Module I· Pensions AccountingAdvanced
Question
How do plan amendments and curtailments affect pension accounting?
Answer
Mechanics
Plan amendments and curtailments typically occur in restructurings or pension reforms. IAS 19 distinguishes three types with different income-statement treatment:
| Type | Content | P&L effect |
|---|---|---|
| Plan amendment | Changes to pension formulas, for example reducing the pension factor from 0.5% to 0.4% of final salary | Past service cost is recognized immediately in P&L. A plan improvement creates immediate expense; a plan reduction creates immediate income. |
| Curtailment | Significant reduction in the number of employees in the plan, for example a plant closure | DBO reduction for affected obligations is recognized immediately in P&L. |
| Settlement | Full transfer of pension obligations to a third party, such as an insurer or pension buyout | Difference between settlement cost and DBO reduction goes to P&L. |
Deep diveShow more details
Valuation adjustment
Remove one-time past-service effects from reported EBIT for a run-rate comparison.
Pitch tip
A plant closure can create a $50m curtailment gain because the DBO falls as employees leave the plan. Adjust EBITDA / EBIT for that item, otherwise the run-rate is overstated. A pension reform for new hires reduces long-term DBO build, but may not create an immediate effect.