Question

Major Medical reported a net loss–AOCI in last year’s balance sheet. This year, the company revised its estimate of future salary levels causing its PBO estimate to decline by $12 million. Also, the $22 million actual return on plan assets fell short of the $24 million expected return.

How does this gain and loss affect Major’s income statement, statement of comprehensive income, and balance sheet?

Answer 1

Major Medical's revision of future salary levels leading to a PBO decrease will be reported as a gain in OCI, not affecting the income statement. The less actual return on plan assets will be recognized as a loss in OCI and both items will adjust AOCI on the balance sheet but not the income statement.

Step-by-step explanation:

When Major Medical revised its estimate of future salary levels, causing its Projected Benefit Obligation (PBO) to decline by $12 million, this event would typically be reported as a gain in the Other Comprehensive Income (OCI) section of the statement of comprehensive income. It would not be recognized in the income statement because changes in PBO estimates due to actuarial gains and losses are recorded in OCI under pension accounting rules.

The $2 million less actual return on plan assets compared to the expected return ($22 million actual vs. $24 million expected) would be considered a loss and also recognized in OCI, not affecting the current income statement. Both the gain from the revised PBO estimate and the loss from the lower return on assets would adjust the Accumulated Other Comprehensive Income (AOCI) on the balance sheet, while the net loss or gain would affect the equity section of the balance sheet.