculation of the benefit expenses.
For pension plans, the benefit obligation is the projected benefit obligation
, which is the present value of all future benefits earned by employees prior to the current date.
Under SFAS 158, companies with defined benefit pension plans must recognize the difference between the plan's projected benefit obligation
and its fair value of plan assets as either an asset or a liability.
Before Settlement Impact of Settlement Projected Benefit Obligation
$ (100,000,000) $ 40,000,000 Assets 120,000,000 (42,000,000) Funded Difference 20,000,000 (2,000,000) Transition Obligation 5,000,000 0 Prior Service Cost 0 0 Unrecognized Gain (35,000,000) 15,588,000 (Accrued)/ Prepaid Pension Expense $ (10,000,000) $13,588,000 After Settlement Projected Benefit Obligation
$ (60,000,000) Assets 78,000,000 Funded Difference 18,000,000 Transition Obligation 5,000,000 Prior Service Cost 0 Unrecognized Gain (19,412,000) (Accrued)/ Prepaid Pension Expense $ 3,588,000
A reconciliation of the projected benefit obligation
for pensions and the accumulated post-retirement benefit obligation from beginning to end of the year, showing separately the service cost, interest, contributions by participants, actuarial gains and losses, foreign currency exchange rate changes, benefits paid, amendments, business combinations, divestitures, curtailments, settlements, and special termination benefits.
Under pension accounting, service cost is the increase in projected benefit obligation
earned during a period.
The new requirement will affect stockholders' equity in many instances, but most probably in companies that sponsor dollar-per-month plans, where the projected benefit obligation
is equal to the ABO, and other plans whose unfunded ABO rose as a result of actuarial losses, such as declines in asset values stemming from the stock market crash.