To: Professor John Li Department of Economics Hunter College
From: Yuen Mei Hau
Date: November 27, 2017
Summary: This article is talking about Ballooning Out of Control LLC want to reduce their increasing compensation and benefit costs. One of the method is to amend the pension plan by eliminating the accrual of pension benefits for future service, the company won’t add value to the pension plan. Another one is to reduce their employee population by 5%. Both actions are under the requirements of U.S. GAAP and IFRSs.
Question 1: Determine how to account for each of the following alternative actions to reduce BLOC’s increasing …show more content…
Soft freeze should be considered as a curtailment. A curtailment occurs when an event eliminates the accrual of additional future benefits for a significant number of plan participants. We should measure the plan obligation and fair value of plan assets before measuring the effects of a curtailment. A gain/loss should be recognized in other comprehensive income(OCI). Accounting of pension liability based on the defined benefit scheme only to the extent of additional liability on the salary increase on annual basis for the last 5 years of retirement. This will be done based on the accrual actuarial valuation considering the average salary increase for the future period for the existing employees who will retire in the company after attaining the age for retirement.
Hence based on this accrual of pension benefit will reduce substantially cost for the …show more content…
Management decides to permanently lay off 5% of BLOC’s plan- eligible workforce while retaining the current pension plan.
According to ASC 715-30-55-171 said that If a layoff significantly reduces the expected years of future service of present employees covered by a pension plan, a curtailment occurs even if the layoff is expected to be temporary. For example, a curtailment occurs in both of the following actions:
a. The employer temporarily lays off a significant number of present employees covered by a pension plan.
b. The employer temporarily suspends a pension plan so that employees covered by the pension plan do not earn additional pension benefits for some or all of their future services.
In this case, according to ASC 715-30-55-171 it states that whether it’s a temporary or permanent layoff, it will cause a curtailment which will eliminate all the accrued benefits they employees had up until their last employment date.
2. What are the differences, if any, between the requirements of U.S. GAAP and IFRSs in accounting for the two alternative actions management is considering?
Under the IFRSs, all prior service costs are recognized in profit or loss when the employee benefit plan is amended. None of those gains or loss cannot spread over the service period, it may cause volatility in profit and