Question

The projected returns exceed actual returns on pension plan assets for a government offering a defined benefit pension plan. How would the resulting increase in the net pension liability be recognized in the financial statements in the year this difference is recognized?

Answer 1

An increase in net pension liability due to lower actual returns compared to projected returns on pension plan assets will be amortized over a period and recognized as part of the pension expense in the financial statements.

Step-by-step explanation:

When the projected returns on pension plan assets exceed the actual returns for a government's defined benefit pension plan, this usually results in an increase in the net pension liability. This liability is recognized in the financial statements as part of the periodic pension expense. Specifically, under the accounting standards, such as those outlined by the Governmental Accounting Standards Board (GASB) in the United States, differences between expected and actual returns must be amortized over a certain period. This deferred amount will then affect pension expenses in future periods, rather than causing an immediate expense spike in the current year. Therefore, the net pension liability increases in the financial statements when actual returns are lower than projected returns.