Pension Expense Delayed Recognition

Question 1

For the first three components of pension expense, when are those recognized?

Answer 1

IMMEDIATELY EVERY YEAR!!

Question 2

When are the last two components recognized?

Answer 2

They are subject to delayed recognition

Question 3

What is a prior service cost?

Answer 3

An increase in SC for service provided in the past from a plan amendment .

Example: Employees are not covered under plan. They have worked for 10 years. Plan is amended to included! The prior service now needs to be accounted for!

Question 4

What is the journal entry for prior service cost?

Answer 4

Prior Service Cost- OCI XXX
Pension Liability- PBO (XXX)

All the ten years impact the liability immediately.

No pension expense! It will be amortized.

Question 5

What are pension gains and losses?

Answer 5

Arise from a PBO change.

Gain and losses go to OCI and amortized with pension expense.

Question 6

Example: At the beginning of 20X1, a pension plan was amended increasing benefits retroactively. PBO increased by 10 years. Immediate recognition of PSC. What would be your entry for this transaction?

Answer 6

PSC- OCI   12,000 
Pension Liability (or PBO)  (12,000)

Question 7

How can you amortize PSC and gains and losses?

Answer 7

1) Straight line

2) Service Method

Question 8

Under straight line, how do you determine the number years in the denominator?

Answer 8

Average! (all employees years left/# of employees)

Question 9

What is the journal entry when you amortize?

Answer 9

Pension Expense XXX

PSC- OCI (XXX)

Question 10

How do you calculate PBO?

Answer 10

Beginning balance given   XX 
\+ Plan amendment             XX
NEW balance                      XX 
Service Cost                       XX
Interest Cost                       XX 
= Ending PBO 

• NOTE: AMORTIZATION DOES NOT IMPACT PBO, IT JUST TAKES IT OUT OF OCI!!!

Question 11

What are the two sources of pension gains and losses?

Answer 11

Actual is greater than expected or visa versa OR when you have asset changes

If you your obligation goes down = GAIN
If your obligation goes up = LOSS

When your actual return < expected return = LOSS
Actual return > expected return = GAIN

Question 12

How can you amortize the gain or loss?

Answer 12

1) Amortize
2) Corridor method

Net Pension gain or loss- Corridor amount) / Average remaining service life

Corridor amount - 10% of the larger of PBO or assets

IF you get a negative number in the numerator, no amortization