Settlements and curtailments are very different events. Management's decision to settle a pension obligation is a separate, discrete decision from one to reduce its work force or reduce future benefit accruals. Therefore, even when they occur contemporaneously or are related to the same event—for example the sale of a business (curtailment) along with a transfer of a portion of a pension plan to the buyer (settlement)—it is not appropriate to net the gain from one against the loss from the other. The timing of recognition for both may differ in any event and, importantly, the order in which the accounting for each event occurs may affect the ultimate net gain or loss recognized.
When a related series of transactions involves both a curtailment and a partial settlement, and the projected benefit obligation changes as a result of the curtailment, gain or loss recognition may differ depending on the order of applying settlement and curtailment accounting. This is because the pro rata factor for recognition of gains and losses in a settlement is based on the portion of the projected benefit obligation settled, and the amount of potential curtailment gain or loss depends on the amount of any unamortized gain or loss. The order of recording curtailment and settlement events is not specified by ASC 715
. ASC 715-30-35-75
indicates that neither order is demonstrably superior, although the approach selected should be consistently followed.
Example PEB 4-5 illustrates the impact of the order of accounting for a curtailment and a settlement.
EXAMPLE PEB 4-5
Interaction of settlement accounting and curtailment accounting
PEB Corporation sponsors a defined benefit pension plan for all employees. PEB Corporation decides to sell one of its five manufacturing plants to a strategic buyer who will assume the pension benefit obligation for the employees of the disposed plant. The effective termination of the employees participating in the plan in connection with the sale constitutes a curtailment. The transfer of plan assets to the buyer in the sale also settles the pension benefit obligation for those employees.
Assume the demographic profile of the employees at all five manufacturing plants is essentially equal and the following facts about the status of the plan prior to any settlement or curtailment accounting (but after remeasurement of the plan using current assumptions):
- Projected benefit obligation of $2,000,000
- Unrecognized prior service cost of $250,000
- Unrecognized net gain of $250,000
- Curtailment causes a $200,000 reduction in the projected benefit obligation
- Benefits of $300,000 are settled
How does the calculation differ if the curtailment or settlement is calculated first?
If curtailment accounting is applied first, $50,000 of unrecognized prior service cost (1/5 of the remaining years of expected service have been eliminated) represents one component of the curtailment. Because the curtailment causes a $200,000 reduction in the PBO, the remaining PBO is $1,800,000. The $200,000 reduction in the PBO (a potential gain) is recognized in full as there was an unrecognized net gain at the time of the curtailment. Therefore, the net curtailment gain is $150,000 ($200,000 PBO gain less $50,000 prior service cost recognition). For the settlement calculation, 16.7% ($300,000 benefits settled divided by $1,800,000 of remaining PBO) of the unrecognized net gain of $250,000, or $41,667, would be recognized on settlement. As a result, the combined net result of the curtailment and settlement accounting would be a gain of $191,667.
If settlement accounting is applied first, 15% ($300,000 benefits settled divided by $2,000,000 of remaining PBO) of the unrecognized net gain of $250,000, or $37,500, would be recognized as a settlement gain. For the curtailment calculation, $50,000 of unrecognized prior service cost (1/5 of the remaining years of expected service have been eliminated) represents one component of the curtailment. The $200,000 reduction in the PBO (a potential gain) would be recognized in full as there was still an unrecognized net gain after considering the settlement gain recognized. Therefore, the net curtailment gain is $150,000 ($200,000 PBO gain less $50,000 prior service cost recognition). As a result, the combined net result of the curtailment and settlement accounting would be a gain of $187,500.