Corridor Rule

What Is the Corridor Rule?

In pension accounting, the corridor rule requires the disclosure of any actuarial gain or loss that surpasses 10% of the greater of the pension benefit obligation or the market value of the plan's assets and permits this actuarial gain or loss to be amortized over the long haul into the income statement.

The effect of the corridor rule is a smoothing out of the plan support's income statement. The continuous amortization holds shocks back from being brought into the company's income statement because of the additional pension expense, which might impact the company's stock price. Assuming the actuarial gain or loss is under 10% and accordingly inside the corridor, it isn't reported.

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

How the Corridor Rule Works

The corridor rule should be visible as having a smoothening effect with respect to reporting pension gains and losses. The Financial Accounting Standards Board laid out the corridor rule in December 1985 when it issued Statement No. 87.

As per this statement, the prior accounting standards for pension reporting were too weak, and brought about conflicting reporting methods among companies, and now and again even various methods starting with one period then onto the next. Laying out the corridor rule guaranteed that all companies were presently subject to similar reporting requirements, and pensions would be held to similar accounting standards.

1985

The year that the corridor rule was laid out by the Financial Accounting Standards Board.

Illustration of the Corridor Rule

XYZ Company offers its workers a pension that will pay workers 80% of their last salary every year after they retire. As employees enter the pension program, money is put away into the pension fund every year the employee works for the company. These pension dollars are invested in various types of securities and vary with changes in market prices. In the event that the market has a terrible year, XYZ Company could need to report the loss.

In the event that it's a large loss, it could hurt the company's financials and, hence, its stock price. In any case, since the corridor rule permits these losses to be reported throughout some undefined time frame, the impact of the loss is "smoothed," as XYZ Company can report the loss in pieces over a long period of time.

Features

• Actuarial gains or losses that are under 10% fall inside the "corridor" and are not reported.
• The corridor rule sets out rules for reporting actuarial gains or losses in a pension plan.
• Actuarial gains or losses are the projections utilized while evaluating the obligations of a defined benefit plan.
• Under the corridor rule, losses or gains that surpass 10% of the greater of the pension benefit obligation or plan assets must be revealed.
• These losses or gains can likewise be amortized step by step to smoothen their impact on a company's income statement.