4.19 Defined Benefit Pension Plans
In some cases, the benefits payable to plan participants under defined benefit pension or other postretirement plans may be denominated in a currency other than an entity’s functional currency. For example, a foreign entity whose functional currency is the reporting currency of its parent may sponsor a defined benefit plan with benefit payments payable in the local currency. In these instances, it is also common for the plan assets to be denominated in the foreign currency.
Under ASC 715-30, a reporting entity must remeasure the funded status of its defined benefit plans annually or upon the occurrence of certain significant events (e.g., a plan amendment or curtailment). ASC 715-30 requires that the plan assets be remeasured at fair value and that the benefit obligation be remeasured at its actuarial present value. Further, ASC 715-30 requires that all changes in the funded status of a plan that occur as a result of this remeasurement process be recognized in OCI. However, ASC 715-30 does not explicitly address how an entity should consider the effects of exchange rate changes in remeasuring the funded status of a plan that is denominated in a foreign currency.
Under ASC 830, an entity that maintains its books and records in a currency
other than the functional currency must remeasure
those books and records in its functional
currency.
The funded status of a defined benefit plan
that is denominated in a foreign currency should
be remeasured in the functional currency by using
the current exchange rate. As stated above, the
plan assets must be remeasured at fair value under
ASC 715-30. In such circumstances, an entity is
required to use current exchange rates to measure
the fair value of foreign-currency-denominated
plan assets in functional-currency units. In
addition, while the benefit obligation is not
measured at fair value, it is remeasured at the
amount for which the obligation could currently be
settled. Therefore, a current exchange rate must
be used to remeasure the benefit obligation so
that the amount for which it could currently be
settled is properly reflected in an entity’s
functional currency.
However, because neither ASC 715-30 nor ASC 830 explicitly addresses how to
account for the effects of exchange rate changes
related to defined benefit plans (i.e., whether
the change should be recorded as a component of
OCI or in earnings), there are two acceptable
views on presenting the change in the funded
status of a defined benefit plan due to exchange
rate fluctuations.
View A — Recognize Currency Adjustments in OCI
Under View A, the funded status of a defined benefit plan would be considered a
nonmonetary asset or liability under ASC 830. This view is based on an analogy
to the implementation guidance in ASC 255. Specifically, the table in ASC
255-10-55-1 states that the specific assets in “[p]ension, sinking, and other
funds under an entity’s control . . . should be classified as monetary or
nonmonetary” and that, for “[a]ccrued pension obligations,” the “[f]ixed amounts
payable to a fund are monetary” and “all other amounts are nonmonetary.”
Therefore, because the funded status of a plan does not represent a “fixed
amount payable to a fund,” it should be considered a nonmonetary asset or
liability under ASC 255. However, as discussed in Section 4.3.2, other authoritative
literature (in this case, ASC 715-30) may require that a nonmonetary asset or
liability be subsequently remeasured at current exchange rates. Therefore, under
View A, because ASC 715-30 requires that the funded status of a pension plan be
remeasured at current exchange rates, changes in the carrying value should also
be presented in accordance with ASC 715-30. Under ASC 715-30-25-4, all changes
resulting from the remeasurement of the funded status of a plan are reported in
OCI (provided that the entity’s accounting policy is to amortize the resulting
gains and losses into net income over future accounting periods and not to
immediately recognize those gains and losses in net income).
View B — Recognize Currency Adjustments in Income
Under View B, the funded status of a defined benefit plan would be considered a monetary asset or liability under ASC 830 for the following reasons:
- The account will ultimately be settled in cash, through either recovery of the net pension asset or settlement of the net pension liability.
- While not authoritative for entities reporting under U.S. GAAP, paragraph 16 of IAS 21 explicitly states that “pensions and other employee benefits to be paid in cash” are monetary items. Proponents of View B believe that IAS 21 and U.S. GAAP do not substantively differ regarding how an entity determines monetary and nonmonetary accounts when applying the guidance on accounting for the effects of exchange rate changes.
In accordance with ASC 830-10-45-17, all transaction gains and losses related to remeasurement of monetary assets and liabilities that are not denominated in the functional currency must be recognized currently in earnings.
The accounting for currency adjustments related to remeasuring a foreign-currency-denominated defined benefit plan in either OCI or earnings is an accounting policy election that should be applied consistently.