What Is the Corridor Rule?

In pension accounting, the corridor rule requires the disclosure of any actuarial gain or loss that exceeds 10% of the greater of the pension benefit obligation or the market value of the plan's assets and allows this 澳洲幸运5官方开奖结果体彩网:actuarial gain or loss to be💙 amortized over time into the income statement.

The effect of the corridor rule is a smoothing out of the plan sponsor's income statement. The gradual amortization keeps shocks from being introduced into the company's income statement as a result of the added pension expense, which may impact the company's stock price. If the actuarial gain or loss is less than 10% and therefore inside the corridor, it is not reported.

The actuarial gain or loss is a reference to the rise or fall in the projections that are used to determine a company's defined benefit pension plan obligations.

How the Corridor Rule Works

The corridor rule can be seen as having a smoothening effect with respect to reporting pension gains and losses. The 澳洲幸♕运5官方开奖结果体彩网:Financial Accounting Standards Board established the corridor rule in December 1985 when it issued Statement No. 87.

According to this statement, the prior 澳洲幸运5官方开奖结果体彩网:accounting standards for pension reporting were too weak, and resulted in inconsistent reporting methods between companies, and sometimes even different methods from one period to the next. Establishing the corridor rule ensured that all companies were now subject to the same reporting requirements, and pensions would be held to the same accounting standards.

Example of the Corridor Rule

XYZ Company offers its workers a pension that will pay workers 80% of their final salary each year after they retire. As employees enter the pensi🎃on program, money is put away into the pension fund each year the employee works for the company. These pension dollars are invested in different types of securities and fluctuate with changes in market prices. If the market has a bad year, XYZ Company might have to report the loss.

If it's a large loss, it might hurt the company's financials and, therefore, its stock price. However, since the corridor rule allows these losses to be reported over a period of time, the impact of the loss is "smoothed," as XYZ Company can report the loss in pieces over a long period of time.