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4.4 Curtailment accounting
Publication date: 20 Dec 2023
us Pensions guide
The effect of a curtailment can be either a gain or a loss. The gain or loss is the sum of two elements. The first element is the prior service cost accumulated in other comprehensive income associated with years of service no longer expected to be rendered. For purposes of the curtailment calculation, prior service cost includes (a) the cost of retroactive plan amendments and (b) any remaining transition obligation (see PEB 4.4.1). The second element is the change in the projected benefit obligation, in some cases offset by the amount of unrecognized gains and losses (see PEB 4.4.2.2).
Depending on whether the combined effect of these measurements is a gain or loss affects the timing of recognition. A net curtailment loss is recorded when it is probable that a curtailment will occur and the effect of the curtailment is reasonably estimable. A net curtailment gain is deferred until realized (e.g., when the plan amendment is adopted or the employee terminations occur). If an employer cannot unilaterally terminate its plan because PBGC or other oversight entity approval is required, the net gain should be recognized when approval is received rather than when the amendment is adopted. Refer to PEB 4.4.4 for further discussion about the timing of recognition for curtailments. Also see several illustrations in ASC 715-30-55 that demonstrate curtailment accounting.
See PEB 2.7.2 for a discussion of when to remeasure the plan’s obligations and assets in connection with a curtailment.
4.4.1 Prior service cost to be recognized in a curtailment
The theory behind recognition of prior service cost when a curtailment occurs is because the work force has been reduced or the accrual of benefits for some or all future services has been eliminated. Therefore, the employer will not realize all of the expected future economic benefits of prior plan amendments. Consequently, the unamortized prior service cost relating to the affected employees or years of service should be recognized immediately.
The prior service cost to be recognized is computed as follows:
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The determination of the percentage reduction should only include the expected future service years for those active participants who were included in the original determination of the prior service cost amortization. For example, if an employer's pension plan includes both union and salaried employees, and a prior plan amendment affecting only salaried employees was being amortized over the expected future years of service of the salaried employees, a curtailment that affects only the union employees would not result in immediate recognition of the prior service cost associated with the salaried employees. Any existing prior service cost that is not immediately recognized due to the curtailment is generally amortized over the remainder of the original amortization period.
A curtailment may result in all or almost all of a plan's participants becoming inactive, in which case prior service cost amortization would subsequently be based on the remaining life expectancy of the inactive participants. See PEB 3.2.6.4 for further discussion of this topic.
Acceleration of negative prior service cost in a curtailment is handled in a similar fashion. See further discussion of negative plan amendments in PEB 4.6.1).
4.4.2 Net gain/loss from change in projected benefit obligation
Calculating the second element of gain or loss from a curtailment involves two steps: (1) calculate the change in the projected benefit obligation arising from the event causing the curtailment and (2) compare that change to the unrecognized net gain or loss accumulated in other comprehensive income.
4.4.2.1 Change in projected benefit obligation
The projected benefit obligation should first be remeasured using the current discount rate and reflect any other changes in assumptions or the plan's participant population, if significant, before considering the event causing the curtailment. Any gain or loss arising on that remeasurement will become part of the unrecognized net gain or loss that will be used in step 2 of the calculation.
A curtailment may cause the projected benefit obligation to decrease (a gain) or increase (a loss). For example, in a plan when pension benefits are based on final compensation levels, a curtailment caused by a reduction in force will generally reduce the projected benefit obligation because projected future salary increases will no longer materialize. On the other hand, if employees' services are terminated, acceptance of early retirement benefits provided by the plan may exceed estimated rates of acceptance anticipated prior to the curtailment. If the benefits are not actuarially reduced for other reasons, the projected benefit obligation will increase. In this type of arrangement, usually called "subsidized early retirement benefits," the actuarial present value of early retirement benefits exceeds the actuarial present value of normal retirement benefits (at current salary levels). The remeasurement of the projected benefit obligation should reflect the net effect on the projected benefit obligation of all of the elements of the curtailment, both the reductions and increases, as applicable.
4.4.2.2 Comparison of change in PBO to unrecognized gain/loss
Once the change in the projected benefit obligation arising from the curtailment event is determined, it is evaluated for potential recognition in the income statement by comparing it against the unamortized gain or loss in AOCI, as follows (for this purpose, any remaining transition asset is considered a gain):
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4.4.3 Pension plan freezes
Plan freezes occur when an employer amends the plan to eliminate benefit accruals related to future service. An amendment to a defined benefit pension plan to permanently eliminate all future benefit accruals is considered a "hard freeze." In other situations, employers may eliminate benefits for future service, but continue to consider salary increases in determining the defined benefit related to past service, which is considered a "soft freeze." Whether the plan freeze results in a curtailment depends in part on the type of freeze. It also depends on whether the freeze is temporary (for example, an employer may choose to suspend benefit accruals only until the employer's financial condition improves) or permanent (the employer may amend the plan to permanently eliminate all future benefit accruals). In other situations, the employer may announce a freeze that will become effective in a future year, with additional benefits continuing to accrue up to the effective date of the freeze.
4.4.3.1 Hard pension plan freeze
Since a curtailment occurs when an event eliminates the accrual of defined benefits for some or all future service for a significant number of employees, a permanent hard freeze will generally require curtailment accounting.
4.4.3.2 Soft pension plan freeze
ASC 715 does not provide guidance on whether a soft freeze should result in a curtailment; specifically, it does not address whether the increase in the accumulated benefit obligation as a result of future salary increases constitutes the accrual of benefits for future service. As such, employers may elect an accounting policy as to whether a soft freeze constitutes the elimination of the accrual of defined benefits.
If an employer adopts a policy to consider a soft freeze as a curtailment, it would also need to evaluate whether a soft freeze meets the significance threshold described in PEB 4.2.2 for curtailment accounting. Because participants’ accrued benefits continue to increase in relation to future salary levels, a soft freeze will generally not result in a change in the PBO. Thus, the only effect of curtailment accounting for a soft freeze is the immediate recognition of the relevant portion of unamortized prior service costs.
If the employer adopts a policy to consider a soft freeze merely a modification to the benefit arrangement (i.e., view the right to continued salary increases as continuing to accrue benefits for future services), curtailment accounting would not apply, and the existing balance of unamortized prior service costs would continue to be amortized over its existing amortization period. In addition, because the PBO has not changed, there would be no prior service cost or credit arising from the plan amendment that gave rise to the soft freeze. The only immediate accounting impact would be a reduction in service cost, but only prospectively from the next measurement date, which, if not considered a curtailment or significant event, would not occur until the next annual remeasurement.
4.4.3.3 Temporary pension plan freeze
A temporary freeze may require curtailment accounting if the freeze eliminates the accrual of defined benefits for some or all future service for a significant number of employees. ASC 715-30-55-171 and ASC 715-30-55-172 provide that even a temporary suspension of benefit accruals would meet the definition of a curtailment if the suspension eliminates significant pension accruals for some or all of present employees' future service. The probable duration of a temporary freeze should be considered when determining whether the event is significant (see PEB 4.2.2) and, thus, requires curtailment accounting. If the estimated duration of the freeze is a range of years and no single duration in that range is a better estimate than any other, then the determination of significance should be based on the estimated duration of the freeze within the range that results in the minimum net gain or loss from curtailment accounting.
4.4.3.4 Post-freeze pension accounting
Once an amendment that results in a hard freeze is adopted, pension benefits will cease to accrue as of the effective date of the freeze. If an employer considers all or almost all of the participants to be "inactive" (based on the policy choice described in PEB 3.2.7.2 because they are no longer earning additional defined benefits under the plan as a result of the hard freeze, the employer may change the period over which gains and losses are subsequently amortized and the period over which any prior service credit that may have arisen from the plan amendment that led to the freeze is amortized. At the next measurement date after the effective date of the hard freeze, employers could begin to use the new amortization period equal to the average remaining life expectancy of the participants instead of the average remaining service period.
Once a plan is frozen, such that the accrual of future defined benefits cease, no further curtailments can occur because the definition of a curtailment is the elimination of the accrual of benefits for future service. For example, the layoff of employees who participate in a frozen plan may lead to an earlier than expected payment of benefits by the plan (e.g., lump sum payouts, early retirements), which could result in an increase in the present value of the PBO. Nevertheless, because the plan is already frozen and no benefits are being earned, curtailment accounting would not apply and the increase in the PBO would be treated as an actuarial loss at the next remeasurement.
Figure PEB 4-1 summarizes the appropriate accounting for pension plan freezes
Figure PEB 4-1
Accounting for pension plan freezes
Accounting for pension plan freezes
Type of freeze |
Curtailment |
Post-freeze amortization period |
Hard freeze – Immediately effective
|
Yes
|
Remaining life expectancy
|
Hard freeze – Delayed effective date
|
Yes
|
Prior to effective date: remaining service period
Next remeasurement after effective date: Remaining life expectancy
|
Temporary freeze
|
Maybe, depending on whether the probable duration of the freeze results in a significant reduction in future years of service for which benefits are earned
|
Remaining service period
|
Soft freeze – Immediately effective
|
Depends on policy; see PEB 4.4.3.2
|
Curtailment: remaining life expectancy
No curtailment: remaining service period
|
Soft freeze – Delayed effective date
|
Depends on policy; see PEB 4.4.3.2
|
Curtailment:
No curtailment: remaining service period
|
4.4.4 Timing of recognition of curtailments
The timing of recognition of a curtailment depends on the reason for the curtailment and will differ if it is the result of a plan termination or amendment versus the result of employee terminations. In any circumstance, however, a curtailment is a "significant event" and significant events require a remeasurement of plan obligations and assets. Thus, immediately prior to measuring the effect of a curtailment, the projected benefit obligation and fair value of plan assets should be remeasured based on the pre-existing plan terms and demographics (i.e., prior to curtailment). In performing such remeasurements, current discount rates and the fair value of plan assets should be obtained as of the remeasurement date, and other assumptions and significant changes in the plan's population prior to the curtailment should be reconsidered as of that date. That remeasurement will change the amount of gains and losses in accumulated other comprehensive income, which will be relevant when the effects of the curtailment event itself are measured.
4.4.4.1 Curtailment resulting from plan termination or amendment
When a curtailment is a result of a change to the plan—a plan amendment or, in the more extreme case, a plan termination—the gain or loss is generally recognized at the date the amendment is adopted. ASC 715-30-55-184 indicates that the effects of a curtailment that will result in a net gain should be measured and recognized when an employer amends its plan, and not when the plan termination or freeze is effective. Thus, the timing of recognition in these situations is generally the same regardless of whether the curtailment results in a gain or loss. Even if the result (or expected result) of the curtailment is a loss, it should not be recognized prior to when the employer actually amends the plan, even if it is probable that the plan will be amended. The date a plan amendment is adopted often precedes the date at which the amendment will become effective, which sometimes is months or even years later. See PEB 4.6.2 for additional discussion of the timing of plan amendments.
4.4.4.2 Curtailments resulting from employee terminations
When a curtailment is a result of employee terminations (e.g., closing of a plant or a significant reduction in force), the timing of recognition depends on whether the curtailment will result in a gain or a loss. A curtailment loss should be recognized when it is probable that a curtailment will occur and the amount of the loss is reasonably estimable. Conversely, recognition of a curtailment gain should be deferred until the related employees terminate. Thus, even for a single restructuring event, curtailments in multiple plans may be recognized in different periods depending on the circumstances of each plan.
At the date a decision is made to terminate employees, an estimate should be made of whether there will be a curtailment gain or loss. If the estimate indicates a curtailment loss is expected, measurement and recognition of the loss should occur when the curtailment is probable of occurring and its effects are reasonably estimable. This often precedes the period in which the actual employee terminations occur. For example, if a curtailment will result from a disposal of a component of an entity, a curtailment loss would be measured and recognized in earnings when the disposal is probable of occurring and the curtailment effects are reasonably estimable. The assessment of probable in this context is independent of the assessment of whether any related property, plant, and equipment has met all the criteria to be classified as held for sale under ASC 360-10-45-9, Property, Plant and Equipment. However, if the curtailment is expected to result in a gain, measurement and recognition of the gain would be deferred until the employees are terminated (typically when the disposal occurs).
4.4.4.3 Methods of recognizing curtailment gains
When a gain is expected from a curtailment resulting from employee terminations, it should not be recognized until those employees terminate. In some situations, employees may be terminated over a period of time pursuant to a single overall restructuring program, and those aggregate terminations may be sufficient to result in a curtailment.
Employers can elect to recognize the curtailment gains in this situation in one of two ways:
a) measure and record the curtailment gain based on the cumulative terminations at the end of each interim reporting period, even if the terminations up to that date would not by themselves meet the significance threshold for a curtailment event, or
b) postpone any curtailment gain recognition until the aggregate terminations result in a sufficient reduction in expected years of future service to meet the significance threshold.
Whichever approach is selected would constitute an accounting policy election and should be followed consistently for future termination events.
Example PEB 4-1 addresses the timing of recognition of curtailment gains and losses related to a plan amendment when the full impact of the curtailment may not be known until a later period.
EXAMPLE PEB 4-1
Recognition of curtailment gains and losses when the impact of the curtailment is not yet known
Recognition of curtailment gains and losses when the impact of the curtailment is not yet known
On October 31, 20X1, PEB Corporation's board of directors approved freezing PEB Corporation’s defined benefit plan effective immediately. In conjunction with freezing the plan, affected employees will need to make certain one-time irrevocable elections regarding matters such as early retirement, joint and survivor annuities, and the treatment of a companion profit sharing defined contribution account that the reporting entity allows to be annuitized through the pension plan. The participants of the plan are to be provided with detailed information about their elections during a specified time period in early 20X2 and will need to make their final elections by June 30, 20X2. PEB Corporation's action to freeze the pension plan eliminates the accrual of defined benefits for future years of service and, thus, results in a curtailment of the plan.
When should PEB Corporation record the curtailment?
Analysis
The curtailment gain or loss should be calculated in the fourth quarter of 20X1 using management's best estimate about how the PBO will be affected by the plan changes and employee elections. If the final impact of the employee elections in June 20X2 is different from their original estimates, these differences should be treated as an actuarial gain or loss at the next measurement date and accounted for in accordance with PEB Corporation’s policy (i.e., amortization or immediate recognition).
PEB Corporation should not wait until the employee elections are finalized in June 20x2 to record the curtailment gain or loss, nor should the amount of curtailment gain or loss recognized in 20x1 be adjusted when the final elections are known in 20X2. The rationale for this approach is that the effects of the curtailment should be recognized when the amendment is effective. Even though the exact measurement of the ultimate effect will depend on the employee elections, the need to estimate those elections is no different than many of the actuarial assumptions developed during the normal measurement of the plan.
Example PEB 4-2 illustrates the accounting for a net curtailment gain in one plan and a net curtailment loss in another plan as a result of the same restructuring event.
EXAMPLE PEB 4-2
Restructuring event causes a net curtailment gain in one plan and a net curtailment loss in another plan
Restructuring event causes a net curtailment gain in one plan and a net curtailment loss in another plan
On December 31, 20X1, PEB Corporation decided to restructure its operations, resulting in the layoff of 10,000 employees. The employees that will be affected by the layoff are covered by two separate pension plans, one for hourly workers (Hourly Plan) and one for salaried workers (Salaried Plan). At the time PEB Corporation determined that the layoff was probable, management evaluated the two plans for curtailment. Upon doing so, they determined that the curtailment in the Hourly Plan would result in a net loss, while the curtailment in the Salaried Plan would result in a net gain. The employees will be terminated during 20X2.
Can PEB Corporation record the effects of both plan curtailments in 20X1?
Analysis
No. ASC 715-30-35-69 requires pension accounting to be applied at the individual plan level (i.e., the determination of whether a curtailment has occurred is a plan-by-plan assessment). Thus, the curtailment of the Hourly Plan is a separate accounting event from the curtailment of the Salaried Plan. In addition, ASC 715-30-35-94 indicates that a net curtailment loss "shall be recognized in earnings when it is probable that a curtailment will occur and the effects described are reasonably estimable." It further states that a net curtailment gain "shall be recognized in earnings when the related employees terminate.” Because the net result of the curtailment of the Hourly Plan is a loss, PEB Corporation should record the loss when it is probable and reasonably estimable (i.e., on December 31, 20X1). On the other hand, because the net result of the curtailment of the Salaried Plan is a gain, PEB Corporation should record the gain when the salaried employees are terminated in 20X2.
Example PEB 4-3 illustrates the recognition of a curtailment from a phased restructuring event.
EXAMPLE PEB 4-3
Recognition of a curtailment from a phased restructuring event
Recognition of a curtailment from a phased restructuring event
On January 1, 20X1, PEB Corporation decided to restructure its operations, resulting in a layoff of employees. The layoffs will occur in phases as each phase is determined by management, but are clearly part of a single restructuring plan. The employees that will be affected by the layoff are covered by a single pension plan. The plan of restructuring represents a curtailment event because it will significantly reduce the expected years of future service of present employees in the pension plan.
During the first quarter of 20X1, PEB Corporation determined that the layoffs as a result of Phase 1 were probable and the number and demographic characteristics of the affected employees were estimable. In turn, management determined that Phase 1 would result in a curtailment loss of $100 million, which was recorded in the first quarter of 20X1. In the third quarter of 20X1, PEB Corporation finalized Phase 2 of the employee terminations, the amount and nature of which were not identified (i.e., not reasonably estimable) prior to that point. The employees from Phase 2 will not be terminated until 20X2. Management determined that the Phase 2 layoffs would result in a curtailment gain of $60 million.
When should PEB Corporation account for the curtailment gain resulting from Phase 2?
Analysis
The curtailment gain from Phase 2 should be recorded in the third quarter when it becomes probable and estimable, as it reduces the overall curtailment loss on the single restructuring action. Normally, a curtailment gain would not be recorded until the related employees are actually terminated. However, in this example, the employees affected by Phase 1 and Phase 2 participate in the same pension plan and the curtailment arises as a result of a single overall restructuring plan.
ASC 715-30-55-172 indicates that when there are individually insignificant reductions of expected future years of service of employees covered by a pension plan that are caused by one event (such as related to a single plan of reorganization), and those reductions accumulate to a significant reduction, the fact that the reductions occur over a period of time does not affect the determination that an event giving rise to a curtailment has occurred. This literature suggests that if there are multiple phases of employee reductions that relate to a single event, the phases should be aggregated to determine whether a curtailment has occurred.
Had PEB Corporation been able to determine that Phase 2 was probable and been able to estimate its impact when PEB Corporation recorded the initial curtailment loss from Phase 1, the amount PEB Corporation would have recorded would have been the combined curtailment loss of $40 million.
Example PEB 4-4 addresses the timing of recognition of curtailment gains for phased terminations.
EXAMPLE PEB 4-4
Timing of recognition of curtailment gains for phased terminations
Timing of recognition of curtailment gains for phased terminations
On December 15, 20X1, PEB Corporation, a calendar year end reporting entity with an OPEB plan, announced a plant closing. As a result, 200 employees will be terminated on or before January 31, 20X2. An additional 200 will be terminated on or before April 15, 20X2 and an additional 200 will be terminated on or before August 1, 20X2. In accordance with ASC 715-30-55-172, PEB Corporation aggregates the terminations that will occur in January, April, and August to determine whether the plant closing results in a curtailment (i.e., whether the combined effect of all three tranches of terminations as part of a single plant closing constitute a significant reduction in future years of service). Based on PEB Corporation’s policy for determining significance, it has concluded that the terminations expected to occur as a result of the plant closing will result in a curtailment and that the curtailment will result in a gain. However, the termination of the first 200 employees on January 31 will not constitute a significant reduction; a significant reduction will occur only when the termination of an additional 200 employees occurs on April 15 for an aggregate termination of 400 employees at that date.
When should PEB Corporation measure and record the curtailment gain?
Analysis
In accordance with ASC 715-30-35-94, a curtailment gain should be recognized in earnings when the related employees terminate, not when the plant closing is announced. Since the employees will be terminated on three separate dates, PEB Corporation may recognize a portion of the gain in the first quarter (for January 31 terminations), in the second quarter (for April 15 terminations), and in the third quarter (for August 1 terminations). A full remeasurement of the obligation and plan assets should be performed immediately prior to determining the gain to be recognized in each quarter.
Alternatively, PEB Corporation can choose to recognize the gain when the number of employees that have been terminated constitutes a significant reduction of future years of expected service and therefore meets the definition of a curtailment. In that case, PEB Corporation would recognize no effect of the curtailment in the first quarter. Then, in the second quarter, the portion of the gain for the 400 employees that are terminated in both the January and April timeframes would be recognized. In the third quarter, the gain associated with the August terminations would be recognized. This treatment is consistent with the guidance in ASC 715-30-55-167 and ASC 715-30-55-168 in which a settlement gain or loss is recognized once the individual settlement amounts are expected to exceed the threshold amount of service and interest and cost for the year. A full remeasurement of the obligation and plan assets should be performed immediately prior to determining the gain to be recognized in the second and third quarters.
Once either method is selected, it would constitute an accounting policy that would need to be applied to similar events in the future.
Importantly, if the effect on the plan from the employee terminations was a curtailment loss, PEB Corporation would have no choice other than to recognize the full amount of the loss in December 20X1, when the curtailment event would have been deemed probable and estimable.
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