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Accounting Alert 07-3: Entities Must Measure and Record Changes in Their Additional Minimum Liability to Comprehensive Income Before Adopting FASB 158

February 8, 2007

When entities adopt the recognition provisions of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans , they will no longer recognize an additional minimum liability (AML).  Statement 158 eliminates the AML by requiring full recognition of the funded status of an entity’s defined benefit pension plan as an asset or liability in its year-end balance sheet.  Because the recognition provisions are to be adopted as of the end of the year, an entity is first required to measure and record changes to its previously recognized AML 1 through comprehensive income based on its measurement date used for current year-end reporting.   An entity should apply the following two-step approach to adopting the recognition provisions of Statement 158 as of the end of its fiscal year (as required by paragraph 16 of Statement 158):

1.       Follow the provisions of paragraphs 35–38 of FASB Statement No. 87, Employers’ Accounting for Pensions (prior to amendment by Statement 158), to determine prepaid or accrued pension cost (including changes to the AML, if applicable) based on the measurement date the entity used for current year-end reporting. 2

2.       Apply Statement 158’s recognition provisions to fully recognize the funded status of the defined benefit pension plan. 3

The adjustments recorded in Step 1 represent the accounting for an entity’s pension plan under Statement 87 throughout the year and up to the point of adopting Statement 158 at year end.  Any adjustments to the AML that would have been recorded as a component of comprehensive income before Statement 158 is considered should continue to be recorded in comprehensive income.  The adjustments in Step 2 should reflect only the incremental impact of adopting Statement 158’s recognition provisions (calculated as the difference between the plan’s funded status and the amounts recognized in Step 1).  As paragraph 16 of Statement 158 indicates, any incremental amounts requiring recognition in accumulated other comprehensive income (AOCI) under Step 2 must be recorded as a direct adjustment to the ending balance of AOCI and not as a component of comprehensive income.

Example

A calendar-year-end entity with a December 31 measurement date adopts the recognition provisions of Statement 158 in its 2006 year-end financial statements.  The table below details the amounts included in AOCI related to its pension plan for the following periods:

December 31, 2005

December 31, 2006 (before the adoption
of Statement 158)

December 31, 2006 (after the adoption
of Statement 158)

AML included in AOCI 4

$(1,000)

$(1,200)

N/A

Amount included in AOCI after the adoption of Statement 158 4

N/A

N/A

$(2,000)


The $200 increase in the AML included in AOCI from December 31, 2005, to December 31, 2006 (before the adoption of Statement 158), should be recorded as a component of comprehensive income (Step 1).  The $800 increase related to the difference between the AML included in AOCI (before the adoption of Statement 158) and the amount included in AOCI (after the adoption of Statement 158) is recorded as a direct adjustment to the ending balance of AOCI to fully recognize the funded status of the entity’s pension plan (Step 2).

________________

1 Changes in the AML could include recording an AML for the first time.  

2 See Question 37 of FASB Staff Implementation Guide (Statement 87), “A Guide to Implementation of Statement 87 on Employers' Accounting for Pensions:  Questions and Answers,” for illustrative example.  

3 See Example 1 in Appendix A of Statement 158 for guidance on the application of Statement 158’s recognition provisions.  

4 Amounts are net of income tax.  

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