Confusion on OCI within F6- Pensions

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  • #173163
    OneToGo
    Member

    Overall, I simply cannot grasp the journal entries referring to prior service costs, deferred tax, etc. that is discussed in Becker beginning on F6-13. Mainly, I am confused about how the OCI account works because it seems to me that it can be increased with either a debit or credit, and same with decreasing. It almost just seems like a “plug” figure in the journal entries. I just want to understand how the OCI is truly increased and decreased… The light-bulb/epiphany moment hasn't happened yet and I'm going crazy! Thanks!

    #662146
    Anonymous
    Inactive

    I had some confusion about this and when I looked at it more closely, it makes much more sense if you understand what Other comprehensive income really works..

    So see, under the income statement, the bottom line is NET INCOME and beneath it is OCI. Net income is usually a CREDIT (if with profit) and OCI is really just like NET INCOME but “not yet' as “real” as NET INCOME because we are holding off on realizing the gains/losses. Think of it this way, net income and oci are like the same — both have credit balances.

    So when we put Pension expenses into consideration, we must also consider that OCI/AOCI will be affected.

    Pension costs (expenses) LOWERS AOCI… just like operating expenses lowers Net income, Pension costs (expenses) also LOWERS AOCI, because we are charging these expenses to our “later realized” income.

    Example, Unrecog.bump up in benefits must go to AOCI. What does this mean? It means that the company must pay more benefits to its employees. This LOWERS your OCI (to deduct from it is DEBIT) and also INCREASES your Pension Liability (if underfunded)

    Dr: Oci

    Cr: Pension Liability

    Also, this means that you will pay LESS tax for Paying more benefits to the employees

    Dr: Deferred Tax asset

    Cr: Def tax benefit-OCI

    So this amount is now sitting in AOCI that must be AMORTIZED…. How do you take it out of AOCI? Then just reverse the first JE:

    DR: Net periodic pension cost ( like expensing)

    Cr: OCI

    Then you can use your deferred tax asset and put it on I/S

    Dr: Def tax benefit: oci

    Cr: Def tax benefit: I/S

    I hope that made sense?

    #662147
    Anonymous
    Inactive

    Wow AnnaMay84 you just helped me cross a wide river. I was stuck on this Pensions thing because I too couldn't get how the OCI thing worked! Thank you.

    #662148
    Anonymous
    Inactive

    AnnaMay84, well done, hat's off to you. That helped me as well. WOO WOOOOO!!!!!!

    #662149
    Anonymous
    Inactive

    I had the same problem with Tim's crazy explanation!!!!!!!!!!!!!!!!!!

    Thanks for the clarification.

    #662150
    jonnyp
    Member

    Thanks for the clear explanation. Thankfully, I was taught pensions quite well in Intermediate Accounting II. However, I did have some lingering confusion regarding the OCI normal balance.

    When Tim said that we “park it” in OCI until ready for the IS, it implies an increase in OCI when, in reality, it's a decrease (hence the Dr. to OCI). Only later, when amortized, is it an increase to OCI (hence Dr. to PenExp. and the Cr. to OCI)

    As a related note, I was confused as to the related tax benefit of the Net Periodic Pension Cost (NPPC [aka pension expense]) during the year. I thought that all deferred taxes were to be “parked” into OCI until amortized. However, when it comes to the “SIR” part of the NPPC (i.e. Service Cost, Interest, and Return on plan asset), it's immediately recognized on the IS. Therefore the related deferred tax journal entry that accompanies the NPPC is a Dr. to Def. tax asset and a Cr. to deferred tax benefit-INCOME STATEMENT.

    #662151
    lab2008
    Member

    this came up on a google search and it's an old post but seems like it was helpful… maybe someone can help elaborate…on Anna May's post she says,”

    So this amount is now sitting in AOCI that must be AMORTIZED…. How do you take it out of AOCI? Then just reverse the first JE:

    her question hadn't said it went into AOCI yet.. thoughts? Thanks.

    #1272627
    khalid
    Participant

    Perfect explanation AnnaMay84.

    old post but it helps in all times.

    #1827601
    alpal617
    Participant

    Even 6 yrs later that was immensely helpful!!!

    "The harder you work for something, the greater you'll feel when you achieve it"

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    #1889389
    Anonymous
    Inactive

    OMG this is so helpful! Thank you!

    #2713239
    thisismyname
    Participant

    Haha, this post is still useful 7 years in! I didn't realize until now that OCI works so similarly to net income. This makes it much more clearer.

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    #2930091
    VexS
    Participant

    Even though this post is crazy old. It is amazing. Thank you so much.

    #2930853
    bigstakk
    Participant

    It’s not as relevant for today’s tests though. I’d focus on the main topics described in the AICPA blue print.

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