Question

Pension accounting would be substantially easier if the components of pension expense were simply the five items, which account for most of the changes in the PBO and the market value of pension plan assets. Identify and discuss the five components of pension expense.

Answer 1

Pension Plan is based on below components that are include in calculating the cost of pension that will be disclosed in the P&L of the company.

Service Cost

Service cost is the main component that is used to determine the cost of pension plan.

The pension of employee depends upon the years of service that are completed by the employee.

In other words the amount that employer set aside every year depends upon the years of completed services.

Interest cost

The interest cost means the interest that has been accrued on the unpaid balance of pension.

Return on plan assets

Pension plans consists of normally the stock, bonds and other investments.’

The employer judger the as of date value of that asset and subtract any gain and add back any loss to make the amount equal to the pension plan.

Amortization of prior service cost.

Employee receives credit once there is any change In the pension plan of the organization. Employer must cover this cost over the employee outstanding share.

Gain and losses

Since the pension plan consists of shares, bonds and other investments. This means that there will be change in the market. The market may be favorable and most of time unfavorable.

When the market is not favorable the loss that will be there will be added back to the pension plan thus this is an additional expense