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4.11 Accounting for pensions in a spinoff
Publication date: 20 Dec 2023
us Pensions guide
In a spinoff, a reporting entity distributes shares of a subsidiary pro-rata to its shareholders. Generally, the distributing company (spinnor) does not recognize a gain or loss on the distribution in accordance with ASC 845-10-30-10 and ASC 505-60-25-2. If the subsidiary being spun off (spinnee) has employees that participate in pension plans, the spinnor will need to determine how the plans will be treated in connection with the spinoff. The following are some of the more common situations encountered.
4.11.1 Standalone spinnee plan
If the employees or retirees of the spinnee participate in a separate pension plan from the employees and retirees of the spinnor, no additional accounting is needed. The spinoff would not result in any change to the benefits or future years of service of the parent’s pension plan; therefore, no curtailment or settlement would occur in connection with the spinoff. Upon the consummation of the spinoff, the net asset or liability (funded status) of the plan of the spinnee would be removed from the spinnor’s balance sheet and included as part of the distribution charged against retained earnings. In addition, any amounts of accumulated other comprehensive income related to the spinnee’s pension plan would be charged or credited to retained earnings of the spinnor at the time of the spinoff, and those balances would be “assumed” by the spinnee for purposes of its post-spin accounting for the plan.
4.11.2 Plan division
When the entity has plans that include employees and retirees of both the spinnor and spinnee, and the entity will be separating the pension plan(s) (e.g., a “mirror” plan will be established for the employees and retirees of the spinnee), the separation would be treated as a plan division in accordance with the guidance discussed in PEB 4.10. That guidance indicates that the plan should be remeasured immediately before the division in order to determine the amounts of unrecognized net gain or loss or prior service cost to be allocated among the two plans. After the plan division, all of the balances—funded status and AOCI—ascribed to the plan of the spinnee should be charged against retained earnings of the spinnor as part of the distribution to shareholders in the spinoff.
4.11.3 Plan remains with spinnor
In some cases, an entity has plans that include employees and retirees of both the spinnor and spinnee, and the entire plan (including the benefit obligation and plan assets) will be retained by the spinnor. The employees and retirees of the spinnee may remain participants in the plan (for any vested and accrued benefits earned to-date), but will typically not accrue additional benefits under the plan. Instead, alternative benefits for future service may be provided by the spinnee (for example, an enhanced defined contribution plan).
As discussed in PEB 4.2, a curtailment occurs when an event significantly reduces the expected years of future service of present employees covered by the employer's pension plan or eliminates the accrual of defined benefits for some or all future services of a significant number of employees. As a result of the spin transaction and the elimination of the spinnee employees from the plan retained by the spinnor, a curtailment of the plan may be triggered if it has not been frozen previously. A gain or loss may need to be recognized as a result of the curtailment.
If the spinoff does not result in a curtailment (i.e., the reduction in expected years of future service or plan participants is not significant) the effects of the spinoff would merely represent experience of the plan that would be captured in the next measurement of the plan. Unlike a disposal of a component resulting in a gain or loss, when “curtailment-like” accounting is applied, as discussed in PEB 4.2.2, a spinoff is not a “realization event.”
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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