Question

How do U.S. GAAP and IFRS differ with regard to reporting prior service costs.

Answer 1

The accounting for post-retirement employee benefits is complex and poses many challenges under the US GAAP as well as the IFRS. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) continue to review the accounting standards pertains to pension accounting in order to improve clarity, provide additional guidance, and accelerate harmonization of both accounting standards.

The IFRS and the U.S. GAAP both report prior service cost a bit different. Both the IFRS and the U.S. GAAP recognized the initial deferral of the pensions gain and losses as part of the Other Comprehensive Income. Under the IFRS the deferred net pension gains or losses just stays in Accumulated Other Comprehensive Income forever, while the U.S. GAAP utilizes a corridor approach. A corridor approach requires the disclosure of a pension actuarial gains or losses. This approach as a limit of 10%, which if exceeded allows the access of the actuarial gains or losses to be amortized gradually, over time of the service, into the income statement.