Question

How do you do the corridor calculation? And can someone please explain it?  

Answer 1

Corridor Rule: It is a materiality rule that requires disclosure of a pension actuarial gain or loss, if the gain or loss exceeds 10% of the greater of the Pension Benefit Obligation (PBO) or the fair value of plan assets. If this is the case, then the corridor rule allows this actuarial gain or loss to be amortized gradually over time into the income statement.

Example of the Corridor Rule

For example, ABC Company offers its workers a pension which will pay out 60% of the final salary each year the employee lives after retiring. As employees enter the pension program, money is put away into the pension fund each year the employee works for the company. These pension dollars for all of the employees are invested in different types of securities and fluctuate with the changes in market prices. If the market has a bad year, ABC Company might have to report the loss. If it's a large loss, it might hurt the company's financials and therefore, stock price. However, since the corridor rule allows these losses to be reported over a period of time, the effect of the loss is "smoothed," as ABC Company can report the loss in pieces over a long period of time.