Hello and welcome everyone. Today I wanted to take this example to actually walk you through how to amortize the gains or losses. What we call the Corridor Method of the amortization for the gains and the losses on pension account. Before we get started, let me remind you, where do these gains and losses? Because the source of those gains and losses come from two sources. Gains or losses on the PBO, or gains or losses on the plan assets. On the PBO the losses can be because of changing any of the actuarial assumptions that were used, so the estimate of the PBO has changed either up or down. If it didn't change up, then there is a loss. If those assumptions or the change in those actuarial assumptions have caused the PBO to decrease, then there is a gain. That's the main source of that gain or loss, and we accumulate that in an account called AOCI. The other source of the gain or the loss is on the plan asset. Actually, the gain can be gain or loss, and simply the gain or the loss can result because of the difference or the discrepancy between the actual return on plan assets versus the expected. If you expected more than what you had actually realized, then obviously I will precede that as a loss because I actually realized less than what I expected, superseding it as a loss. While actually if the actual return was higher than what you expected, then I'll perceive that as a gain. Those are simply briefly, the causes of the gains, and the losses on PBO versus plan assets. I piled those gains and losses, and I put them together, and I accumulated reserve them in an AOCI, and then start amortizing portion of those gains or losses in a way named or if we use the corridor method which we are going to discuss in details in this exercise. I am going to illustrate this corridor method of amortization of the gains or losses from the PBO and the plan assets. Actually, the gains and the losses are piled together. We do not treat each one separately. The gains and the losses from the PBO and the plan assets as I explained are all lumped in one account named AOCI gain or loss. Let's get started. In our exercise I have two cases actually running the two cases. The good thing about those two cases, the notation of the parenthesis is just your choice. I chose to express the gain between parenthesis. It has to be whatever you choose. You can actually choose that the gain will not be between parenthesis, especially when you're comparing cases. When you have two cases like this to distinguish between what is gain and what is loss, you need to identify one of them will be notated by the parenthesis. I chose the gain to be notated between parenthesis. Then obviously, this in case one, those are independent cases. Case one I have a gain. I have a loss or a gain on plan asset or if between parenthesis, then it's a gain. I have on the PBO, I have a loss. It's not between parenthesis, so that is a loss. The PBO has a beginning balance of 1.7 million, and the plan assets is 2 million, and we will know why those are important especially the beginning balance. In case two, I have 210,000, that is a loss that was accumulated. I have an additional loss from plan assets while the gain on the PBO because of changing the actuarial assumptions, I actually had a gain of 220,000, and then the PBO, and then the plan assets. There is additional number figure given, which is the average remaining service period of active employees. That is number of years, which I am going to use that in amortizing the gain or the loss. For each independent case, case one separately, case two separately, calculate the amortization of the net loss or gain, that should be included as a component of the pension expense for the current year. Determine the net loss or gain at the end of each case on December 31st of the current year. Let's get started with each one. As I said, the notation that I used is a gain between parenthesis. In case one I have a gain, and then I used the corridor method. What is the 10 percent corridor? We are not going to amortize except the gain or the loss that lies outside the corridor. What is the corridor? The corridor is 10 percent times the higher of either the projected benefit obligation or the plan assets at the beginning of the year. Looking back at the beginning of the year here, I have in case one, 1.7 million, and I have plan assets 2 million. The bigger the larger is the plan asset. I want to take 10 percent of the 2 million, and that's where the 200,000. In case two, although I don't want to walk you through case two, but let me explain that also. The higher looking at the beginning balance between PBO and the plan assets, the higher now is the PB0. I am taking the 10 percent of the higher, which is 1.6 million, and that's how I calculated the corridor 160,000. Then now the gains on the losses as of the beginning of the balances. I'm going to retire. I don't need whatever the extra that happened this period, but I'm going to amortize the gains and the loss as of the beginning of the year. At the beginning of the year, I had 230 million and the corridor is telling me beyond 200,000 on either side, so gain or loss. Now I have the gain site, so 30,000 excess needs to be amortized. Are we going to amortize all these altogether and take it and amortize it independently? No. We're going to take that as a further way of spreading out this amortization. I'm going to take that amount and divide it by the average remaining service years for my employees, which is 12 years. Here you go, that is the average remaining service period of active employees. That's the amortization is 2,500. In case two, as you can see equivalently, now I have 210,160 is the 10 percent corridor. The 50,000 is excess, actually dividing it by the 10 years then I have five in amortization. Again, the notation of the parenthesis just for consistency across case one and case two so that you can actually see the point. What about the ending balances? I started with a gain of 230,000. I actually had additional gain from plan assets of 6,000. I had a loss on the PB0 of 12,000, and I had an amortization of the 2,500, and actually, the ending balance will be 221,500 gain. Obviously, the notation here because without the parenthesis, you actually can add the 236 here and you can add actually the 14,500 and you see that the difference is 221,500, and that's where the benefit of the notation between parenthesis versus not. In case two, I started with a 210,000 loss. I have additional loss during the period on the plan assets, and I have the amortization of that loss. That's why because I'm amortizing it, so it's reducing the loss. That's why I'm putting it between parenthesis, and then there is an additional gain on the PB0 for this year only, 220,000. Now, because of this huge gain, and because of the amortization, now, it turned out to be 13,000 gain instead of 210,000 loss from the PBO and the plan asset altogether. This is what we referred to, or how to amortize gains or losses and take portion of those. So those are amortization. See those huge numbers? That is the only two portions in case one, out of all those numbers, that's the 2,500, that will be important in the pension expense, and in case two, that's the only 5,000 that will be imported into the pension expense, as we will see and explain in details the process of amortizing it using journal entries and T-accounts later as we go. For now, this is just to emphasize and to illustrate the amortization or the corridor method of amortization for the gains and the losses on PBO and plan assets. Thank you.
