Question

Panther Company currently sponsors a defined benefit pension plan for its employees. At the end of 2016, the plan had a projected benefit obligation of $1,456,000 and fair value of plan assets of $1,629,000. Panther recognized a net pension asset in its balance sheet of $173,000 at the end of 2016. Due to the plans overfunded position, Allison Costello, Panther's CFO, is interested in finding out if it is possible to settle or curtail the plan. Specifically, she is interested in purchasing a portfolio of high-quality bonds that have principal and interest payment dates very similar to the estimated dates pension benefits would be paid. Directions Research the GAAP and prepare a short memo to Allison Costello that provides guidance on the following issues: What is a pension settlement and pension curtailment? Can the company recognize a gain or loss if it settles its pension plan? What is the amount of the gain or loss? Can the company recognize a gain or loss if it curtails its pension plan? What is the amount of the gain or loss? Would Allison Costello's plan of purchasing high quality bonds qualify as a settlement of a pension plan? Why or why not?

Answer 1

1. Pension Settlement – When an entity enters into a transaction which eliminates all further legal and constructive obligation of the defined benefit pension plan is settlement. For example, receiving lump sum payment now in exchange of post retirement benefit ;i.e. Pension.
2. Pension Curtailment- Curtailment is reducing the future service years of current employees or reducing the number of employees. It reduces the future service cost.
3. Company can recognize gain/loss immediately on settling of pension plans as no further obligation is left.
4. Gain on settlement of Pension plan = $173,000
5. Similar treatment is given for gain/loss arising in case the pension plan is curtailed. Gain/loss on the curtailment is to be recognized when the curtailment occurs.In the current case, curtailment of the pension plan cannot be done as curtailment takes place only when a plan amendment reduces benefit of future service cost and the purchasing of high quality Bonds does not reduce Pension liability.
6. No gain/loss as no curtailment is done.
7. Purchasing high quality bonds does not qualify as settlement of a pension plan. Replacing old plan by a new plan which offers benefits same as the former; it is not a settlement as the legal and constructive obligation does not end.