Determine Minimum Liability

To determine if a ML must be recognized, compare the ABO with the FVA. When the ABO is greater than the FVA, then the ML is equal to the difference between ABO and FBA. When the ABO is less than FVA, there is no minimum pension liability.

Decision Rule 1

Determine minimum liability

If ABO > FVA, then ML = ABO - FVA

If ABO (less than or equal to) FVA, then ML = 0

Lotus statement for Decision Rule 1: @IF(ABO>FVA, ABO-FVA,0)

In Lotus, the format of the IF statement is @IF(condition,x,y), where the condition must be a numeric value or formula resulting in a numeric value and the results or arguments x and y can be either numeric or string values. The @IF states that if the condition is met, then x is the result, if the condition is not met, then y is the result. In this statement, if the condition ABO > FVA exists, then ML will be ABO - FVA. If this condition is not met, then ML = 0.

Determine Additional Liability

Minimum pension liability accounting considers the balance of the prepaid pension cost-accrued pension liability (PPC/APL) account to determine whether an additional pension liability (ADL) should be recognized in order to comply with the ML requirement. A balance in PPC/APL results from cumulative differences between pension expense recognized and cumulative cash disbursed for funding pension expense. ML represents an excess of ABO over FVA. Since projected benefit obligation (PBO) is related to pension expense while ABO is considered in the ML requirement, and since cumulative cash disbursed for funding pension expense increases or decreases as financial markets change, the difference between ABO and FVA may not be the same as the difference between cumulative pension expense and cumulative cash disbursed for funding pension expense.

The ending balance of the PPC/APL must be calculated before the additional liability (ADL) can be determined. The ending balance of the PPC/APL (EB PPC/APL) is calculated by subtracting current year funding from the required current year pension expense, resulting in current year over/under funding, which is then netted against the beginning balance of the PPC/APL (BB PPC/APL). A credit (APL) balance in PPC/APL decreases the amount of the ML that must be recognized as the ending balance of the additional pension liability (EB ADL). A debit balance (PPC) in the PPC/APL account is added to the ML amount to determine the EB ADL.

The ADL is computed by comparing the ML (Decision Rule 1) with the ending balance of the PPC/APL to determine the appropriate ending balance of the additional pension liability (EB ADL).

Decision Rule 2

Determine ending balance of additional pension liability

When EB PPC/APL Is Zero:

If EB PPC/APL = 0, then EB ADL = ML.

When EB PPC/APL Is a Credit Balance (APL):

If ML (is less than or equal to) APL, then EB ADL = 0.

If ML > APL, then EB ADL = ML - APL.

When EB PPC/APL Is a Debit Balance (PPC):

If ML = 0, then EB ADL = 0.

If ML > 0, then EB ADL = ML + PPC.

Lotus statement for Decision Rule 2: @IF(ML=0,0,@IF(PPC/APL(is greater than or equal to)0, ML+PPC/APL, @IF(ML(is greater than or equal to)@ABS(PPC/APL),0, ML+PPC/APL)))

This nested IF statement first causes Lotus to determine if ML = 0 and if so, then the EB ADL is zero. If ML is not zero, then Lotus examines the EB PPC/APL to see if it is zero, a debit balance or a credit balance (0, + or -). If the EB PPC/APL is zero or a debit balance ((is greater than or equal to)0), then the EB ADL is equal to ML + EB PPC/APL. If the EB PPC/APL is a credit balance (<0) Lotus compares the ML to the EB PPC/APL to determine if ML is less than or equal to ((is less than or equal to)) the EB PPC/APL, and if it is, the EB ADL is zero. If the ML is greater than (>) the EB PPC/APL, the EB ADL equals ML + EB PPC/APL, the EB ADL equals ML + EB PPC/APL. Note that in the case of a credit balance the EB PPC/APL is a negative number; therefore, Lotus compares the ML to the absolute value of the EB PPC/APL, and adds the ML to the negative EB PPC/APL to produce the correct ending balance of ADL.

Determine Adjustment to

Additional Pension Liability

The balance in the ADL account must be adjusted to reflect the appropriate ending balance (Decision Rule 2). To determine the adjustment, compare the beginning balance of ADL to the desired ending balance and debit or credit the difference between the two to achieve the proper ending balance.

Decision Rule 3

Determine adjustment to additional pension liability

If BB ADL = EB ADL, then no adjustment

If BB ADL > EB ADL, then debit difference to ADL

If BB ADL < EB ADL, then credit difference to ADL

Lotus statement for Decision Rule 3: +BBADL-EBADL

The subtraction of the EB ADL from the BB ADL will calculate the difference as well as indicate a credit to the ADL account as a negative number, or a debit as a positive number.

Determine Adjustment to

Intangible Asset

When an ADL must be recognized, an equal amount is recognized as an intangible asset (IA), with the constraint that the IA may not exceed unrecognized prior service cost (UPSC). Any excess of ADL over UPSC is treated as a non-current deferred expense which is reflected, net of income tax effect, in the balance sheet equity section. This contra equity (CE) does not affect the current period income statement.

When the UPSC is greater than or equal to the EB ADL, then adjust the IA so that the EB IA is equal tot he EB ADL. If UPSC is less than EB ADL, then adjust IA so that the EBIA is equal to the UPSC.

Decision Rule 4

Determine adjustment to intangible asset

If UPSC is greater than or equal to EB ADL, then ADJ IA = EB ADL - BB IA

If UPSC < EB ADL, then ADJ IA = UPSC - BB IA

Lotus statement for Decision Rule 4:

@IF(UPSCis greater than or equal toEBADL,EBADL-BBIA, UPSC-BBIA)

This @ IF states that if UPSC is greater than or equal to EB ADL, then the adjustment will be equal to EB ADL-BB IA. If UPSC < EB ADL, then the adjustment will equal UPSC - BB IA.

Determine Adjustment to Contra

Equity

When the unrecognized prior service cost (UPSC) is greater than or equal to the EB ADL, then no contra equity account is required and any previous balance should be reversed. If UPSC is less than EB ADL, then the ocntra equity must be adjusted so that the ending balance (EB CE) is equal to the excess of the EB ADL over UPSC.

Decision Rule 5

Determine adjustment to contra equity

If UPSC is greater than or equal to EB ADL, then reverse balance in CE

If UPSC < EB ADL, then ADJ CE = EB ADL - EB IA - BB CE

Lotus statement for Decision Rule 5:

@IF(UPSCis greater than or equal toEBADL,0-BBCE,EBADL- EBIA- BBCE)

This @IF states that if UPSC is greater than or equal to EB ADL, then the adjustment will be a reversal of the account balance, computed by subtracting the BB CE from zero. If UPSC (< EB ADL, then the adjustment is equal to EB ADL - EB IA - BB CE.)

The Calculations are Complex

The calculations needed for compliance with the ML requirements of SFAS 87 are complex. Constructing a Lotus spreadsheet and using the decision rule approach set forth in this paper, can simplify the process. A sample worksheet illustrating the Lotus commands is presented in Figure 1 and the results of the worksheet are presented in Figure 2. Note that the Lotus commands worksheet utilizes range names to indicate specific cell references.