ASC 715 vs IAS 19: pension settlement and curtailment gains and losses
A pension settlement or curtailment produces a gain or loss in the income statement under both US GAAP and IFRS, but the two frameworks start from different balances and often reach opposite answers for the same event. Under ASC 715, the gain or loss is driven largely by amounts that have been waiting in accumulated other comprehensive income (AOCI): a settlement recycles a pro rata share of the deferred net actuarial loss, and a curtailment recycles the prior service cost tied to service that will no longer be rendered. Under IAS 19, nothing waits in equity for recycling, so the gain or loss is measured only from the change in the defined benefit obligation and the price paid to settle it.
The difference shows up in common transactions: annuity buyouts for retirees, lump-sum windows for deferred vested participants, plant closures and benefit freezes. A US subsidiary of an IFRS reporter can report a settlement loss of several million dollars in its local US GAAP statements while the group shows no settlement loss at all for the same buyout. A plant closure can produce a curtailment loss under ASC 715 and a curtailment gain under IAS 19.
Presentation also differs. ASC 715 requires settlement and curtailment gains and losses to be reported with the other non-service components of net periodic pension cost, outside any subtotal of income from operations. IAS 19 defines past service cost and settlement gains and losses as part of service cost, recognized in profit or loss.
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WHAT COUNTS AS A PENSION SETTLEMENT OR CURTAILMENT.
IAS 19 defines a settlement as a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan, other than benefit payments made under the plan terms and already included in the actuarial assumptions. Buying an insurance policy is a settlement only if the entity keeps no legal or constructive obligation to pay further amounts if the insurer fails to pay. An annuity purchase that leaves the employer exposed to the insurer's default is a plan asset transaction, with no settlement.
US GAAP uses a similar concept. A settlement under ASC 715-30 is an irrevocable action that relieves the employer, or the plan, of primary responsibility for a pension obligation and eliminates significant risks related to the obligation and the assets used to effect it. Lump-sum cash payments to participants in exchange for their rights and the purchase of nonparticipating annuity contracts are the usual examples.
The curtailment definitions differ more. IAS 19 describes a curtailment as a significant reduction by the entity in the number of employees covered by a plan, for example after a plant closure, discontinuance of an operation or termination or suspension of a plan. ASC 715 describes a curtailment as an event that significantly reduces the expected years of future service of present employees, or eliminates for a significant number of employees the accrual of defined benefits for some or all of their future services. A hard freeze of future accruals is therefore a curtailment under US GAAP, while IAS 19 treats the resulting change in the obligation as past service cost from a plan amendment or curtailment.
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HOW IAS 19 MEASURES SETTLEMENT GAINS AND PAST SERVICE COST.
IAS 19 requires the entity to remeasure the net defined benefit liability or asset before it determines past service cost or a settlement gain or loss. The remeasurement uses the current fair value of plan assets and current actuarial assumptions, including market interest rates, and the resulting actuarial gains and losses go to other comprehensive income. Only after that step does the entity measure the event itself.
Past service cost is the change in the present value of the defined benefit obligation for employee service in prior periods resulting from a plan amendment or a curtailment. It can be positive when benefits are improved or negative when benefits are reduced, so a curtailment that removes future salary growth from the obligation produces a credit. The entity recognizes past service cost as an expense, or income if negative, at the earlier of the date the amendment or curtailment occurs and the date it recognizes related restructuring costs or termination benefits.
The settlement gain or loss is the difference between the present value of the defined benefit obligation being settled, measured at the settlement date, and the settlement price, which includes any plan assets transferred and any payments made directly by the entity. The gain or loss is recognized when the settlement occurs. If the price equals the obligation, there is no gain or loss to recognize.
Two further rules shape the numbers. Past service cost and settlement gains or losses are determined without considering the asset ceiling, and any change in the asset ceiling effect is then recognized in other comprehensive income. After a plan amendment, curtailment or settlement, the entity uses the assumptions from the remeasurement to determine current service cost and net interest for the rest of the annual reporting period. Remeasurements already in other comprehensive income are never reclassified to profit or loss.
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HOW ASC 715-30 MEASURES SETTLEMENT AND CURTAILMENT GAINS AND LOSSES.
Under US GAAP, the plan is also remeasured at the date of a settlement or curtailment, but the gain or loss comes mainly from AOCI. On a settlement, the employer recognizes in earnings the same percentage of the net gain or loss in AOCI as the percentage reduction in the projected benefit obligation (PBO). A full settlement recycles the entire net gain or loss. When the settlement price exceeds the PBO settled, the excess is generally treated as an actuarial loss that joins the net loss in AOCI before the pro rata portion is computed.
ASC 715 adds a threshold that IAS 19 does not have. Settlement accounting is required when the cost of all settlements in a year exceeds the sum of the service cost and interest cost components of net periodic pension cost for that year. Below the threshold the employer may elect, as a consistently applied accounting policy, to recognize settlement gains and losses anyway. Plans paying regular lump sums need to track this test every year.
A curtailment has two parts. First, the prior service cost in AOCI associated with years of service no longer expected to be rendered is recognized as a loss. Second, the change in the PBO caused by the curtailment is compared with the net gain or loss in AOCI. A decrease in the PBO is a gain only to the extent it exceeds a net loss in AOCI, and an increase is a loss only to the extent it exceeds a net gain in AOCI. The portion that is offset stays inside AOCI.
Timing follows the sign of the net result. A net curtailment loss is recognized when the curtailment is probable and the effects can be reasonably estimated. A net curtailment gain is recognized when the related employees terminate or the plan suspension or amendment is adopted. Under the presentation rule introduced by ASU 2017-07, these gains and losses are reported with the other components of net periodic pension cost outside income from operations, and only the service cost component can be capitalized into assets such as inventory.
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PENSION SETTLEMENT AND CURTAILMENT: ASC 715 VS IAS 19.
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Point | ASC 715 (US GAAP) | IAS 19 (IFRS) |
Settlement gain or loss | Pro rata share of AOCI net gain or loss | Obligation settled minus settlement price |
Settlement threshold | Required above service cost plus interest cost | No threshold |
Curtailment trigger | Fewer expected years of future service | Significant reduction in employees covered |
Curtailment result | Prior service cost loss plus PBO change net of AOCI | Change in obligation as past service cost |
Net loss timing | When probable and reasonably estimable | Earlier of event and related restructuring |
Recycling from equity | Yes, from AOCI | Never |
Income statement line | Outside income from operations | Part of service cost in profit or loss |
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The contrast in the AOCI row explains most of the differences. Companies reporting under ASC 715 that defer actuarial losses in AOCI carry a balance that a settlement releases into earnings, which is why large annuity buyouts by US sponsors often come with large non-cash settlement charges. Under IAS 19 the equivalent losses were recognized in other comprehensive income as they arose and stay there permanently. The corridor and amortization mechanics behind that AOCI balance are covered in our article on ASC 715 vs IAS 19 pension actuarial gains and losses.
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WORKED EXAMPLE: ANNUITY BUYOUT AND PLANT CLOSURE JOURNAL ENTRIES.
The figures below are illustrative, in USD thousands and before income taxes. Each illustration starts from the same remeasured balances on the event date: a PBO (defined benefit obligation under IAS 19) of 50,000, plan assets at fair value of 46,000, and, under US GAAP only, a net actuarial loss of 8,000 and unrecognized prior service cost of 1,500 in AOCI. Service cost for the year is 1,200 and interest cost is 2,400.
In the first illustration, the employer buys a nonparticipating annuity contract from an insurer for its retirees and pays the premium of 15,000 from plan assets. The obligation for those retirees is 15,000, so the price equals the obligation settled. The settlement cost of 15,000 exceeds service cost plus interest cost of 3,600, so settlement accounting is required under US GAAP. The PBO falls by 30% (15,000 out of 50,000), and the employer recycles 30% of the 8,000 net loss, a settlement loss of 2,400. Under IAS 19 the settlement loss is zero because the price equals the obligation settled. Had the insurer charged 15,450, IAS 19 would recognize a settlement loss of 450 in profit or loss.
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Settlement entry | Debit | Credit |
US GAAP: Pension settlement loss (other components) | 2,400 | |
US GAAP: AOCI, net actuarial loss | 2,400 | |
Both: Defined benefit obligation (within net liability) | 15,000 | |
Both: Plan assets (within net liability) | 15,000 | |
IAS 19: Settlement gain or loss | 0 | 0 |
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The net pension liability is 4,000 both before and after the buyout (46,000 minus 50,000, then 31,000 minus 35,000), because assets and obligation fall by the same amount. Under US GAAP the AOCI net loss drops to 5,600.
In the second illustration, the employer closes a plant and stops future accruals for the affected employees. The PBO falls by 900 because projected salary increases for those employees are no longer included, and 40% of the expected future years of service of active participants are eliminated. Under US GAAP, 40% of the 1,500 prior service cost, or 600, is a curtailment loss. The 900 decrease in the PBO is fully offset against the 8,000 net loss in AOCI, so there is no curtailment gain, and the net result is a curtailment loss of 600, recognized when the closure is probable and estimable. Under IAS 19 the same 900 reduction is negative past service cost, recognized as income of 900.
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Curtailment entry | Debit | Credit |
US GAAP: Pension curtailment loss (other components) | 600 | |
US GAAP: AOCI, prior service cost | 600 | |
US GAAP: Net pension liability (PBO decrease) | 900 | |
US GAAP: AOCI, net actuarial loss | 900 | |
IAS 19: Net defined benefit liability | 900 | |
IAS 19: Past service cost (income) | 900 |
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After the curtailment, the US GAAP PBO is 49,100, prior service cost in AOCI is 900 and the net actuarial loss in AOCI is 7,100. The same plant closure produces a 600 loss in US GAAP earnings and a 900 gain in IFRS profit or loss. Deferred taxes on the AOCI movements under US GAAP follow the same pattern and are omitted here for clarity.
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PRESENTATION AND DISCLOSURE OF PENSION SETTLEMENTS.
Under US GAAP, settlement and curtailment gains and losses sit with interest cost, expected return on assets and amortization in the non-service line, outside income from operations, and the employer discloses which line item contains those components. They also appear in the disclosed components of net periodic pension cost and in the reconciliation of the benefit obligation and plan assets. When a plant closure triggers both a curtailment and severance, the termination benefits follow their own recognition rules, explained in our article on severance accounting under ASC 420, ASC 712 and IAS 19.
Under IAS 19, past service cost and settlement gains and losses are recognized in profit or loss as part of service cost, and the reconciliation of the opening and closing net defined benefit liability shows them separately. IAS 19 does not prescribe the income statement line, so the entity's accounting policy and the notes determine where readers find the amounts. The balance sheet effect is the same under both frameworks: the net funded status, explained in our article on how defined benefit pension assets and liabilities are recognized on the balance sheet.
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COMMON ERRORS IN SETTLEMENT AND CURTAILMENT ACCOUNTING.
The most frequent error is measuring the event on stale balances. Both frameworks require the plan to be remeasured at the event date, and using the last year-end valuation misstates both the AOCI share recycled under US GAAP and the gain or loss computed under IAS 19. A related error under IAS 19 is continuing to use opening assumptions for current service cost and net interest after the event, instead of the remeasured ones.
A second error is treating every annuity purchase as a settlement. A buy-in contract held as a plan asset, or any contract where the employer keeps the risk of insurer default, leaves the obligation in place under both frameworks. Under US GAAP, a third error is ignoring the annual threshold test: a run of lump-sum payments that crosses service cost plus interest cost in the fourth quarter triggers settlement accounting for the whole year's settlements.
For curtailments under US GAAP, teams often recognize the full PBO decrease as a gain without first offsetting it against a net loss in AOCI, or recognize a net gain when the closure is announced instead of when employees terminate. Under IAS 19, the common slip is timing past service cost from the employee exit dates when the related restructuring provision was recognized earlier.
The checklist below covers the steps that most often go wrong at the close.
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Step | Close check |
1 | Transaction removes all further legal or constructive obligation |
2 | Obligation and plan assets remeasured at the event date |
3 | US GAAP threshold test run on all settlements in the year |
4 | AOCI share recycled and curtailment offset computed separately |
5 | ASC 715 and IAS 19 results compared for IFRS group reporting |
6 | Non-service components outside income from operations (US GAAP) |
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PENSION SETTLEMENT AND CURTAILMENT DIFFERENCES FOR US AND IFRS REPORTERS.
The direction of the result often differs between the two frameworks for the same event. ASC 715 releases deferred actuarial losses and prior service cost from AOCI, so annuity buyouts and plant closures tend to produce charges in US GAAP earnings even when the price paid equals the obligation. IAS 19 measures only the change in the obligation and the price paid, so a buyout at the obligation's value produces no settlement loss and a closure that cuts projected benefits produces a gain.
The judgement areas are concrete: whether an insurance contract removes all further obligation, whether a reduction in workforce is significant enough to be a curtailment, the event date that drives recognition, and the actuarial assumptions used in the remeasurement. Groups with US subsidiaries reporting under both frameworks need two calculations for every buyout or closure, and a reconciliation of the two results in their consolidation package.
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