How are pension plan amendments handled retrospectively under IFRS and US GAAP?

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AcadiFi · Accepted Answer

When a defined benefit plan is amended, the change in the projected benefit obligation (PBO) is called **prior service c...

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**US GAAP (ASC 715):**
- Prior service cost from a plan amendment is recognized in **OCI** initially
- Then amortized from OCI into pension expense over the **remaining service period** of affected employees
- If most participants are inactive, amortize over their remaining life expectancy

**IFRS (IAS 19R):**
- Past service cost is recognized **immediately in profit or loss** in the period of the amendment
- No amortization -- full impact hits income right away
- This makes IFRS earnings more volatile in amendment years

**Example -- Redstone Manufacturing (fictional):**
Redstone increases its pension formula, raising the PBO by $8 million. Average remaining service life of affected employees is 10 years.

| Treatment | US GAAP | IFRS |
|---|---|---|
| Year 1 P&L impact | $800K (8M / 10 yrs) | $8,000K (full amount) |
| Year 1 OCI impact | $7,200K initial recognition | None |
| Year 2 P&L impact | $800K amortization | None |

\`\`\`mermaid
flowchart TD
    A[Plan Amendment Increases PBO by $8M] --> B{Which Standard?}
    B -->|US GAAP| C[Recognize in OCI]
    C --> D[Amortize to P&L over 10 years]
    D --> E[$800K/year pension expense]
    B -->|IFRS| F[Immediate P&L Recognition]
    F --> G[$8M expense in Year 1]
\`\`\`

For CFA Level II, remember that IFRS is more aggressive -- plan amendments hit earnings immediately, which can cause large one-time charges. US GAAP smooths the impact through OCI amortization.

How are pension plan amendments handled retrospectively under IFRS and US GAAP?

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