FAR · Select balance sheet accounts · 6 practice questions
Actuarial Gains and Losses: 10% Corridor Amortization
Minimum corridor amortization applies only to the beginning net actuarial gain or loss above the 10% threshold. Below, a worked calculation shows how to find the threshold, subtract it, and spread the excess.
Try one first
Hint
First compute the 10% corridor using the larger of beginning PBO and plan assets, then compare the net loss to that amount.
Answer D. The corridor equals 10% of the greater of the beginning projected benefit obligation or plan assets. The greater amount is $1,000,000, so the corridor is $100,000. Only the excess of the $130,000 net actuarial loss over that corridor, or $30,000, is subject to amortization.
Why not A: This treats the corridor itself as the amount to amortize. The corridor is only the unamortized portion allowed to remain in OCI before amortization begins; only the excess over it is subject to amortization.
Why not B: This comes from using 10% of plan assets, or $80,000, as the corridor. The rule uses the greater of the projected benefit obligation or plan assets, so the corridor is $100,000, not $80,000.
Why not C: This assumes the entire net actuarial loss must be amortized. Under the corridor approach, amortization applies only to the portion that exceeds the corridor amount.
Worked example
At the beginning of the year, Cedar Co. has a $1,600,000 projected benefit obligation, $2,000,000 market-related value of plan assets, and a $260,000 net actuarial loss in AOCI. Most participants are active, with average remaining service of 12 years. Cedar uses minimum corridor amortization. What loss amortization enters this year's pension expense?
| 1 | Select the larger beginning balanceLarger of $1,600,000 and $2,000,000 | $2,000,000 |
| 2 | Compute the 10% corridor$2,000,000 × 10% | $200,000 |
| 3 | Find the loss above the corridor$260,000 − $200,000 | $60,000 |
| 4 | Amortize the excess$60,000 ÷ 12 years | $5,000 |
Cedar includes $5,000 of net loss amortization in this year's pension expense, increasing pension expense by $5,000.
Check: Only $60,000 exceeds the corridor, so divide $60,000 by 12, not the full $260,000 loss.
Key points
- Use beginning balances, not year-end balances.
- At or below the corridor, minimum amortization is zero.
- Net loss amortization increases pension expense; net gain amortization decreases it.
- A faster systematic method is permitted if applied consistently to both gains and losses.
How the exam traps you
- Using the smaller balance, an average, or the sum to compute the corridor. Use only the larger beginning PBO or market-related value of plan assets.
- Amortizing the entire AOCI loss or the corridor itself. Subtract the corridor first. Divide only the positive excess by the amortization period.
- Using retirees' life expectancy when active employees dominate. Use active employees' average remaining service unless all or almost all participants are inactive.
Question 2
Hint
When the corridor requires amortization, ask whether a net gain behaves like a cost-reducing amount or a cost-increasing amount.
Answer D. Amortizing a net actuarial gain reclassifies part of that gain out of AOCI into pension expense. Because a gain offsets pension cost, the amortization decreases pension expense and reduces the remaining net gain balance in AOCI.
Why not A: This mistake gets the expense direction right but assumes amortization adds to AOCI. Amortization reclassifies an existing gain out of AOCI, so the remaining gain balance must decrease.
Why not B: This mistake treats a gain like a loss when determining the effect on pension expense. Although amortization reduces the amount still sitting in AOCI, a gain lowers pension expense rather than increases it.
Why not C: This choice reverses both effects. A net actuarial gain is cost-reducing when amortized, and reclassification out of AOCI cannot increase the gain balance left there.
Question 3
Hint
First decide whether the normal active-service period rule gives way to the inactive-participant exception.
Answer C. Under U.S. GAAP, actuarial gains and losses exceeding the corridor are generally amortized over the average remaining service period of active employees expected to receive benefits. When all or almost all plan participants are inactive, the period is the average remaining life expectancy of the inactive participants. With 980 of 1,000 participants inactive, the inactive-participant exception applies, so 16 years is used.
Why not A: This uses the life expectancy of all participants combined. The inactive-participant exception uses the average remaining life expectancy of inactive participants, not all participants.
Why not B: This uses the estimated period over which benefits will be paid. Corridor amortization does not use the expected benefit payment period for this participant mix.
Why not D: This uses the general average remaining service period for active employees. That period is not used when all or almost all participants are inactive.
Question 4
Hint
Compare the proposed period with minimum corridor amortization, then ask whether the policy is systematic.
Answer A. U.S. GAAP allows an employer to use a systematic amortization method for actuarial gains and losses that is faster than the minimum corridor amortization. A five-year straight-line method is faster than amortizing over the 10-year average remaining service period. The method must be applied consistently.
Why not B: This confuses faster systematic amortization with immediate recognition. Immediate recognition is not required; a shorter straight-line policy can qualify if it meets the consistency and speed requirements.
Why not C: This treats the average remaining service period as the only permitted amortization period. That period is used for minimum corridor amortization, but GAAP permits a faster systematic method.
Why not D: This treats the election as limited to one-sided loss amortization or only loss amounts above the corridor. The elective faster method must be a systematic policy for actuarial gains and losses, not a special rule only for net losses.
Question 5
Hint
Start with the beginning balances, compare the unrecognized net loss with 10% of the larger base, and amortize only any excess.
Answer B. The corridor is 10% of the greater of beginning projected benefit obligation or beginning fair value of plan assets. The greater amount is $900,000, so the corridor is $90,000. The unrecognized net loss exceeds the corridor by $60,000, and that excess is amortized over 10 years, producing $6,000.
Why not A: This reflects amortizing the $90,000 corridor amount itself over 10 years. Only the portion of the unrecognized net loss above the corridor is amortized.
Why not C: This comes from using the $700,000 fair value of plan assets as the corridor base. GAAP uses 10% of the greater of beginning projected benefit obligation or beginning plan assets, so the base is $900,000, not $700,000.
Why not D: This results from spreading the entire $150,000 unrecognized net loss over 10 years. The full balance is not amortized unless it exceeds the corridor by that full amount.
Question 6
Hint
First compute 10% of the larger of the PBO and plan assets, then compare the unrecognized balance to that threshold.
Answer D. The corridor is 10% of the greater of the projected benefit obligation or plan assets, so it is $100,000 here. Because the unrecognized net loss of $80,000 is inside that corridor, no amortization of the beginning loss is included in Year 3 pension expense. With no new actuarial gains or losses, the full $80,000 remains in AOCI.
Why not A: This answer assumes any unrecognized actuarial loss must be recognized in current pension expense. Under the corridor approach, actuarial gains and losses remain in AOCI unless the unrecognized balance exceeds the corridor.
Why not B: This mistake treats the $20,000 gap between the $80,000 loss and the $100,000 corridor as an amount to amortize. The corridor is a threshold for excess balances, so a balance below it does not create any amortization.
Why not C: This comes from spreading the entire unrecognized loss over the remaining service period. That approach fails because the corridor method amortizes only the amount outside the corridor, not the full balance when it is inside the corridor.
Common questions
What is the difference between the pension corridor and annual amortization?
The corridor is the 10% threshold. Minimum annual amortization is the net gain or loss above that threshold divided by the appropriate period.
When do you use retirees' life expectancy for corridor amortization?
Use inactive participants' average remaining life expectancy when all or almost all plan participants are inactive. Otherwise, use active employees' average remaining service period.
How does actuarial gain amortization affect pension expense and AOCI?
It decreases pension expense and reduces the remaining net gain in accumulated other comprehensive income, or AOCI. Loss amortization increases pension expense and reduces the remaining net loss in AOCI.
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