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									PENSION COSTS
123.400 Settlements and Curtailments of Pension
Plans and Certain Termination Benefits
Welcome to KPMG’s Accounting and Reporting Guide – US!
January 2007
This section reflects standards issued through Statement 158.

CONTENTS
Introduction
Scope
Definition of Settlements and Curtailments
Accounting for the Settlement of a Pension Obligation
Accounting for a Curtailment of Pension Benefits
Discontinued Operations, Disposal of a Component of an Entity, and Spinoffs
Certain Termination Benefits
Presentation and Disclosure
Technical References

INTRODUCTION
123.400 This section discusses certain events or transactions that trigger the immediate
recognition in net income of gains or losses and prior service costs included in
accumulated other comprehensive income for single employer defined benefit pension
plans. Those events or transactions include settlements and curtailments of pension
obligations. This section also addresses the accounting for certain termination benefits,
specifically termination benefits that are contractually required or offered to employees
who voluntarily accept an offer of special termination benefits.

SCOPE
123.401 The guidance in this section is derived from Statements 88 and 158. This section
assumes the provisions of Statement 158, which amended Statements 87 and 88, have
been adopted. This section does not discuss the accounting for terminations of defined
contribution pension plans or multiemployer plans. The accounting for those plans is
discussed in Section 123.300 Defined Contribution Plans and Other Pension Plan
Arrangements. Settlement and curtailment accounting for postretirement plans other than
pensions (e.g., health and welfare benefits) is discussed in Chapter 127 Postretirement
Benefits Other Than Pensions. Termination benefits provided under an ongoing corporate
policy or plan are discussed in Chapter 125 Postemployment Benefits. One-time
termination benefits related to involuntary terminations for which the benefit is not
prescribed by law or covered by an ongoing corporate policy or plan are discussed in
Chapter 117 Liabilities: Exit or Disposal Costs.
DEFINITION OF SETTLEMENTS AND CURTAILMENTS
123.402 Settlements versus Curtailments. A settlement is defined as an irrevocable
action that relieves the employer (or the plan) of primary responsibility for pension
obligations and eliminates significant risks related to those obligations and the assets used
to effect the settlement. Examples of settlements include lump-sum payments to
participants in exchange for the right to postretirement benefits and purchasing long-term
nonparticipating insurance contracts for the accumulated postretirement benefit
obligation for some or all of the participants. A curtailment, in contrast, is an event that
significantly reduces the expected years of future service of present employees or
eliminates the accrual of defined benefits for future services of a significant number of
active participants. Common examples of curtailments include significant layoffs of plan
participants, or termination or suspension of a plan such that employees do not earn
additional future benefits for their future service.
123.403 Relationship between Settlements and Curtailments. A plan settlement and a
curtailment may occur separately or together. If future benefits are reduced (for example,
because half the work force is dismissed or a plant is closed), but the plan remains in
existence and continues to pay benefits, invest in assets, and receive contributions from
the sponsor, a curtailment occurred. However, this would not give rise to a settlement. If
an employer purchases a nonparticipating annuity contract for the postretirement
obligation benefits and continues to provide defined benefits for future service, either in
the same plan or in a successor plan, a settlement occurred but not a curtailment. If a plan
is terminated (the obligation is settled and the plan ceases to exist), and is not replaced by
a successor defined benefit plan, both a settlement and a curtailment occurred, regardless
of whether the employees continue to work for the employer. Statement 88, par. 7
123.404 Simultaneous Settlement and Curtailment. The timing of recognition required
for a related settlement and curtailment may be different. In situations in which both a
settlement and curtailment take place, when the accounting for one is required before the
accounting for the other, the required sequence should be followed. In other cases,
however, the accounting for a curtailment and settlement may be required at the same
time and the order of accounting may affect the amounts to be recognized in the financial
statements. The proper sequence of events to follow to measure the effects of a settlement
and a curtailment that will be recognized at the same time is a policy election. In
measuring the effects of a settlement and a curtailment that are to be recognized together,
an employer should consistently select which event it will recognize first. Although the
sequence selected can affect the amount of the aggregate gain or loss recognized in net
income, selecting the event to be measured first (settlement or curtailment) is an
accounting policy decision; neither order is demonstrably superior to the other. However,
once an employer selects an approach, it should consistently follow that approach to
determine the effects of subsequent settlements and curtailments that are to be recognized
together. Statement 88, Q&A No. 41
123.405 Unit of Account. An employer should apply the requirements of Statement 88 to
each individual pension plan. In determining the effect of a settlement or curtailment,
plans should generally not be divided or combined for purposes of applying Statement
88. Statement 88, Q&A No.19



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123.406 Transition Assets and Liabilities. Upon adopting Statement 87, employers
were required to measure a transition asset or liability (based on the funded status of each
plan at the time of adoption), and amortize that transition asset or liability over the
average remaining service lives of employees active at the date of adoption (or,
optionally, 15 years if longer). See Paragraph 123.152. For purposes of applying the
guidance in Statement 88 on accounting for curtailments and settlements, any remaining
transition amount that is included in accumulated other comprehensive income is treated
as a prior service cost if a liability and a gain if an asset.

ACCOUNTING FOR THE SETTLEMENT OF A PENSION
OBLIGATION
This section covers the following topics:
Determining Whether a Settlement Has Occurred
Transactions That Are Not Considered Settlements
Accounting for Settlements
Illustrations of Settlement Accounting

Determining Whether a Settlement Has Occurred
123.407 Settlement Criteria. A settlement is a transaction that meets all of the following
conditions:
       (a) It is an irrevocable action. A transaction or event is irrevocable if it cannot be
           revoked, recalled, or undone; the transaction or event is unalterable;
       (b) It relieves the employer (or the plan) of primary responsibility for a pension
           benefit obligation; and
       (c) It eliminates significant risks related to the obligation and the assets used to
           effect the settlement.
123.408 Examples of transactions that constitute a settlement include (a) making lump-
sum cash payments to plan participants in exchange for the forfeiture of their rights to
receive specified pension benefits and (b) purchasing nonparticipating annuity contracts
to cover vested benefits. A transaction that does not meet all of the criteria for a
settlement described above does not constitute a settlement for purposes of Statement 88.
For example, investing in a portfolio of high-quality fixed-income securities with
principal and interest payment dates similar to the estimated benefit payment dates may
avoid or minimize certain risks. However, it does not constitute a settlement because the
investment decision can be reversed nor does it eliminate the risks related to the
obligation. That strategy does not relieve the employer (or the plan) of primary
responsibility for a pension obligation, nor does it eliminate significant risks related to the
obligation (e.g., the risk that participants may live longer than estimated). Statement 88
pars. 3-4
123.409 Timing of Recognition of a Settlement. An employer should carefully consider
the criteria listed above Paragraph 123.407 in determining the period in which a
settlement should be recognized for accounting purposes. For example, if plan
participants agreed to accept lump-sum cash payments in exchange for their rights to


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receive specified pension benefits and the amounts of the payments have been fixed, the
timing of the payment is relevant in assessing whether the criteria for a settlement were
met. If the cash payments have not been made, the agreement may be revocable. Further,
if plan assets have not been transferred by the pension plan to effect the settlement, they
may be at risk. If significant risks related to the pension benefit obligation and the plan
assets to be used to effect the settlement have not been eliminated, no gain or loss should
be recognized related to the settlement. Generally, a settlement will not be recognized
until required assets have been transferred and the settlement is fully executed. A
commitment to settle, in and of itself, does not constitute a settlement. Statement 88,
Q&A No. 3
123.410 In some cases, a settlement and a related curtailment occur at or about the same
time. Because of the different recognition requirements related to curtailments (see
discussion beginning at Paragraph 123.443), a curtailment loss will frequently be
recognized prior to the recognition of a related settlement. Care should be taken to
separately recognize the effects of a related settlement and curtailment in the proper
periods as required by Statement 88. Statement 88, pars. 9, 14, 47
123.411 Settlements Effected with Nonparticipating Annuity Contracts. For purposes
of determining whether a settlement occurred, a nonparticipating annuity contract is a
contract in which a noncontrolled insurance company unconditionally undertakes a legal
obligation to provide specified benefits to designated individuals in return for a fixed
consideration or premium. A nonparticipating annuity contract is irrevocable and
involves the transfer of significant risk from the employer to the insurance company.
Some annuity contracts (participating annuity contracts) provide that the purchaser (either
the plan or the employer) may participate in the experience of the insurance company.
Under those contracts, the insurance company ordinarily pays dividends to the purchaser.
If the substance of a participating annuity contract means that the employer remains
subject to all or most of the risks and rewards associated with the benefit obligation
covered, or the assets transferred to the insurance company, the purchase of the contract
does not constitute a settlement. Statement 88, par. 5
123.412 Participating Annuity Contracts. It may be difficult to determine the extent to
which a participating contract exposes the purchaser to the risk of unfavorable
experience, which would be reflected in lower than expected future dividends. Under
some participating annuity contracts, the purchaser might remain subject to all or most of
the same risks and rewards related to future experience that would have existed if the
contract were not purchased. While the FASB noted that there are no quantitative
thresholds for determining whether the majority of risks and rewards have been retained,
we believe that participating annuity contracts for which the value of the participation
right at purchase exceeds 10% of the price of a comparable nonparticipating contract,
would usually not qualify as a settlement for pension accounting purposes. Nevertheless,
an employer should consider the facts and circumstances inherent in its situation. Further,
some participating contracts may require or permit payment of additional premiums if
experience is unfavorable. If a participating contract requires or permits payment of
additional premiums because of experience losses, or if the substance of the contract
indicates that the purchaser retains all or most of the related risks and rewards, the



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purchase of that contract does not constitute a settlement. Statement 88, par. 34;
Statement 88, Q&A No. 11
123.413 Captive versus Controlled Insurance Companies. Annuity contracts are
defined differently in Statement 88 and Statement 87. The definition of annuity contracts
in Statement 88 excludes from settlement accounting those annuity contracts purchased
from an enterprise controlled by the employer, whereas Statement 87 excludes from
annuity contracts those purchased from a captive insurer (i.e., an insurance company that
does business primarily with the employer and affiliates of the employer). Therefore, an
employer that purchases annuity contracts from an insurance company that it controls
should not recognize a settlement gain or loss associated with the transaction (i.e., the
transaction would not qualify for settlement accounting under Statement 88). However,
unless the insurance company is a captive insurer, the pension benefits covered by the
annuity contracts should be excluded from the projected benefit obligation and the value
of the contracts should be excluded from plan assets (except for participation rights, if
applicable). In Statement 88, the Board decided that the circumstances under which an
employer should recognize in net income gains or losses that are included in accumulated
other comprehensive income should be limited and that recognition should not occur if
the “settlement” transaction is between an employer and an entity that it controls. Further,
disclosure of the approximate amount of annual benefits covered by annuity contracts
issued by the employer and related parties is required. Statement 87, Q&A No. 83
123.414 Subsidiary Purchases Annuity Contracts from Another Subsidiary. In
situations where a subsidiary purchases annuity contracts from another subsidiary owned
by the same parent entity, the facts must be examined carefully. Such transactions
generally will not constitute a settlement in the consolidated financial statements but may
constitute a settlement in the subsidiary’s separate financial statements.

 Example 123.401: Subsidiary Purchases Annuity Contracts from Another
 Subsidiary
 Assume parent company ABC Corp.’s two wholly-owned subsidiaries (Subsidiary A and
 Subsidiary B) have separate pension plans. Subsidiary B purchases nonparticipating annuity
 contracts from Subsidiary A (an insurance company) to provide the vested pension benefits
 under Subsidiary B's pension plan. Because settlement accounting excludes the purchase of
 annuity contracts from an insurance company controlled by the employer (i.e., Subsidiary A is
 controlled by ABC), the transaction described does not constitute a settlement in the parent
 company's consolidated financial statements. The significant risks related to the pension
 benefit obligation and plan assets remain with ABC (the employer). However, assuming the
 other criteria for a settlement are satisfied, the purchase of the nonparticipating annuity
 contracts does constitute a settlement in the separately issued financial statements of
 Subsidiary B because significant risks related to a pension benefit obligation and the plan
 assets used to effect the settlement were assumed by another company (Subsidiary A) not
 controlled by Subsidiary B. Disclosure of the related party nature of the settlement should be
 made as discussed in Chapter 133.000 Related Parties. Statement 88, Q&A No. 12

123.415 Purchase of Annuity Contracts from an Equity Method Investee. Assuming
all of the criteria for a settlement are met, an investor employer's noncontrolling


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ownership interest in an investee insurance company (equity-method investee) that issues
nonparticipating annuity contracts for a settlement is not subject to the controlling interest
guidance of Statement 88. Therefore, the purchase of the annuity contract from an equity-
method investee is a settlement if the criteria for a settlement are met. The treatment of
this intercompany transaction is different from typical accounting for intercompany
transactions with an equity-method investee and is not a precedent for nonpension
intercompany transactions, which should generally be eliminated until realized by the
investee company (see Chapter 111.000 Investments: Equity Method). Statement 88,
Q&A No.17
123.416 Employer Settles a Plan and Establishes a Successor with an Identical
Benefit Formula. If an employer terminates its pension plan, settles a pension benefit
obligation, withdraws excess plan assets, and establishes a successor pension plan that
has the same pension benefit formula, a settlement occurs, but a curtailment does not.
This type of transaction is common when an employer wishes to recapture excess assets
in an overfunded pension plan (an asset reversion transaction). Although employees no
longer accrue pension benefits under the terminated pension plan, they do accrue pension
benefits under the successor pension plan. For accounting purposes, the two pension
plans are viewed as one pension plan because, in substance, the pension plan has not been
terminated. The only transactions that require accounting recognition in the employer's
financial statements are the settlement and withdrawal of excess plan assets. If the
successor pension plan adjusts pension benefits related to future services, that change in
the benefit formula is accounted for as a pension plan amendment. See Paragraph
123.403 for a further discussion of successor pension plans. Statement 88, Q&A No. 14
123.417 Limited-Term Insurance Company Contracts for Settlement. A settlement
does not occur if an employer enters into a contract with an insurance company that
requires the insurance company to pay only a portion of specific participants' pension
benefits such as payments due to retirees for the next five years. The contract should
provide life annuities, not limited-term annuities, for a settlement to occur. A contract for
limited-term annuities does not eliminate significant risks related to the pension benefit
obligation for the participants (e.g., the duration of their pension benefit payments) and,
therefore, does not satisfy the criteria for a settlement. Statement 88, Q&A No. 8

Other Transactions That Are Not Considered Settlements
123.418 Nonparticipating Annuity Contracts for Which Regulatory Approval Is
Probable. An employer may need regulatory approval to terminate a pension plan. Even
if it is probable that the employer will receive regulatory approval of the termination
plan, an employer should not recognize a settlement gain or loss until it meets all of the
criteria in Paragraph 123.412. The probability of completing the irrevocable action is
sufficient to conclude that a settlement has occurred. Thus, an employer that purchases a
nonparticipating annuity contract for the vested benefits of all plan participants, and can
rescind its purchase if it does not receive regulatory approval, has not completed an
irrevocable action necessary to relieve the employer of the primary responsibility for the
pension benefit obligation. The employer should not recognize in net income a settlement
gain or loss until all three settlement criteria are met. Similarly, an employer may decide
in 20X7 to terminate its pension plan, withdraw excess plan assets, and establish a


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successor pension plan but may delay the purchase of nonparticipating annuity contracts
until January 20X8 (after it obtains regulatory approval but before it issues its 20X7
financial statements). Because the employer is unable to purchase the annuity contracts
(which include the settlement of the vested benefit obligation) until regulatory approval is
obtained, it would be inappropriate for that entity to adjust its 20X7 financial statements
to reflect a settlement, although disclosure of the event may be required. Statement 88,
Q&A Nos. 1, 2
123.419 Consistent with these considerations, the EITF reached a consensus in EITF 03-2
that the transfer to the Japanese government of a substantial portion of an employee
pension fund obligation should not be recognized as a settlement until all phases of the
settlement process had been completed and the government has issued final approval of a
transfer of obligations from the employer to the government. EITF 03-2
123.420 Commitment to Purchase Individual Nonparticipating Annuity Contracts.
A commitment to purchase individual nonparticipating annuity contracts for the purpose
of a settlement does not satisfy the criteria for a settlement. The transaction has not yet
been consummated and, therefore, does not result in a settlement gain or loss that is
recognized in net income. In determining whether a settlement has taken place, the
employer or plan must assess whether it is irrevocably relieved of primary responsibility
for a pension benefit obligation and eliminated significant risks related to the pension
benefit obligation, as well as the plan assets used to effect the settlement. An entity
should not recognize a settlement gain or loss in net income unless the insurance
company that issues the annuity contracts unconditionally assumes the legal obligation to
provide the specified pension benefits. If the premium has not been paid, the purchase of
the annuity contracts may be revocable. Further, if plan assets have not been transferred
by the pension plan to effect the settlement, they may be at risk. To qualify as a
settlement, the purchase of an annuity contract should be fully executed. If significant
risks related to the pension benefit obligation and the plan assets that will be used to
effect the settlement have not been eliminated, the employer should not recognize a gain
or loss in net income. Statement 88, Q&A Nos. 6, 7
123.421 Withdrawal of Excess Plan Assets without Effecting a Settlement. In some
cases, an employer may withdraw excess plan assets (e.g., cash) from a pension plan
when it has not met the requirements for settlement accounting. In these types of asset
reversions, none of the gains or losses that are included in accumulated other
comprehensive income should be recognized in net income. Instead, the transaction
should be recorded as a negative contribution. The employer should record a debit to cash
and a credit to accrued or prepaid pension cost. This type of transaction may be more
common outside the United States. In the United States, an employer is generally
required to settle its pension obligations before removing assets from a plan. Statement
88, Q&A Nos. 4, 5

Accounting for Settlements
123.422 For purposes of this section, the maximum gain or loss that an employer may
recognize in net income when a pension obligation is settled is the net gain or loss plus
any remaining transition asset (but not a transition obligation) included in accumulated
other comprehensive income. That maximum amount is based on the fair value of plan


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assets (not the market-related asset value) and plan obligations measured just before
calculating the effect of the settlement. A settlement event requires a measurement of
plan assets and obligations at the date of settlement (i.e., it triggers an interim
measurement date). The employer recognizes the maximum amount in net income if it
settles the entire projected benefit obligation. If it settles only part of the projected benefit
obligation, the employer should recognize in net income a pro rata portion of the
maximum amount equal to the percentage reduction in the projected benefit obligation.
Statement 88, par. 9; Statement 88, Q&A Nos. 30, 31, 42
123.423 Measuring and Recognizing Settlement Costs. If the purchase of a
participating annuity contract constitutes a settlement, the employer should reduce the
maximum gain (but not the maximum loss) by the cost of the participation right before
determining the amount to be recognized in net income. This accounting treatment
reflects the fact that the risk of loss has not been entirely eliminated for participating
contracts. Statement 88, par. 10
123.424 If the cost of all plan settlements in a year is less than or equal to the sum of the
service cost and interest cost components of net periodic pension cost for the year,
recognition in net income of the gain or loss is permitted but not required. The
accounting policy adopted should be applied consistently from year to year. To determine
whether the cost of settlement may be deferred from net income, the cost of a cash
settlement is the amount of cash paid to participants. For settlements using
nonparticipating annuity contracts, the cost of the settlement is the cost of the contracts.
For settlements using participating annuity contracts, the cost of the settlement is the cost
of the contracts less the amount attributed to the participation feature. If the gain or loss is
not recognized in net income, it becomes part of the gains and losses recognized in
accumulated other comprehensive income and is subject to recognition along with other
gains and losses included in accumulated other comprehensive income (see Paragraph
123.147. If an employer chooses to recognize in net income settlement gains and losses
when aggregate settlement costs are less than service and interest cost, that employer may
select an alternative policy consistent with these requirements. For example, it could
choose to recognize gains and losses in net income when settlements exceed service cost.
Statement 88, par. 11, Q&A No. 45
123.425 When aggregate settlement costs for the year exceed the threshold for
recognition, the amount to be recognized in net income is the entire settlement gain or
loss included in accumulated other comprehensive income, not the portion that exceeds
the recognition threshold. If an employer estimates for interim reporting purposes that the
cost of settlements during the year will fall below its gain and loss recognition threshold
but subsequently determines (in a later interim period) that settlement costs will exceed
that threshold, previously deferred settlement costs included in accumulated other
comprehensive income should be recognized in net income as a change in estimate at the
time that determination is made. Statement 88, Q&A No. 46
123.426 Methods of Allocation. The remaining transition asset (but not transition
obligation) and the net gain or loss that are included in accumulated other comprehensive
income are both treated as gains and losses in determining the settlement gain or loss. A
question arises in a settlement about how to allocate the portion of gains and losses to be
recognized in net income among actuarial gains and losses and remaining net asset from


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transition. The FASB concluded that an employer may elect its policy for allocation as
long as it is consistently applied. An amount equal to the settlement gain could be
allocated initially to (a) the remaining transition net asset included in accumulated other
comprehensive income, (b) the net gain included in accumulated other comprehensive
income, or (c) allocated pro rata between the two. The allocation method can affect the
measure of subsequent periods' net periodic pension cost. Therefore, allocation on a pro
rata basis is recommended because it is a neutral or unbiased approach. Statement 88,
Q&A No. 43
123.427 Similarly, in settlements involving a qualified participating annuity contract, a
question arises about how to allocate the deferred gain required for the value of the
participation right between gains and losses and the remaining transition asset. This is
also a policy decision that should be consistently applied. Example 123.402 allocates the
amount of the participation right initially to actuarial gains and losses for ease of
calculation. Nevertheless, for reasons similar to those outlined above, a pro rata basis is
generally recommended as the best approach. Statement 88, Q&A No. 44
123.428 Measuring the Unsettled Portion of the Projected Benefit Obligation Using
Implicit Annuity Interest Rates. The measurement of the portion of the projected
benefit obligation being settled is the purchase price of the nonparticipating annuity
contracts or other consideration paid to settle the obligation. Any gains or losses that
result from remeasuring the projected benefit obligation and plan assets at the date of
settlement are included in the maximum gain or loss subject to pro rata recognition in net
income before the settlement gain or loss to be recognized is determined. If a settlement
occurs and the interest rates implicit in the purchase price of nonparticipating annuity
contracts used to effect the settlement are different from the assumed discount rates used
to determine net periodic pension cost, the employer should not automatically adjust the
assumed interest rates used to measure the unsettled portion of the obligation. Instead, the
employer should consider the demographics of the participants related to the settled and
unsettled portions of the projected benefit obligation, and whether the rates implicit in the
annuity contract represent the rates at which the unsettled portion of defined benefits
could be effectively settled, as discussed in Section 123.100 Single-Employer Defined
Benefit Plans. Given the guidance in Statement 87, par. 44A and the SEC’s position on
the best way to measure assumed discount rates and effective settlement, we believe an
employer will generally continue to estimate assumed discount rates for the unsettled
portion of defined benefits (e.g., benefits related to future salary increases) using current
interest rates inherent in high-grade zero coupon bonds with maturities similar to the
expected payout profile of the benefit obligation. Statement 88, Q&A Nos. 32, 33
123.429 Amortization of Remaining Transition Asset Included in Accumulated
Other Comprehensive Income. An employer that reduces the net transition asset
included in accumulated other comprehensive income when it recognizes a settlement
gain should amortize the remaining balance of that asset on a straight-line basis over the
remainder of the amortization period determined at transition. Statement 88, Q&A No. 35
123.430 Asset Reversions. In the United States, an employer is generally prohibited
from removing excess assets from a pension plan without settling its pension obligations
by making lump-sum payments to participants or purchasing annuities. While asset
reversions may often be related to settlements (and vice versa), the triggering event for


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recognizing a settlement gain or loss is governed by the recognition and measurement
requirements discussed earlier in this section and not by the timing (or existence) of an
asset reversion event. Asset reversions should be accounted for at the time they occur as
an increase in employer assets with a corresponding decrease in prepaid pension assets
(or increase in accrued pension costs). If an asset reversion includes employer equity
securities (i.e., return of treasury stock), it should be accounted for at fair value as a
reduction in equity at the time of the asset reversion. Statement 88, Q&A No. 34
123.431 An employer that withdraws excess plan assets from its pension plan may be
subject to an excise tax on that withdrawal. An excise tax is independent of taxable
income. It is a tax due on a specific transaction, regardless of whether there is taxable
income for the period in which the transaction occurs. Thus, it is not an income tax that
an employer should account for under Statement 109. Rather, an employer should
recognize an excise tax as an expense (not classified as income taxes) in the period in
which the excess plan assets revert to the employer and the excise tax becomes payable.
For this purpose, we believe the reversion should be considered to occur at the earlier of
(a) withdrawal of the excess funds from the plan, or (b) the period in which a settlement
that will result in recapture of excess assets is recognized. Statement 88, Q&A No. 66
123.432 Accounting for Pension Benefits Paid by Employers after Insurance
Companies Fail to Provide Annuity Benefits. If an employer settles its pension
obligation through the purchase of insurance annuity contracts from an insurance
company and, subsequently, the insurance company becomes insolvent and is unable to
meet all of its obligations under the annuity contracts, the employer may decide to make
up some or all of the deficiency in annuity payments to the retirees. In this situation, the
employer should recognize a loss at the time it assumes the deficiency if it recognized a
gain on the original settlement. The loss recognized would be the lesser of (1) the gain
recognized on the original settlement, or (2) the amount of the benefit obligation assumed
by the employer. The excess of the obligation assumed by the employer over the loss
recognized should be accounted for as a plan amendment or plan initiation under Section
123.100 Single-Employer Defined Benefit Plans. EITF 91-7
123.433 Measurement Date Precedes Fiscal Year-End. Before Statement 158, an
employer was permitted to measure plan assets and obligations as of the date of the
annual financial statements or, if used consistently from year to year, as of a date not
more than three months before that date. For fiscal years ending after December 15,
2008, Statement 158 eliminated the provisions in Statement 87 that permitted employers
to measure plan assets and benefit obligation as of a date not more than three months
before the balance-sheet date except for plans sponsored by a subsidiary or equity-
method investee that are included in the annual financial statements using a fiscal period
different from that of the parent or investor. Before adopting Statement 158, generally, an
employer should not include the gain or loss from a settlement or curtailment that occurs
after its measurement date, but before its fiscal year-end, when determining the results of
operations for that fiscal year. Rather, the employer should include the gain or loss in the
financial statements for the subsequent fiscal year (i.e., when a lag measurement date is
used, there will be a corresponding lag recognition of a settlement). However, if the gain
or loss results from the employer’s terminating the pension plan and not establishing a
successor pension plan, the effect of the settlement and curtailment should be recognized


                                                                                         10
in the current fiscal year. If a gain or loss is not recognized in net income in the current
fiscal year and the employer's financial position or results of operations would have been
materially affected had it been recognized, the employer should disclose the nature of the
event, its consequences, and when it will recognize the gain or loss. For fiscal years
ending after December 15, 2008, Statement 158 will require plan asset and benefit
obligations to be measured in the period in which the settlement occurs. Statement 88,
Q&A No. 28

Illustrations of Settlement Accounting
123.434 Illustrations 123.401-123.402 provide examples of the settlement accounting
requirements in Statement 88

 Illustration 123.401—Accounting for a Plan Termination without a
 Replacement Defined Benefit Plan (Simultaneous Settlement and
 Curtailment)
 Company A sponsored a final-pay noncontributory defined benefit plan. On November 16,
 20X0, the employer terminated the plan, settled the accumulated benefit obligation of
 $1,500,000 (nonvested benefits became vested on termination of the plan) by purchasing
 nonparticipating annuity contracts, and withdrew excess assets. Defined benefits were not
 provided under any successor plan. The plan ceased to exist as an entity.
 As a result, Company A recognized a gain of $900,000 in net income, determined as follows:
                                                Company A
                                                (in thousands)

                                                Just Before       Effect of         After
                                                Termination       Termination       Termination
 Assets and obligations:
    Accumulated benefit obligation              $   (1,500)       $   1,500a        $   0
    Effects of projected future
    compensation levels                             (400)             400b              0
    Projected benefit obligation                    (1,900)           1,900             0
    Plan assets at fair value                       2,100             (1,500)a
                                                                      (600)c            0
 Funded status and recognized asset             $   200           $   200           $   0

 Amounts recognized in accumulated other
 comprehensive income:
    Transition asset d, e                $          (200)         $   200           $   0
    Net gain e                                      (300)             300               0
 Accumulated other comprehensive income $           (500)         $   500           $   0


 Footnotes:



                                                                                          11
(a) The accumulated benefits of $1,500 were settled by using an equivalent amount of plan assets to purchase
nonparticipating annuity contracts.
(b) The effects of projected future compensation levels ceased to be an obligation of the plan or the employer due
to the termination of all plan participants. Under Paragraph 123.426, the gain (i.e., the decrease in the projected
benefit obligation) resulting from the curtailment is first offset against any existing net loss included in
accumulated other comprehensive income. Because the existing amount included in accumulated other
comprehensive income in this case was a gain ($200 remaining transition asset plus $300 net gain), the $400 gain
from the curtailment was recognized.
(c) Plan assets, in excess of the amount used to settle the pension benefits, were withdrawn from the plan.
(d) A transition asset included in accumulated other comprehensive income is treated as a net gain for purposes of
applying Statement 88.
(e) A pro rata amount of the maximum gain, which includes the net gain included in accumulated other
comprehensive income ($300) and the transition asset remaining in accumulated other comprehensive income
($200), is recognized due to settlement. The projected benefit obligation was reduced from $1,500 to $0 (the
curtailment initially reduced the projected benefit obligation from $1,900 to $1,500 as described in footnote b), a
reduction of 100%. Accordingly, the entire amount included in accumulated other comprehensive income of $500
($300 + $200) is recognized in net income.
The journal entry required to reflect the accounting for the plan termination was:
                                                           Debit              Credit

           Cash                                            600
           Accumulated other comprehensive
                                                           500
           income
                  Gain from plan termination                                  900
                  Pension asset                                               200
The gain from the plan termination without a replacement defined benefit plan was composed
of the following:
Gain from curtailment                                      $ 400
Gain from settlement                                         500
        Total gain                                         $ 900




Illustration 123.402—Accounting for a Settlement of a Pension Obligation
The following examples illustrate the accounting for a settlement of a pension obligation in
three specific situations. In the first example Company B had a transition obligation remaining
in accumulated other comprehensive income. In the second and third examples, the entities
(Company C and Company D) each had a transition asset remaining in accumulated other
comprehensive income. Each company settled a portion of the obligation subsequent to
transition to Statement 87. However, in each case, the Company did not curtail future benefits.
Therefore, employees continue to earn additional benefits from future service as before.
Company B had a retroactive plan amendment after transition and therefore had prior service
cost recognized in accumulated other comprehensive income; Company C and Company D did
not.




                                                                                                        12
Example 123.402—Projected Benefit Obligation Exceeds Plan Assets
Company B sponsors a final-pay noncontributory defined benefit plan. On December 31,
20X0, Company B settled the vested benefit portion ($1,300,000) of the projected benefit
obligation through the purchase of nonparticipating annuity contracts. As a result, Company B
recognized a gain of $195,000, determined as follows:
                                                        Company B
                                                        (in thousands)

                                                        Just Before           Effect of             After
                                                        Settlement            Settlement            Settlement
Assets and obligations:
   Vested benefit obligation                            $     (1,300)         $     1,300a          $    0
   Nonvested benefits                                         (200)                                      (200)
   Accumulated benefit obligation                             (1,500)               1,300                (200)
   Effects of projected future compensation
   levels                                                     (500)                                      (500)
   Projected benefit obligation                               (2,000)               1,300                (700)
   Plan assets at fair value                                  1,400                 (1,300)a             100
   Funded status and recognized liability               $     (600)           $     0               $    (600)

Amounts recognized in accumulated other
comprehensive income:
   Transition Obligation b                              $     650                                   $    650
   Prior service cost                                         150                                        150
   Net gain c                                                 (300)                 195                  (105)
Accumulated other comprehensive income                  $     (500)           $     (195)           $    305


Footnotes:
(a) The vested benefits of $1,300 were settled by using plan assets to purchase nonparticipating annuity contracts.
(b) A transition obligation remaining in accumulated other comprehensive income is treated as prior service cost
included in accumulated other comprehensive income and therefore is not affected by settlement of the
obligation.
(c) A pro rata portion of the maximum gain included in accumulated other comprehensive income is recognized
in net income due to the settlement. The projected benefit obligation was reduced from $2,000 to $700, a
reduction of 65%. Accordingly, 65% of the maximum gain of $300, a gain of $195, is recognized in net income.
The journal entry required to reflect the accounting for the plan settlement was:
                                                            Debit             Credit

        Accumulated other comprehensive
        income                                              195
                  Gain from settlement                                        195
Statement 88, Illustration 2A




                                                                                                        13
Example 123.403–Plan Assets Exceed the Projected Benefit Obligation
Company C sponsors a final-pay noncontributory defined benefit plan. On December 31,
20X0, Company C settled the vested benefit portion ($1,300,000) of the projected benefit
obligation through the purchase of nonparticipating annuity contracts. As a result, Company C
recognized a gain of $325,000 in net income, determined as follows:
                                                      Company C
                                                      (in thousands)

                                                      Just Before           Effect of            After
                                                      Settlement            Settlement           Settlement
Assets and obligations:
   Vested benefit obligation                          $ (1,300)             $    1,300a          $ 0
   Nonvested benefits                                   (200)                                      (200)
   Accumulated benefit obligation                       (1,500)                  1,300             (200)
   Effects of projected future
   compensation levels                                   (500)                                      (500)
    Projected benefit obligation                        (2,000)                  1,300             (700)
    Plan assets at fair value                           2,100                    (1,300)a          800
    Funded status and recognized asset                $ 100                 $    0               $ 100

Items recognized in accumulated other
comprehensive income:
   Transition asset b, c                              $ (200)               $    130             $ (70)
   Net gain c                                           (300)                    195               (105)
Accumulated other comprehensive
income                                                $ (500)               $    325             $ (175)
Statement 88, Illustration 2B
Footnotes:
(a) The vested benefits of $1,300 were settled by using plan assets to purchase nonparticipating annuity contracts.
(b) A transition asset remaining in accumulated other comprehensive income is treated as a net gain included in
accumulated other comprehensive income for purposes of Statement 88.
(c) A pro rata amount of the maximum gain, which includes the net gain included in accumulated other
comprehensive income ($300) and the transition asset remaining in accumulated other comprehensive income
($200), is recognized in net income due to settlement. The projected benefit obligation was reduced from $2,000
to $700, a reduction of 65%. Accordingly, 65% of the maximum gain of $500 ($300 + $200), a gain of $325, is
recognized in net income. The journal entry required to reflect the accounting for the plan settlement was:
                                                          Debit                  Credit

        Accumulated other comprehensive
                                                          325
        income
                Gain from settlement                                             325




                                                                                                        14
Example 123.404—Plan Assets Exceed the Projected Benefit Obligation
and a Participating Annuity Contract Is Purchased to Settle Benefits
Company D sponsors a final-pay noncontributory defined benefit plan. On December 31,
20X0, Company D settled the vested benefit portion ($1,300,000) of the projected benefit
obligation through the purchase of a participating annuity contract at a cost of $1,430,000. The
plan could have purchased a nonparticipating contract covering the same benefits for
$1,300,000. The participation features were not considered significant enough to preclude
settlement accounting. As a result, Company D recognized a gain of $240,000 (rounded) in net
income, determined as follows:
                                                   Company D
                                                   (in thousands)

                                                   Just Before             Effect of             After
                                                   Settlement              Settlement            Settlement
Obligations:
  Vested benefit obligation
  Nonvested benefits                               $ (1,300)               $ 1,300a              $ 0
  Accumulated benefit obligation                     (200)                                         (200)
  Effects of projected future
  compensation levels                                 (1,500)                 1,300                 (200)
  Projected benefit obligation                        (500)                                         (500)
                                                      (2,000)                 1,300                 (700)
Plan assets at fair value:
   Participation right                                                       130a                  130
   Other plan assets                                 2,100                   (1,430)a              670
   Funded status and recognized asset              $ 100                   $ 0                   $ 100

Amounts recognized in accumulated
other comprehensive income:
   Transition asset b, c                              (200)                   96d                   (104)
   Net gain c                                         (300)                   144d                  (156)
Accumulated other comprehensive
income                                             $ (500)                 $ 240                 $ (260)


Footnotes:
(a) The vested benefits of $1,300 were settled by using $1,430 of plan assets to purchase a participating annuity
contract. However, a nonparticipating contract covering the same benefits could have been purchased for $1,300.
The plan paid the additional $130 to obtain the participation right.
(b) A transition asset remaining in accumulated other comprehensive income is treated as a net gain included in
accumulated other comprehensive income for purposes of Statement 88.
(c) A pro rata amount of the maximum gain, which includes the net gain included in accumulated other
comprehensive income ($300) and the transition asset remaining in accumulated other comprehensive income
($200), was recognized due to the settlement. However, any gain on a settlement that uses a participating annuity
contract is computed by first reducing the maximum gain by the cost of the participation right [($200 + $300) -



                                                                                                       15
 $130 = $370]. The projected benefit obligation was reduced from $2,000 to $700, a reduction of 65%.
 Accordingly, a gain of $240 (rounded) was recognized (0.65 x $370) in net income. The journal entry required to
 reflect the accounting for the plan settlement was:
                                                     Debit                    Credit

          Accumulated other
          comprehensive income                       240
             Gain from settlement                                             240

 (d) The amount of gain from settlement was allocated as follows (rounded):
          Transition asset [($200 / $500) x $240]   $                96
          Net gain [($300 / $500) x $240]                            144
                                                    $                240
 Statement 88, Illustration 2C

ACCOUNTING FOR A CURTAILMENT OF PENSION BENEFITS
This section covers the following topics:
Determining Whether a Curtailment Occurred
Accounting for Curtailments
Illustrations of Curtailment Accounting

Determining Whether a Curtailment Occurred
123.435 A curtailment is an event that either:
        (a) Significantly reduces the expected years of future service of present
            employees (e.g., a large layoff); or
        (b) Eliminates for a significant number of employees the accrual of defined
            benefits for some or all of their future services (e.g., eliminating future
            benefits).
123.436 There is no specific threshold for determining whether an event results in
significantly reducing expected years of future service or eliminating the accrual of
pension benefits for some or all future services of a significant number of employees. An
employer should apply judgment for each pension plan based on the facts and
circumstances. Distinct and separate pension plans should not be combined to determine
the effect of a curtailment or settlement. Statement 88, Q&A No. 18
123.437 Individually Insignificant Reductions of Expected Years of Future Service.
Individually insignificant reductions of employees’ expected years of future service
covered by a pension plan that are caused by one event, such as a strike, or that are
related to a single plan of reorganization and accumulate during more than one fiscal year
to a significant reduction, constitute a curtailment. The fact that the reductions occur over
a period of time does not affect whether an event giving rise to a curtailment occurred.
Unrelated, individually insignificant reductions of employees’ expected years of future
service covered by a pension plan that accumulate to a significant reduction over a single
year or more, do not constitute a curtailment. The effect of unrelated, individually
insignificant reductions in employees’ expected future service should be accounted for as


                                                                                                      16
part of actuarial gains and losses as described in Section 123.100 Single-Employer
Defined Benefit Plans. Statement 88, Q&A Nos. 21, 22
123.438 Effect of Temporary Layoffs of Employees and Suspensions of the Pension
Plan. A temporary layoff results in a curtailment if the layoff significantly reduces the
expected years of future service of present employees covered by a pension plan.
Likewise, a pension plan suspension that eliminates significant pension benefit accruals
for the future services of some or all present employees is a curtailment even if the
pension plan suspension is temporary. Statement 88, Q&A No. 20
123.439 Successor Plans in the Context of a Settlement or a Curtailment. If a pension
plan is terminated (the obligation is settled and the pension plan ceases to exist) and not
replaced by a successor pension plan, both a settlement and a curtailment have occurred,
regardless of whether the employees continue to work for the employer. A curtailment
occurs if a pension plan is terminated and replaced by a successor pension plan that
eliminates, for a significant number of employees, the accrual of defined pension benefits
for some or all of their future services. Examples of plan replacements that result in
curtailment events include a successor pension plan that:
       (a) Covers only half of the employees previously covered by the terminated
           pension plan, or
       (b) Does not provide for accrual of additional defined pension benefits for certain
           years of future services.
123.440 To illustrate example (b), assume a pension plan provides a flat benefit of $1,500
per year of service. At the end of 20X7, the employer terminates that pension plan and
establishes a successor pension plan that provides a flat benefit of $1,000 per year for all
years of service, including services provided under the terminated pension plan. Pension
benefits earned under the successor pension plan are reduced by the pension benefits
earned under the terminated pension plan. At the end of 20X7, Employee A, with five
years of service, has an accumulated and projected pension benefit of $7,500 per year
under the terminated pension plan ($1,500 × 5 years of service). For years 20X8, 20X9,
and the first half of 20X0, Employee A will accrue no additional pension benefits (i.e.,
until benefits under the new plan exceed the accumulated and project benefits under the
old plan). The accrual of additional pension benefits will commence in the second half of
20X0. If a significant number of employees will not accrue additional pension benefits
for some or all of their future services (as is the situation for Employee A), a curtailment
occurs. Statement 88, Q&A No. 24
123.441 A new pension plan that an employer establishes, or that amends one or more
existing pension plans, and provides for the accrual of defined pension benefits for the
future services of present employees previously covered by the old plan is considered a
successor pension plan for purposes of determining whether a curtailment occurred
unless:
       (a) The new plan's pension benefit formula or the amendment to the existing
           pension plan provides for accrual of only insignificant defined pension
           benefits for those employees, or




                                                                                           17
       (b) The new or existing pension plan(s) covers only an insignificant number of
           employees previously covered by the old plan.
Statement 88, Q&A No. 26
123.442 Employer Terminates Plan and Provides Additional but Reduced Pension
Benefits in Successor Plan. An employer may terminate a pension plan and establish a
successor pension plan that provides reduced pension benefits for all years of employees'
future service. In that situation, the employer essentially maintained the same pension
plan but with reduced pension benefits. The termination is not a curtailment because
pension benefits continue to accrue for all years of future service, albeit at a reduced
level. The termination does not eliminate for a significant number of employees the
accrual of pension benefits for some or all of their future years of service. Accordingly,
the reduction in pension benefits is accounted for as a negative pension plan amendment
under Section 123.100. Statement 88, Q&A No. 23

Accounting for Curtailments
123.443 A curtailment event results in the immediate recognition of a proportion of prior
service cost and any remaining transition obligation that are included in accumulated
other comprehensive income discussed below. In addition, a curtailment event may result
in recognizing certain changes in the projected benefit obligation.
123.444 Prior Service Cost. The prior service cost included in accumulated other
comprehensive income associated with years of service no longer expected to be rendered
as the result of a curtailment is a loss. For example, if a curtailment eliminates 40% of the
estimated remaining future years of service of those who were employed at the date of a
prior plan amendment, and were expected to receive benefits under the plan, then the loss
associated with the curtailment is 40% of the prior service cost included in accumulated
other comprehensive income related to that amendment. In the context of this paragraph,
prior service cost includes the cost of retroactive plan amendments and remaining
transition obligation (but not asset), included in accumulated other comprehensive
income. Statement 88, par. 12
123.445 Employees may continue to work for an employer even after a plan termination
or suspension that results in a curtailment. In determining the net gain or loss to be
recognized for the curtailment, an employer should include prior service cost included in
accumulated other comprehensive income associated with the employees affected by the
pension plan termination or suspension, even if they will continue to work for the
employer after the curtailment. Delayed recognition of prior service cost provides for the
likelihood of future economic benefits to the employer as a result of retroactive pension
plan amendments. Those pension benefits are associated with the future services of those
employees who at the date of the pension plan amendment are expected to receive
pension benefits under the pension plan. Because a pension plan termination (or
suspension) eliminates the accrual of pension benefits for some or all of those future
services, it raises sufficient doubt about the continued existence of the future economic
benefits of the retroactive pension plan amendment to justify recognizing prior service
cost included in accumulated other comprehensive income. On termination of a pension



                                                                                          18
plan (without establishing a successor pension plan), all remaining items included in
accumulated other comprehensive income are recognized. Statement 88, Q&A No. 48
123.446 In the event of a curtailment, the employer should recognize the prior service
cost included in accumulated other comprehensive income associated with years of
service no longer expected to be rendered, regardless of whether it amortizes prior service
cost by assigning an equal amount to each future period of service of each active
employee or consistently uses an alternative amortization approach (e.g., straight-line
amortization over average remaining service period of employees expected to receive
benefits under the plan). For an employer that uses an alternative amortization approach,
the ability to associate prior service cost included in accumulated other comprehensive
income with years of service no longer expected to be rendered is more difficult and the
result may be less precise. After the curtailment, it may be necessary to use the
percentage reduction of years of service to determine the amount of cost that should be
recognized in net income. For example, if the future years of service determined as of the
immediately preceding measurement date for those employees covered under a prior
pension plan amendment are reduced by 40% due to a curtailment, the employer would
recognize 40% of the remaining prior service cost included in accumulated other
comprehensive income. Statement 88, Q&A No. 47
123.447 Gains and Losses. The projected benefit obligation may be decreased (a gain)
or increased (a loss) by a curtailment. To the extent that a gain exceeds any net loss
included in accumulated other comprehensive income (or the entire gain, if a net gain
exists), it is a curtailment gain. To the extent that a net loss exceeds any net gain included
in accumulated other comprehensive income, (or the entire loss, if a net loss exists) it is a
curtailment loss. For purposes of this paragraph, an employer should treat a remaining
transition asset (but not liability) included in accumulated other comprehensive income as
a net gain that should be combined with the net gain or loss included in accumulated
other comprehensive income for purposes of making curtailment calculations. As
discussed in Paragraph 123.444, the remaining amount of any transition liability is
considered a prior service cost and not included with gains and losses in making these
calculations. Statement 88 par. 13
123.448 The existence of both a transition asset and a net loss at the date of a curtailment
will affect how an employer accounts for a curtailment. For purposes of determining the
curtailment gain or loss to recognize, a remaining transition asset is treated as a gain.
Although gains and losses and transition assets included in accumulated other
comprehensive income are combined for purposes of determining the amount of any
curtailment gain or loss, the intent of this calculation is not to provide a mechanism for
offsetting a net loss against any remaining transition asset. See Illustration 123.405 for
examples of the application of this guidance. Statement 88, Q&A No. 52
123.449 If both a remaining transition asset and a net gain exist at the date of a
curtailment in accumulated other comprehensive income that increases the projected
benefit obligation, an employer may offset the effects of the curtailment using any of the
following approaches: (a) initially against the remaining transition asset, (b) initially
against the gain, or (c) against both on a pro rata basis. Once an approach is identified, it
should be applied consistently from year to year. However, for the reasons stated in



                                                                                           19
Paragraph 123.426 on settlement accounting, the recommended approach is to offset both
on a pro rata basis (alternative c). Statement 88, Q&A No. 53
123.450 Timing of Curtailment Recognition. If the sum of the effects identified in
Paragraphs 123.444–123.446 and 123.447–123.449 is a net loss, an employer should
recognize that loss in net income when it is probable that a curtailment will occur and the
employer can reasonably estimate the effects described. If the sum of those effects is a
net gain, the employer should recognize that gain in net income when the related
employees terminate (for a curtailment related to terminations), or the employer adopts
the plan suspension or amendment (for a curtailment related to the elimination of
benefits). Statement 88 par. 14
123.451 For curtailments related to plan amendments, the curtailment is accounted for at
the adoption date, not the effective date of the plan amendment. For example, an
employer may amend its pension plan to provide for its termination or suspension and
thereby eliminate for a significant number of employees the accrual of some or all of the
pension benefits for their future services after a subsequent date (the effective date of the
pension plan termination or suspension is after the amendment date). If the sum of the
effects of the resulting curtailment is a net gain, the employer should measure and
recognize the net gain from the curtailment when the employer amends its pension plan,
not when the pension plan termination or suspension is effective. Statement 88, Q&A No.
56
123.452 If settlement of the pension benefit obligation as part of a pension plan
termination occurs in a financial reporting period that is different from the period in
which the effects of the curtailment resulting from the pension plan termination ordinarily
would be recognized, the effects of the settlement and the curtailment should not be
recognized in the same financial reporting period. The effects of the settlement and the
effects of the curtailment that result from a pension plan termination should be
recognized in accordance with the guidance on settlements and curtailments, respectively,
which may result in the effects of those events being recognized in different periods.
Illustration 123.404 illustrates the application of this guidance. Statement 88, Q&A No.
27
123.453 Prior to the effective date of Statement 158, an employer is allowed to measure
plan assets and obligations as of a date not more than three months prior to the date of the
annual financial statements. In such situations, generally, an employer should not include
the gain or loss from a settlement or curtailment that occurs after its measurement date
but before its fiscal year-end in determining the results of operations for that fiscal year.
Unless the curtailment results from the final termination of a pension plan, the employer
should include the gain or loss in the financial statements for the subsequent fiscal year.
Statement 88, Q&A No. 28
123.454 Use of Estimates. A curtailment may relate to a temporary pension plan
suspension (e.g., the pension plan suspension will end as soon as the employer's financial
condition sufficiently improves) or some other event in which estimates are required. In
these situations, the employer should determine the net gain or loss from the curtailment
based on the probable duration of the pension plan suspension or other activity. The term
probable is used consistent with Statement 5 to mean that a transaction or event is likely


                                                                                          20
to occur. If the duration is a range of years and no single period is a better estimate than
any other period, the employer should base the determination on the estimate of duration
within the range that results in a minimum net gain or loss from the curtailment.
Statement 88, Q&A No. 49
123.455 Accounting for the Termination of an Existing Plan and Subsequent
Contribution of Assets to a New Defined Contribution Plan. An employer may
terminate its existing defined benefit pension plan, settle the pension benefit obligation,
and withdraw excess plan assets, which it then contributes and allocates to participants'
accounts in a new defined contribution pension plan. In those circumstances, the
employer may not combine the net gain or loss from the settlement and curtailment of the
old plan with the net periodic pension cost from the contribution to the defined
contribution pension plan and report both on a net basis. Two separate events have
occurred that require separate accounting recognition: (a) a pension plan termination
resulting in recognition of all net pension amounts included in accumulated other
comprehensive income and (b) a contribution of assets to a defined contribution pension
plan resulting in recognition of net periodic pension cost equal to the amount contributed
and allocated to participants’ accounts. Netting the results of the separate events is
inappropriate. Statement 88, Q&A No. 29
123.456 Transition Asset or Obligation Included In Accumulated Other
Comprehensive Income Is Reduced as Part of the Accounting for a Curtailment. If
the transition asset or obligation included in accumulated other comprehensive income is
reduced as part of the accounting for a curtailment, the employer should amortize as part
of net periodic pension cost the remaining balance of the transition asset or obligation on
a straight-line basis over the remainder of the amortization period determined at
transition. This guidance applies even if almost all of the plan’s participants become
permanently inactive due to the curtailment (although this would likely mean that the
majority of any transition obligation would be recognized as part of the curtailment gain
or loss). Statement 88, Q&A Nos. 50, 51

Illustrations of Curtailment Accounting
123.457 The following illustrations provide examples of applying the curtailment
accounting requirements in Statement 88:

 Illustration 123.403—Accounting for a Plan Curtailment
 The following examples illustrate the accounting for a curtailment in two specific situations. In
 the first example, Company E had a transition obligation and a prior service cost from a
 retroactive plan amendment in accumulated other comprehensive income. In the second
 example, Company F had a transition asset in accumulated other comprehensive income.



 Example 123.405—Disposal of a Component—Projected Benefit
 Obligation Exceeds Plan Assets



                                                                                          21
Company E sponsors a final-pay noncontributory defined benefit plan. On January 1, 20X0,
the company had a retroactive plan amendment resulting in $800,000 of prior service cost. On
December 31, 20X1, Company E management committed to a formal plan to dispose of a
component of the entity. In connection with the disposal, the number of employees
accumulating benefits under the plan would be reduced significantly. The portion of the
projected benefit obligation to be reduced based on the expected future compensation levels of
the terminated employees was $90,000, and reduction of nonvested benefits of the terminated
employees was $20,000. The plan also had included in accumulated other comprehensive
income a transition obligation, which is treated as prior service cost in a curtailment. The
remaining expected future years of service associated with those employees present at the date
of transition was reduced by 30% due to the termination of employees. Accordingly, 30% of
the transition obligation remaining in accumulated other comprehensive income at December
31, 20X1 was a loss of $120,000.
The prior service cost included in accumulated other comprehensive income (which relates to
the plan amendment of January 1, 20X0) associated with the previously expected years of
service of the terminated employees that will not be rendered was a loss of $160,000.
The sum of the effects resulting from the plan curtailment was a loss of $170,000, recognized
in net income, determined as follows:
                                        Company E
                                        (in thousands)

                                        Just Before         Effect of         After
                                        Curtailment         Curtailment       Curtailment
Assets and obligations:
    Vested benefit obligation           $   (1,300)                           $ (1,300)
    Nonvested benefits                      (200)           $ 20                (180)
    Accumulated benefit obligation          (1,500)           20                (1,480)
    Effects of projected future
    compensation levels                     (500)              90                (410)
    Projected benefit obligation            (2,000)            110               (1,890)
    Plan assets at fair value               1,400                                1,400
Funded status and recognized asset
(liability)                             $   (600)           $ 110             $ (490)

Amounts recognized in accumulated
other comprehensive income:
    Transition obligation               $   400             $ (120)           $ 280
    Prior service cost resulting from
    plan amendment                          651                (160)             491
    Net gain                                (151)                                (151)
Accumulated other comprehensive
income                                  $   900             $ (280)           $ 620




                                                                                      22
Statement 88, Illustration 3A



Example 123.406—Plan Assets Exceed the Projected Benefit Obligation
Company F sponsors a final-pay noncontributory defined benefit plan. On July 27, 20X0, the
management of Company F decided to reduce significantly the operations of a line of business
products. Although that decision did not result in closing down any facilities, it required the
termination of a significant number of employees, which took place on November 1, 20X0.
The portion of the projected benefit obligation that will be reduced related to expected future
compensation levels of terminated employees was $90,000, and the portion of nonvested
benefits to be reduced related to the terminated employees was $20,000.
As a result, Company F recognized a gain of $70,000 on November 1, 20X0, the date the
terminations actually took place, determined as follows:
                                                   Company F
                                                   (in thousands)
                                                   Just Before                                  After
                                                   Realization of                               Realization of
                                                   Curtailment            Effect of             Curtailment
                                                   Gain                   Curtailment           Gain
Assets and obligations:
   Vested benefit obligation                       $ (1,300)                                    $ (1,300)
   Nonvested benefits                                (300)                $ 20                    (280)
   Accumulated benefit obligation                    (1,600)                20                    (1,580)
   Effects of projected future
   compensation levels                               (400)                    90                  (310)
   Projected benefit obligation                      (2,000)                  110a                (1,890)
   Plan assets at fair value                         1,960                                        1,960
Funded status and recognized asset                 $ (40)                 $ 110                 $ 70

Amounts recognized in accumulated
other comprehensive income:
   Transition asset a                              $ (60)                 $ 60a                 $ 0
   Net loss                                          100                    (100)a                0
Accumulated other comprehensive
income                                             $ 40                   $ 0                   $ 0


Footnotes:
(a) Under Statement 88, the decrease in the projected benefit obligation is first offset against any existing net loss
included in accumulated other comprehensive income. The transition asset remaining in accumulated other
comprehensive income is treated as a net gain for curtailment accounting purposes. Thus, the net amount of gain
or loss included in accumulated other comprehensive income for curtailment purposes in this example is a loss of
$40 ( net loss of $100 minus the remaining transition asset of $60). The reduction in the projected benefit



                                                                                                           23
obligation ($110) is offset against the net loss ($40) resulting in the recognition of a curtailment gain of $70. .
The journal entry required to reflect the accounting for the plan curtailment was:
                                                       Debit                 Credit

          Pension asset                                110
            Gain from curtailment                                            70
            Accumulated other
                                                                             40
            comprehensive income
Statement 88, Illustration 3B



Illustration 123.404—Accounting for a Pension Plan Termination without a
Successor Pension Plan
On July 20, 20X1 an employer formally amends its pension plan to provide for its termination.
Employees cease to accrue additional pension benefits as of November 30, 20X1 (the effective
date of the pension plan termination), and pension benefits are not to be provided under a
successor pension plan. On January 30, 20X8, upon receipt of the appropriate regulatory
approvals for termination of the pension plan, nonparticipating annuity contracts are purchased
to settle the accumulated benefit obligation of $1,650,000 as of that date (nonvested pension
benefits become vested on termination of the pension plan), and the employer withdraws
excess plan assets. The pension plan ceases to exist.
The portion of the projected benefit obligation at July 20, 20X1 based on future compensation
levels beyond November 30, 20X1 is $400,000. As a result, the employer recognizes a
curtailment gain of $400,000 as of July 20, 20X1, the date of the pension plan amendment.
The employer recognizes a settlement gain of $550,000 as of January 30, 20X2, the date of the
settlement. Tables 1 and 2 indicate the determination of the effects of the curtailment a and the
settlement, respectively (in thousands):

Table 1—Curtailment Accounting
                                                  July 20, 20X1

                                                  Before                 Effect of                After
                                                  Curtailment            Curtailment              Curtailment
Assets and obligations:
   Accumulated benefit obligation                 $ (1,480)              $                        $ (1,480)
   Effect of future compensation
   levels                                            (420)                   $400b                    (20)
   Projected benefit obligation                      (1,900)                 400                      (1,500)
   Plan assets at fair value                         2,100                                            2,100
   Funded status and recognized
   asset                                          $ 200                  $ 400                    $ 600
    Net gain recognized in                        $ (500)                $ 0                      $ (500)


                                                                                                           24
    accumulated other comprehensive
    income

Table 2—Settlement Accounting
                                                January 30, 20X2

                                                Before                 Effects of              After
                                                Settlement             Settlement              Settlement
Assets and obligations:
   Projected benefit obligation
   (equals accumulated and vested
   benefit obligation)                          $ (1,650)              $ (1,650)c              $ 0
   Plan assets at fair value                      2,300                  (1,650)c                0
                                                                         (650)d
Funded status and recognized asset
(liability)                                     $ 650                  $ (650)                 $ 0
    Net gain recognized in
    accumulated other comprehensive
    income                                      $ (550)                $ 550e                  $ 0


Footnotes:
(a) Because the effect of the curtailment is a gain, that gain is recognized when the pension plan amendment is
adopted (July 20, 20X1) and is based on plan assets and the projected benefit obligation measured as of that date.
(b) The effect of future compensation levels beyond November 30, 20X1 ceases to be part of the projected benefit
obligation when the amendment to terminate the pension plan is adopted. The gain (the decrease in the projected
benefit obligation) resulting from the curtailment is first offset against any existing net loss included in
accumulated other comprehensive income. Because the amount is a gain of $500, the $400 gain from the
curtailment is recognized in net income. The journal entry to account for the curtailment is:

                                                   Debit                  Credit

        Pension asset                              400
            Gain from curtailment                                         400

(c) The vested benefit obligation of $1,650 is settled by using plan assets of an equal amount to purchase
nonparticipating annuity contracts.
(d) Plan assets in excess of the amount used to settle the vested benefit obligation are withdrawn from the pension
plan.
(e) A pro rata amount of the maximum gain of $550 is recognized in net income due to a settlement. The
projected benefit obligation is reduced from $1,650 to $0, a reduction of 100%. Accordingly, 100% of the
maximum gain is recognized in net income. The journal entry to account for the settlement and withdrawal of
excess plan assets is:

                                                   Debit                  Credit

        Cash                                       650



                                                                                                        25
        Accumulated other
        comprehensive income                          550
           Pension asset                                                    650
           Gain from settlement                                             550
Adapted from Statement 88, Q&A Illustration 1



Illustration 123.405—Employer Has a Transition Asset Remaining in
Accumulated Other Comprehensive Income
On July 1, 20X0, the employer decides to terminate a significant number of employees as part
of a plan to reduce its operations. The effects of the terminations are reasonably estimable at
that date. The termination of employees occurs on August 29, 20X0.
Case 1—A Transition Asset Remaining in Accumulated Other Comprehensive Income Is
Less Than Net Loss Included in Accumulated Other Comprehensive Income
The projected benefit obligation based on future compensation levels and the nonvested
accumulated benefit obligation related to the terminated employees decrease by $90,000 and
$20,000, respectively. The curtailment is accounted for as of August 29, 20X0, a as follows (in
thousands):
                                                  August 29, 20X0

                                                  Before                  Effects of            After
                                                  Curtailment             Curtailment           Curtailment
Assets and obligations:
   Vested benefit obligation                      $    (1,550)                                  $    (1,550)
   Nonvested benefits                                  (250)              $ 20                       (230)
   Accumulated benefit obligation                      (1,800)              20                       (1,780)
   Effect of future compensation
   levels                                              (400)                  90                     (310)
   Projected benefit obligation                        (2,200)                110b                   (2,090)
   Plan assets at fair value                           2,100                                         2,100
   Funded status and recognized
   asset(liability)                               $    (100)              $ 110                 $    10
Amounts recognized in accumulated
other comprehensive income:
   Transition asset                               $    (200)                  200b              $    0
   Net loss                                            300                    (300)b                 0
Accumulated other comprehensive
income                                            $    100                $ (100)               $    0


Footnotes:
(a) If the sum of the effects resulting from a curtailment is a net gain, that gain is recognized in net income when



                                                                                                          26
the related employees terminate (August 29, 20X0) and is based on plan assets and the projected benefit
obligation recorded as of that date.
(b) The curtailment gain (the decrease in the projected benefit obligation) resulting from the curtailment is first
offset against any existing net loss included in accumulated other comprehensive income. Because the amount
included in accumulated other comprehensive income is a loss of $100 ($300 net loss less the $200 remaining
transition asset), the $110 decrease in the projected benefit obligation is initially offset against the loss, resulting
in a $10 net gain from the curtailment. The journal entry to account for the curtailment is:
                                                         Debit                   Credit

          Pension asset                                  10
          Pension liability                              100
             Accumulated other
             comprehensive income                                                100
             Gain from curtailment                                               10
Case 2—Transition Asset Remaining in Accumulated Other Comprehensive Income
Exceeds Net Loss Included in Accumulated Other Comprehensive Income
The net change in the projected benefit obligation for the terminated employees is an increase
of $110,000. There is an increase of $220,000 for supplemental early retirement benefits and a
decrease of $110,000 relating to future compensation levels ($90,000) and nonvested
accumulated pension benefits ($20,000). As a result, the curtailment is accounted for as of July
1, 20X0a, as follows (in thousands):
                                                    July 1, 20X0

                                                    Before                  Effects of              After
                                                    Curtailment             Curtailment             Curtailment
Assets and obligations:
   Vested benefit obligation                        $    (1,550)            $    (220)              $    (1,770)
   Nonvested benefits                                    (250)                   20                      (230)
   Accumulated benefit obligation                        (1,800)                 (200)                   (2,000)
   Effect of future compensation
   levels                                                (400)                   90                      (310)
   Projected benefit obligation                          (2,200)                 (110)b                  (2,310)
   Plan assets at fair value                             2,100                                           2,100
   Funded status and recognized
   liability                                        $    (100)              $    (110)              $    (210)
Amounts recognized in accumulated
other comprehensive income:
   Transition asset                                 $    (200)              $    200b               $    0
   Net loss                                              100                     (100)b                  0
Accumulated other comprehensive
                                                    $                       $                       $
income                                                   (100)                   100                     0


Footnotes
(a) If the sum of the effects resulting from the curtailment is a net loss, that loss is recognized when it is probable
that the curtailment will occur and effects are reasonably estimable.



                                                                                                              27
 (b) The loss (the increase in the projected benefit obligation) resulting from the curtailment is first offset against
 any net gain included in accumulated other comprehensive income. Because the amount included in accumulated
 other comprehensive income is a gain of $100 ($100 net loss plus the $200 remaining transition asset), the $110
 increase in the projected benefit obligation is initially offset against the gain, resulting in a $10 net loss from the
 curtailment. The journal entry to account for the curtailment is:
                                                         Debit                  Credit

           Loss from curtailment                         10
           Accumulated other
           comprehensive income                          100
               Pension liability                                                110
 Adapted from Statement 88, Q&A, Illustration 5



DISCONTINUED OPERATIONS, DISPOSAL OF A COMPONENT
OF AN ENTITY, AND SPINOFFS
123.458 Net periodic pension cost of employees who worked for a component of an
entity that met the requirements of Statement 144 to be classified as a discontinued
operations should be reclassified to discontinued operations with other costs and revenues
of the component. A disposition or planned disposition may result in a curtailment, a
settlement, or both. Settlements and curtailments related to disposition of a component of
an entity should generally be recognized and measured in the same way as settlements
and curtailments that do not relate to a discontinued operation except that even if a
curtailment is not significant to the plan, it should nonetheless be measured and
recognized in calculating the gain or loss on disposal of a component of an entity (see
Chapter 89.000 Impairments).
123.459 Reporting a Settlement as Part of Discontinued Operations. An employer
may sell a component of an entity as defined in Statement 144 and settle a pension
benefit obligation related to the employees affected by the sale. A settlement is directly
related to a disposal transaction if there is a demonstrated cause-and-effect relationship
and the settlement occurs no later than one year following the disposal transaction, unless
it is delayed by events or circumstances beyond an entity’s control. In a disposal of a
component of an entity, the timing of a settlement may be at the discretion of the
employer. If the employer simply chooses to settle a pension benefit obligation at the
time of the sale, the resulting coincidence of events is not, in and of itself, an indication
of a cause-and-effect relationship and, therefore, should be accounted for as a normal
settlement (and classified in continuing operations). However, if a direct cause-and-effect
relationship can be demonstrated, (e.g., settlement of a pension benefit obligation for
those employees affected by the sale is a necessary condition of the sale), the settlement
gain or loss should be classified in discontinued operations based on the timing discussed
in Chapter 89.000 Impairments. Statement 88, Q&A No. 37
123.460 Timing of Recognition and Reclassification to Discontinued Operations. The
timing of recognition of curtailment and settlement gains and losses is not changed by a
conclusion that those gains and losses relate to a discontinued operation. A curtailment


                                                                                                             28
loss is recognized in net income when it is probable that the curtailment will occur and
the related amounts can reasonably be estimated. Therefore, although a reporting entity
may not have satisfied all the criteria in Statement 144, par. 42 necessary to classify the
operations of the component as discontinued operations, it should nonetheless recognize a
curtailment loss if it is probable that the disposal will occur and the amount of the
curtailment loss can reasonably be estimated. Further, a curtailment gain is recognized in
net income when the related employees terminate or the plan suspension or amendment is
adopted. The timing of a curtailment gain may also be different from the timing required
for discontinued operations classification discussed in Statement 144 (See Chapter
89.000 Impairments). In these cases, a curtailment gain or loss required to be recognized
under Statement 88 should be classified in income from continuing operations until the
reporting entity satisfies those criteria in Statement 144 for reporting discontinued
operations at which point, the amount should be reclassified to discontinued operations.
Statement 88, Q&A No. 39
123.461 A settlement gain or loss is recognized when the settlement occurs. If a pension
obligation associated with the disposal group is settled after meeting the criteria for
reporting discontinued operations in Statement 144, the related gain or loss (determined
in accordance with the guidance in Statement 88) should be recognized in net income in
the period in which the settlement occurs and is classified in discontinued operations, if
the settlement is directly related to the disposal transaction. Again, the timing for
recognizing a settlement gain or loss may be different from the timing for recognition of
a related curtailment. Statement 88, Q&A No. 39
123.462 Calculating Disposal Gains and Losses When Reduction in Employee
Service Is Not Significant for Curtailment Purposes. A disposal of a component of an
entity may result in a termination of some employees' services earlier than expected, yet
it may not significantly reduce the expected years of future service of the total number of
present employees covered by the pension plan. In that situation, the employer that
disposed of a component of an entity should measure the effects of the reduction in the
work force on the pension plan in the same manner as a curtailment to determine the gain
or loss on disposal under Statement 144. Although the reduction in the work force may
not result in a significant reduction in the expected years of future service of present
employees covered by the pension plan and, therefore, a curtailment does not technically
occur, it is appropriate for purposes of determining the gain or loss on the disposal to
measure the effects of the reduction in the work force in the same manner as a
curtailment. Statement 88, Q&A No. 25
123.463 Transfer of Pension Benefit Obligation to Purchaser through Sale of a
Component of an Entity. If as part of the sale of a component of an entity, there is a
transfer of a pension benefit obligation to the purchaser (the purchaser assumes the
pension benefit obligation for specific employees), a settlement occurs if the settlement
criteria are satisfied. A settlement does not occur if there is a reasonable possibility that
the purchaser will be unable to meet the pension benefit obligation assumed under the
sales agreement and the seller remains contingently liable for that pension benefit
obligation. A curtailment occurs if the sale significantly reduces the expected years of
future service of present employees covered by the employer's pension plan. Even if a
curtailment does not occur, the seller should consider the effects of the reduction in the


                                                                                                29
work force on the gain or loss on the sale, as described above. Refer to Paragraph
123.462. Statement 88, Q&A No. 15

 Illustration 123.406—Accounting for a Settlement and Curtailment That
 Occur as a Direct Result of a Sale of a Component of an Entity
 Scenario 1
 On January 1, 20X1, an employer adopts a retroactive pension plan amendment that results in
 $800,000 of prior service cost.
 During the second quarter of 20X2, the employer determines that it is probable that it will sell
 a component of the entity. The employer estimates that the sale will occur by year-end.
 However, all the criteria under Statement 144 necessary to report discontinued operations are
 not satisfied during the second quarter. The employer estimates that the prior service cost
 included in accumulated other comprehensive income related to the pension plan amendment
 of January 1, 20X1 and associated with the previously expected years of service of the
 terminated employees that will not be rendered is a loss of $160,000. That estimate needs no
 revision on December 31, 20X2.
 During the third quarter of 20X2, the employer enters into an agreement with a December 31,
 20X2 closing date to sell the component. On December 31, 20X2 (disposal date), the employer
 sells the component at a $100,000 profit before considering the following pension-related
 effects. In connection with the sale, (a) certain employees cease to be employed by the selling
 employer, which results in a significant reduction in the number of present employees
 accumulating pension benefits under the selling employer’s pension plan (Plan A), (b) the
 terminated employees are hired by the acquiring employer, (c) the acquiring employer, through
 its pension plan (Plan B), agrees to assume the accumulated benefit obligation ($200,000)
 related to the terminated employees, and (d) plan assets of $250,000 ($200,000 for the
 settlement of the accumulated benefit obligation and $50,000 as an excess contribution) are
 transferred from Plan A to Plan B.
 The portion of the projected benefit obligation based on future compensation levels of the
 terminated employees is $75,000.
 The sum of the pension-related effects resulting from the sale is a net loss of $26,000
 computed as follows:
 Curtailment net loss (recognized during second quarter of
 20X2):
    Prior service cost included in accumulated other
    comprehensive income associated with terminated
    employees                                                    $ 160,000
    Reduction in projected benefit obligation                      (75,000)          $ 85,000

 Settlement gain (recognized in net income on December 31,
 20X8):
    Portion of transition asset remaining in accumulated
    other comprehensive income                                     (82,000)



                                                                                           30
   Portion of net gain included in accumulated other
   comprehensive income                                              (27,000)         (109,000)

Transfer of plan assets in excess of the projected benefit
obligation (recognized in net income on December 31,
20X8)                                                                                 50,000
                                                                                    $ 26,000


Tables 1 and 2 indicate the determination of the effects of the curtailment and settlement,
respectively (in thousands).
Table 1
Because the employer determined in the second quarter of 20X2 that it was probable that the
component would be sold, the curtailment loss should be recognized in that quarter. However,
because the employer had not satisfied all the criteria under Statement 144 for reporting
discontinued operations in that quarter, the curtailment loss should be initially reported as
income from continuing operations. In the third quarter when the employer satisfies those
relevant criteria, the curtailment loss would be reclassified to discontinued operations as part
of recasting the second quarter.

                                                             Curtailment-
                                                             Related Effects
                                        Before               Resulting from     After
                                        Sale                 Sale               Curtailment
Assets and obligations:
   Accumulated benefit obligation       $ (1,500)                               $    (1,500)
   Effect of future compensation
   levels                                   (500)            $ 75a                   (425)
   Projected benefit obligation             (2,000)            75                    (1,925)
   Plan assets at fair value                2,400                                    2,400
   Funded status and recognized
   asset                                $ 400                $ 75               $    475
Amounts recognized in accumulated
other comprehensive income:
   Transition asset                     $ (790)              $                  $    (790)
   Prior service cost                     651                    (160)b              491
   Net gain                               (261)                                      (261)
Accumulated other comprehensive
income                                  $ (400)              $ (160)c           $    (560)


Table 2
Because the settlement occurred on December 31, 20X2, the gain from the settlement is
recognized on that date and classified in discontinued operations.


                                                                                           31
                                                        December 31, 20X2
                                                                       Settlement-
                                                                       Related
                                                                       Effects
                                                        After          Resulting
                                                        Curtailment    from Sale                      After Sale

Assets and obligations:
   Accumulated benefit obligation                       $ (1,500)              $ 200d                 $ (1,300)
   Effect of future compensation levels                   (425)                                         (425)
   Projected benefit obligation                           (1,925)                200                    (1,725)
   Plan assets at fair value                              2,400                  (250)d                 2,150
   Funded status and recognized asset                   $ 475                  $ 50                   $ 425
Amounts recognized in accumulated other
comprehensive income:
   Transition asset                                     $ (790)                $ 82e                  $ (708)
   Prior service cost                                     491                                           491
   Net gain                                               (261)                  27e                    (234)
Accumulated other comprehensive income                  $ (560)                $ 109                  $ 451


Scenario 2
Assume the same fact pattern as Scenario 1 except that prior to the fourth quarter of 20X2, the
employer did not expect to sell or otherwise dispose of the component of the entity. In
Scenario 2, the determination of the curtailment loss and the settlement gain is the same as that
presented in Tables 1 and 2 in Scenario 1. However, both the curtailment loss and the
settlement gain should be recognized in the fourth quarter of 20X2 and reported in
discontinued operations pursuant to Statement 144.
Footnotes:
(a) The gain (the decrease in the projected benefit obligation) resulting from the curtailment is first offset against
any net loss included in accumulated other comprehensive income. Because the amount included in accumulated
other comprehensive income is a gain of $1,051 ($261 net gain plus the $790 remaining transition asset), the $75
gain from the curtailment is recognized in net income.
(b) The reduction of prior service cost (which relates to the pension plan amendment of January 1, 20X1)
included in accumulated other comprehensive income associated with the previously expected years of service of
the terminated employees that will not be rendered is $160 (detail calculations are omitted).
(c) The journal entry to account for the curtailment is:

                                                          Debit                Credit

     Pension asset                                        75
     Loss from curtailment                                85
         Accumulated other comprehensive
         income                                                                160




                                                                                                           32
 (d) The accumulated benefit obligation of $200 is settled by transferring plan assets of an equal amount to the
 acquiring employer. In addition, the selling employer agrees to transfer an additional $50 of plan assets. The
 journal entry to account for the transfer of plan assets and the accumulated benefit obligation to Plan B as part of
 the sale is:
                                                          Debit                Credit

      Gain (loss) on sale                                 50
          Pension asset                                                        50

 (e) A pro rata amount of the maximum gain of $1,051 ($261 net gain plus the $790 remaining transition asset) is
 recognized in net income due to the settlement. The projected benefit obligation is reduced from $1,925 ($2,000
 less the $75 curtailment gain) to $1,725, a reduction of 10.4% (rounded) due to the settlement. Accordingly,
 10.4% of the maximum gain ($109 rounded) is recognized in net income. The journal entry to account for the
 settlement is:
                                                          Debit                Credit

      Accumulated other comprehensive
      income                                              109
          Gain from settlement                                                 109

 Adapted from Statement 88, Q&A Illustration 3


123.464 Spinoff of Nonmonetary Pension-Related Assets or Obligations to Owners
of an Entity. Chapter 121.000 Nonmonetary Transactions does not permit gain or loss
recognition for the spinoff of nonmonetary assets to owners of an entity. Similarly, an
employer that incorporates a division of its operations and subsequently spins it off to
owners of the entity and also transfers to the new entity's pension plan either (a) a
pension benefit obligation related to the employees transferred as part of the spinoff, or
(b) plan assets, may not recognize a gain or loss on those transferred obligations or assets.
The entity should allocate (a) the transition asset obligation included in accumulated
other comprehensive income and (b) the net gain or loss included in accumulated other
comprehensive income to each pension plan in proportion to the projected benefit
obligations of the two pension plans. It should allocate prior service cost included in
accumulated other comprehensive income to the pension plans based on the individuals
included in the employee groups covered. Refer to Paragraph 123.237, which addresses
the division of a pension plan. Statement 88, Q&A No. 40
123.465 Illustration 123.407 below demonstrates how an employer should account for the
transfer of a pension benefit obligation or plan assets to a spun-off entity's new pension
plan. In Case 1, only a pension benefit obligation is transferred to the pension plan
established by the new entity. In Case 2, both plan assets and a pension benefit obligation
are transferred.




                                                                                                           33
Illustration 123.407—Accounting for Transfers to a Spun-off Entity’s New
Pension Plan
Case 1—Accounting for a Transfer of a Pension Benefit Obligation to a Spun-off Entity's
New Pension Plan
An employer (Company A) incorporates a division (Company B) and subsequently spins it off
to the owners of the entity. The new entity assumes Company A's projected benefit obligation
under its pension plan (Old Plan) for the employees that are transferred as part of the spinoff.
The accumulated benefit obligation for those employees ($30,000) is fully vested at the date of
the spinoff. The portion of the projected benefit obligation attributable to the future
compensation levels for those employees is $6,000. No plan assets are transferred to the new
entity's pension plan (New Plan).
The following is the funded status of the pension plans immediately before and after the
spinoff:
                                       Before Spinoff       After Spinoff
                                       Old Plan             Old Plan           New Plan
Assets and obligations:
  Accumulated benefit obligation       $ (72,000)           $   (42,000)       $   (30,000)
  Effect of future compensation
  levels                                  (18,000)              (12,000)           (6,000)
  Projected benefit obligation            (90,000)              (54,000)a          (36,000)a
  Plan assets at fair value               160,000               160,000b           0b
  Funded status and recognized
  assets (liabilities)                 $ 70,000             $   106,000        $   (36,000)
Amounts recognized in
accumulated other comprehensive
income:
   Transition asset                    $ (40,000)           $   (24,000)c      $   (16,000)c
   Prior service cost                    25,000                 17,500d            7,500d
   Net gain                              (55,000)               (33,000)c          (22,000)c
Accumulated other comprehensive
income                                 $ (70,000)           $   (39,500)       $   (30,500)


Journal Entries
The journal entries to account for the spinoff are:
                                            Debit               Credit
Company A
    Pension asset                           36,000
    Accumulated other
    comprehensive income –
    transition asset                        16,000




                                                                                      34
       Accumulated other
       comprehensive income – net
       gain                                22,000
            Stockholders' equitye                               66,500
            Accumulated other
            comprehensive income –
            prior service cost                                  7,500

       To record the transfer of a pension benefit obligation and net deferred amounts from
       Company A to Company B.

Company B
    Stockholders' equitye                  66,500
    Accumulated other
    comprehensive income – prior
    service cost                           7,500
          Pension liability                                     36,000
          Accumulated other
          comprehensive income –
          transition asset                                      16,000
          Accumulated other
          comprehensive income –
          net gain                                              22,000

       To record the receipt of a pension benefit obligation and net deferred amounts from
       Company A. (Company B should not recognize the effects of assuming the pension
       benefit obligation as the cost of either a pension plan amendment or an initiation of a
       pension plan subject to amortization.)

Case 2—Accounting for a Transfer of a Pension Benefit Obligation and Plan Assets to a
Spun-off Entity's New Pension Plan
Assume the same facts as in Case 1 except that plan assets ($28,000) are also transferred to the
New Plan. The following is the funded status of the pension plans immediately before and
after the spinoff:
                                       Before Spinoff      After Spinoff
                                       Old Plan            Old Plan             New Plan
Assets and obligations:
  Accumulated benefit obligation       $   (72,000)        $   (42,000)         $   (30,000)
  Effect of future compensation
  levels                                   (18,000)            (12,000)             (6,000)
  Projected benefit obligation             (90,000)            (54,000)a            (36,000)a
  Plan assets at fair value                160,000             132,000b             28,000b
  Funded status and recognized
  asset (liability)                    $   70,000          $   78,000           $   (18,000)



                                                                                        35
Amounts recognized in
accumulated other comprehensive
income:
   Transition asset                     $   (40,000)       $   (24,000)c        $   (16,000)c
   Prior service cost                       25,000             17,500d              7,500d
   Net gain                                 (55,000)           (33,000)c            (22,000)c
Accumulated other comprehensive
income                                  $   (70,000)       $   (39,500)         $   (30,500)


Journal Entries
The journal entries to account for the spinoff are:
                                            Debit              Credit
Company A
    Pension asset                           8,000
    Accumulated other
    comprehensive income –
    transition asset                        16,000
    Accumulated other
    comprehensive income – net
    gain                                    22,000
          Stockholders' equitye                                38,500
          Accumulated other
          comprehensive income –
          prior service cost                                   7,500

       To record the transfer of plan assets, a pension benefit obligation, and net deferred
       amounts from Company A to Company B.

Company B
    Stockholders' equitye                   38,500
    Accumulated other
    comprehensive income – prior
    service cost                            7,500
          Pension liability                                    8,000
          Accumulated other
          comprehensive income –
          transition asset                                     16,000
          Accumulated other
          comprehensive income –
          net gain                                             22,000




                                                                                        36
         To record the receipt of plan assets, a pension benefit obligation, and net deferred
         amounts from Company A. (Company B should not recognize (a) the effects of
         assuming the pension benefit obligation as the cost of either a pension plan amendment
         or an initiation of a pension plan subject to amortization or (b) the receipt of cash as a
         gain subject to amortization.)

 Footnotes:
 (a) Allocation based on individual employees covered by each pension plan.
 (b) Allocation determined by Company A. (Illustration assumes that no regulatory requirements apply.)
 (c) Allocation based on percentage of total projected benefit obligation ($90,000) assumed by each pension plan,
 which is 60% and 40% for the Old Plan and New Plan, respectively.
 (d) Allocation based on prior service cost associated with the future years of service of the individual employees
 covered by each pension plan.
 (e) The accounting within stockholders' equity is not addressed (other than for components of accumulated other
 comprehensive income). The equity accounts are those used to account for all assets and liabilities transferred or
 received as part of the spinoff. No gain or loss results from the spinoff.


 Adapted from Statement 88, Q&A Illustration 4



CERTAIN TERMINATION BENEFITS
123.466 An employer may provide benefits to employees in connection with their
termination of employment. The benefits may be special termination benefits offered
only for a short period of time to employees who accept an offer to terminate in exchange
for those special benefits, contractual termination benefits required by the terms of a plan
only if a specified event (such as a plant closing) occurs, or other postemployment
benefits. An employer that offers special termination benefits to employees should
recognize a liability and a loss when employees accept the offer and the amount can be
reasonably estimated. An employer may be able to estimate the number of employees
who will accept an offer before actual acceptance. Nevertheless, no estimate of special
termination benefit expense should be accrued before acceptance. An employer that
provides contractual termination benefits, on the other hand, should recognize a liability
and a charge to net income when it is probable that employees will be entitled to benefits
and the amount can be reasonably estimated. Other postemployment benefits are not
discussed in Statement 88 and should be accounted for under other GAAP such as
Statement 112 (see Chapter 125.000 Postemployment Benefits). Statement 88, par. 15,
Q&A No. 61
123.467 Measurement of Termination Benefits. Termination benefits may take various
forms including lump-sum payments, periodic future payments, or both. They may be
paid directly from an employer's assets, an existing pension plan, a new employee benefit
plan, or a combination of those means. The cost of termination benefits recognized as a
liability and a charge to net income should include the amount of lump-sum payments
and the present value of any expected future payments. A situation involving termination
benefits may also involve a curtailment to be accounted for under the guidance provided
at Paragraphs 123.443-123.456. The effect of the curtailment should be separated from



                                                                                                         37
the effect of special termination benefits as discussed in this section. Statement 88, par.
15
123.468 Scoping. The guidance in Statement 88 on termination benefits applies to
termination benefits provided in the context of a pension plan, as well as termination
benefits provided outside of a pension plan (e.g., lump-sum payments). Several
accounting standards address termination benefits and, therefore, the scoping of
termination benefits can be complex. This section discusses only voluntary termination
benefits (special benefits that the employer offers during a short period of time to
employees who choose to terminate), and contractual termination benefits (certain
benefits that the employer is obligated to pay on termination after certain events occur
under contract or law). The employer should consider the following types of termination
benefits and the standards that apply to its particular facts and circumstances:
 Type of Termination Benefit            Applicable Standards         KARG Reference

 Voluntary benefits (special
 termination benefits)                  Statement 88                 Section 123.400 Settlements
                                                                     and Curtailments of Pension
                                                                     Plans and Certain
                                                                     Termination Benefits

 Contractual benefits, required
 only if a specified event occurs       Statement 88                 Section 123.400 Settlements
                                                                     and Curtailments of Pension
                                                                     Plans and Certain
                                                                     Termination Benefits


 Benefits pursuant to an ongoing
 formal severance plan or
 distributed HR policy
                                        Statement 112                Chapter 125.000
                                                                     Postemployment Benefits

 One-time benefits not provided
 pursuant to an ongoing policy or
 contract                               Statement 146                Chapter 117.000 Liabilities:
                                                                     Exit or Disposal Costs


123.469 In certain situations, termination benefits will include components that should be
accounted for under the guidance in this section (e.g., contractual benefits) and
components that should be accounted for under other guidance (e.g. one-time benefits).
In those cases, the appropriate accounting requirements should be applied to each
component of the termination benefit, which may result in differences in the timing and
measurement of different components of termination expenditures.


                                                                                              38
123.470 Special Termination Benefits Related to Defined Benefit Pension
Obligations. To account for employees’ acceptance of special termination benefits
granted under a defined benefit pension plan, an employer must determine (a) the liability
and the losses that arise from the employees’ acceptance, and (b) the change in the
projected benefit obligation due to the related curtailment. The liability and the loss from
the acceptance of the offer of special termination benefits is the difference between, as of
the date the employees accept the offer, the actuarial present value of:
       •   The respective employees' accumulated pension benefits without considering
           the special termination benefits, and
       •   Their accumulated pension benefits considering the special termination
           benefits.
Statement 88, Q&A No. 54
123.471 It is possible for an employer to recognize an offer of special termination
benefits in a different reporting period from the period in which a related curtailment is
recognized. The employer recognizes a net loss from a curtailment when it is probable
that a curtailment will occur and the effects can reasonably be estimated. The employer
does not recognize the cost of special termination benefits until employees accept the
offer and the amount can be reasonably estimated. In these circumstances, the special
termination benefit represents the incremental increase in the employer’s obligation that
results from an increase in benefits to the terminated employee. For example, an
employer may have determined that it will terminate 2,000 employees and offer special
(higher) termination benefits to the first 1,000 employees who volunteer for termination.
If the effect of the probable curtailment is a loss, that curtailment loss should be
recognized for the anticipated termination of 2,000 employees on the date it becomes
probable and can be estimated. An incremental obligation associated with the offer of
higher voluntary benefits for those who choose to terminate should be recognized when
those employees accept the offer. Statement 88, Q&A No. 57
123.472 The following illustrates the accounting for special termination benefits offered
in the context of a defined benefit pension plan:

 Illustration 123.408—Accounting for a Curtailment When Termination
 Benefits in the Form of Increased Pension Benefits Are Offered to
 Employees
 On May 11, 20X0, an employer offers for a short period of time (until June 13, 20X0)
 special benefits to its employees in connection with their voluntary termination of
 employment (special termination benefits). An additional five years of service will be
 credited, and eligibility for early retirement benefits will be granted for employees who
 are age 50 or older with more than 20 years of service and who elect to retire. Normal
 early retirement is age 55. The special termination benefits (increased pension benefits)
 together with the employees’ regular pension benefits will be paid directly from plan
 assets.
 On June 13, 20X0, employees representing 15% of the work force accept the offer of
 special termination benefits. For those employees, the actuarial present value of their


                                                                                           39
accumulated pension benefits, assuming they terminated at that date without the special
termination benefits, is $525,000. The actuarial present value of their accumulated
pension benefits with the special termination benefits is $625,000. None of the employees
accepting the offer of special termination benefits are otherwise eligible for early
retirement benefits under the pension plan.
The portion of the projected benefit obligation based on the future compensation levels of
the terminated employees is $80,000, and all terminated employees are fully vested in
their accumulated pension benefits.
The portion of the transition obligation remaining in accumulated other comprehensive
income assigned to the years of service no longer expected from the terminated
employees is $150,000.
As a result, the employer recognizes as of June 13, 20X0 a loss of $170,000 that includes
the cost of the special termination benefits and the net lossa from the curtailment,
determined as follows (in thousands):
                                                 June 13, 20X0
                                                 Before                                     After
                                                 Employee              Effects of           Employee
                                                 Terminations          Terminations         Terminations
Assets and obligations:
   Vested benefit obligation
   Employees accepting offer                     $ (525)               $ (100)b             $ (625)
   Other employees                                 (775)                                      (775)
   Nonvested benefits                              (200)                                      (200)
   Accumulated benefit obligation                  (1,500)                 (100)              (1,600)
   Effect of future compensation
   levels                                            (500)                 80c                   (420)
   Projected benefit obligation                      (2,000)               (20)                  (2,020)
   Plan assets at fair value                         1,400                                       1,400
   Vested benefit obligation
   Funded status and recognized
   liability                                     $ 600                 $ (20)               $ 620
Amounts recognized in accumulated
other comprehensive income:
   Prior service cost                            $ 800                 $ (150)d             $ 650
   Net gain                                        (300)                                      (300)
Accumulated other comprehensive
income                                               500                   (150)                 350


Footnotes:
(a) If the sum of the effects resulting from a curtailment is a net loss, that loss is recognized when it is
probable that the curtailment will occur and the effects are reasonably estimable. In this example, it is
assumed that the effects resulting from the curtailment are not reasonably estimable until June 13, 20X0,
the acceptance date for the offer of special termination benefits.
(b) The loss from acceptance of the special termination benefits is $100 ($625 – $525).



                                                                                                           40
 (c) The gain (the decrease of $80 in the projected benefit obligation) resulting from the curtailment is first
 offset against any net loss included in accumulated other comprehensive income. Because the amount is a
 gain of $300 (the net gain), the $80 gain from the curtailment is recognized in net income.
 (d) A transition obligation remaining in accumulated other comprehensive income is treated as prior service
 cost. The reduction of net prior service cost included in accumulated other comprehensive income
 associated with the previously expected years of service of the terminated employees is $150 (detail
 calculations are omitted).
 (e) The loss recognized is $170, which includes the cost of the special termination benefits of $100, and the
 curtailment loss which is the net of the gain related to the absence of future compensation of $80, and the
 recognition of a portion of the prior service cost on which future service will no longer be provided in
 accumulated other comprehensive income of $150. The journal entry to account for the employee
 terminations is:
                                                       Debit               Credit
           Special Termination Benefits
         Loss on employee terminations                 100
           Pension liability                                               100

            Curtailment
            Curtailment Loss                           70
            Pension liability                          80
                   Accumulated other
                   comprehensive income                                    150

 Adapted from Statement 88, Q&A, Illustration 6
123.473 Supplemental Early Retirement Benefits. An employer that sponsors a
pension plan that provides supplemental early retirement benefits should not account for
those pension benefits as contractual termination benefits. Those benefits are payable
because of the occurrence of a specific event that causes employee services to be
terminated involuntarily. An employer should account for supplemental early retirement
benefits as part of net periodic pension cost under the attribution approach described in
Section 123.100 Single-Employer Defined Benefit Plans. Statement 88, Q&A No. 59
123.474 Termination Indemnities. Termination indemnities are arrangements usually
encountered outside the United States. They also are referred to as termination
allowances or severance indemnities. Termination indemnities are amounts payable to
eligible employees on termination of employment. Eligibility may be determined by law,
by local custom, by the employer's policy, or by contract with the employer. Plans may or
may not be in writing. Termination indemnities are normally, but not exclusively,
associated with preretirement severance of employment. They are usually payable as a
lump sum, or occasionally, in a few payments over a short period of time. An employer
should assess on a case-by-case basis plans that provide termination indemnities. Benefits
that are paid only for involuntary termination of employment due to the occurrence of a
specific event qualify as contractual termination benefits, and an employer should
recognize a liability and a loss when it is probable that employees will receive benefits
and the amount can be reasonably estimated. Other indemnities will more properly be
considered postemployment benefits under Statement 112. If a plan is, in substance, a
pension plan (providing retirement benefits), the plan is subject to the provisions of
Section 123.100 Single-Employer Defined Benefit Plans. Statement 88, Q&A No. 60



                                                                                                          41
PRESENTATION AND DISCLOSURE
123.475 Presentation. Gains and losses from settlements, curtailments, and termination
benefits are normally classified in continuing operations. Further, as discussed at
Paragraph 123.458, there may be situations in which an event is tied to a discontinued
operation and classification as discontinued operations is appropriate.
123.476 Settlements, curtailments, and termination benefits are not normally classified as
extraordinary items. The gain or loss from a settlement or curtailment or the cost of
termination benefits can be classified as an extraordinary item only when the criteria of
APB 30, pars. 19-20 are met. In almost all cases, gains and losses from settlements,
curtailments, and termination benefits do not result from an unusual and infrequently
occurring event or transaction as those terms are defined in APB 30. For example, none
of the following meet the unusual nature and infrequency of occurrence criteria that
would be required for an employer to classify any resulting gain or loss as extraordinary:
       (a) An employer terminates its only pension plan and does not establish a
           successor pension plan.
       (b) An employer terminates its only pension plan, withdraws excess plan assets,
           and establishes a successor pension plan, but because of current regulatory
           guidelines is prohibited from effecting the same series of transactions for 15
           years.
       (c) An employer terminates one of its foreign pension plans, withdraws excess
           plan assets, and establishes a successor pension plan. The employer has never
           effected this series of transactions in the past and has no intention of repeating
           them in the future.
       (d) An employer terminates an underfunded pension plan, and a regulatory
           agency takes over the pension plan and initiates a lien against 30% of the
           employer's net worth.
123.477 Notwithstanding the infrequency of occurrence of these events as they relate to a
particular employer, terminating a pension plan is an occurrence that is a consequence of
customary and continuing business activities. Therefore, the unusual nature criterion
usually is not met. Unless the pension plan termination is directly related to an event that
qualifies as unusual in nature and infrequent in occurrence, a gain or loss on termination
would not qualify for classification as an extraordinary item. Statement 88, Q&A Nos.
63, 64
123.478 Disclosure. An employer that has a settlement or curtailment of its defined
benefit pension plan, or has a termination of benefits should consider the effect of that
settlement or curtailment on the required disclosures. See Chapter 126.000 Pension and
Other Postretirement Plan Disclosures.

TECHNICAL REFERENCES
APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions


                                                                                            42
FASB Implementation Guide on Statement 87, “Employers’ Accounting for Pensions”
Questions and Answers
FASB Implementation Guide on Statement 88, “Employers’ Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,”
Questions and Answers
FASB Statement No. 5, Accounting for Contingencies
FASB Statement No. 87, Employers’ Accounting for Pensions
FASB Statement No. 88, Employers’ Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits
FASB Statement No. 112, Employers’ Accounting for Postemployment Benefits
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets
FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities
FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)
EITF Issue No. 91-7, “Accounting for Pension Benefits Paid by Employers after
Insurance Companies Fail to Provide Annuity Benefits”
EITF Issue No. 03-2, “Accounting for the Transfer to the Japanese Government of the
Substitutional Portion of Employee Pension Fund Liabilities”




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