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May 1989

The calculation and presentation of the minimum pension liability.

by Sanborn, Robert H.

    Abstract- Accountants need to calculate corporate minimum pension liabilities for fiscal years beginning after December 15, 1988. The determination of minimum pension liability is dependent on whether pension plan asset fair values are exceeded by accumulated benefit obligations. The recognized liability needs to account for any existing accrued or prepaid pension costs. Liability credit matching debits are intangible assets and they cannot exceed maximum pension intangibles. Any debits that are made in excess of maximum intangibles must be placed in a contra-equity account net of tax.

For fiscal years that begin after December 15, 1988, corporations must calculate whether a minimum pension liability (MPL) exists for that year and must determine the correct presentation of any resulting liability on the statement of financial position. This article will assist in the computation of MPL and in the presentation of the liability on the balance sheet.

Existence of a Minimum Liability

The determination of the existence of MPL depends on whether the accumulated benefit obligation of the pension plan exceeds the fair value of the pension plan assets. Throughout most of SFAS No. 87, the guidelines use the projected benefit obligation or the actuarial present value of all pension benefits due employees using assumptions to estimate future employee compensation levels upon which their benefits will be computed. The calculation of the existence of MPL departs from the use of the projected obligation and instead relies on the more modest figure of an accumulated obligation. The accumulated benefit obligation computes all future pension obligations using current compensation levels instead of estimating future compensation levels. Because employee compensation rates will usually increase, the use of future salary rates would result in a higher pension obligation than if current salaries were used. The MPL, therefore, is truly a minimum liability that is due employees based only on current information.

The fair value of the pension plan assets is defined in SFAS No. 87, in much the same manner that it was under the old pension guidelines, as the amount that could be expected to be received for the pension investments in a non-forced sale between a willing buyer and a willing seller. The fair value then has been interpreted as the market value of the pension plan assets kept in trust to satisfy the future pension claims. Therefore, MPL will exist for any pension plans that are underfunded in respect to their current obligation.

Corporations that have pension plans that are not under-funded with respect to their accumulated benefit obligations do not have MPL, and must be sure to eliminate any existing MPL remaining from prior periods. Elimination entries will be the opposite of any of the three entries (explained later) which gave rise to the old MPL.

Existence of an Additional Liability

Corporations which have an underfunded pension plan next need to determine whether an additional liability will enter the calculation and presentation process. An additional liability will exist if prepaid or accrued pension costs exist at year end. Prepaid pension costs arise if employers contribute an amount in excess of the net pension costs, and accrued pension costs represent the accumulated net pension cost not yet funded by employers. Since pension accounting methods for GAAP purposes and for tax purposes often differ, the funding requirements of the pension plan agreement often will not coincide with pension expenses, and prepaids or accruals will result. The additional liability will be the MPL plus any prepaid pension cost balance or minus any accrued pension cost balance. If the accrued pension cost is greater than the MPL, no additional liability will exist, and no liability other than the accrued pension cost need be booked. If an additional liability does not exist because no prepaid or accrued pension costs exist, the only entry that need be made is to debit an intangible asset account called "deferred pension cost" and to credit a long-term liability account called "minimum pension liability" for the amount computed for the MPL.

The existence of an additional liability because of an accrued pension cost balance again requires that the "deferred pension cost" account be debited and the "minimum pension liability" account be credited. However, the amount involved in this situation is the amount calculated for the additional liability. The same presentation is required if a prepaid pension cost exists and the additional liability is less than the maximum pension intangible.

The Maximum Pension Intangible

The maximum pension intangible is the amount by which the projected benefit obligation exceeds the fair value of the plan assets when SFAS No. 87 was adopted by the employer. This amount represents the maximum amount that can be recorded due to unrecognized prior service cost. The FASB limited the pension intangible to this amount so that the asset recognized would have some basis of value (that of the promised future payments) and would not include any amounts which might arise due to a post-actuarial loss.

Additional liabilities that are larger than the maximum pension intangible necessitate the establishment of a contra-equity account called "net loss not recognized as pension expense." The debit to this account must be the net of the tax difference between the total additional liability and the maximum pension intangible. The deferred tax account must be debited for the difference times the tax rate so that the pension accounting guidelines conform to APB Opinion No. 11, Accounting for Income Taxes. The maximum pension intangible amount is then debited to the "deferred pension cost" account, and the entire additional liability is credited to the "minimum pension liability" account.

Application of the following Flowchart using the principles described in the above article should uncomplicate and ease the process of complying with this last requirement of SFAS No. 87.


MPLs arise due to an underfunding of the pension trust. When the underfunding exceeds the accumulated benefit obligation, a liability must be recognized. The liability must take into account any existing prepaid or accrued pension costs, and, while these accounts cannot be diminished, the minimum liability can be effected. The debit created to match the liability credit is an intangible asset which cannot exceed a maximum pension intangible. Debits required in excess of the maximum intangible must be made net of tax to a contra-equity account, and deferred taxes must also be updated.

The MPL must be calculated and presented for all corporations having domestic defined benefit pension plans for years beginning after December 15, 1988.

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