Question

Identify and briefly discuss the most common components that make up the pension expense benefit cost.

Answer 1

Answer

The Major Components of pension expense includes service cost, interest cost, expected return on plan assets, amortization of prior service cost and effects of AOCI gains and losses.

The service cost is the present value of projected retirement benefits earned by covered employees (or amount the employer must set aside each year) in the current year.

Interest cost is accumulated on the unpaid balance of the projected benefit obligation year on year as service time of covered employee increases (time value of benefits)

The return on plan assets depicts the current year's earnings on invested plan assets which is deducted from service cost and interest cost to arrive at Net pension expense

The amortization of prior service depicts the cost of providing past years benefits over the remaining service-years of the covered employees which is added to arrive at Net pension expense

The amortization of AOCI gains or losses components depicts the changes in the PBO and the market impact on plan assets and is added or deducted as the case may be.