Question

WHY PRIOR SERVICE COST DECREASES OTHER COMPREHENSIVE INCOME?

WHY THE AMORTIZATION OF THE PSC INCREASES PENSION EXPENSE AND OCI?

Answer 1

Answer:

WHY PRIOR SERVICE COST DECREASES OTHER COMPREHENSIVE INCOME?

Amortization of prior service costs. These costs are charged to other comprehensive income on the date of the amendment, and then amortized to earnings over time. The amount to be amortized is derived by assigning an equal amount of expense to each future period of service for each employee who is expected to receive benefits. If most of the employees are inactive, the amortization period is instead the remaining life expectancy of the employees.

Prior service credits. If a plan amendment reduces plan benefits, record it in other comprehensive income on the date of the amendment. This amount is then offset against any prior service cost remaining in accumulated other comprehensive income. Any residual amount of the credit is then amortized using the same methodology just noted for prior service costs.

Gains and losses. Gains and losses can be recognized immediately if the method is applied consistently. If you do not elect to recognize them immediately, it is also possible to account for them as changes in other comprehensive income as they occur. If there is a gain or loss on the difference between the expected and actual amount of return on plan assets, recognize the difference in other comprehensive income in the period in which it occurs, and amortize it to earnings using the following calculation:

1. Include the gain or loss in net pension cost for a year in which, as of the beginning of that year, the gain or loss is greater than 10% of the greater of the projected benefit obligation or the market-related value of plan assets.

2. If this test is positive, amortize the excess just noted over the average remaining service period of those active employees who are expected to receive benefits. If most of the plan participants are inactive, amortize the excess over their remaining life expectancy.

WHY THE AMORTIZATION OF THE PSC INCREASES PENSION EXPENSE AND OCI?

Amortization of Prior Service Cost Components of Pension Expense:

-Plan amendments often include provisions to increase benefits for employee service provided in prior years.
-Company allocated the cost (prior service cost) of providing these retroactive benefits to pension expense in the future, especially to the remaining service-years of the affected employees.
-Straight line method
-Prior Service Cost is initially recorded in OCI and then recognized as a component of pension expense over there examining service lives of the employees who are expected to benefit from the change in plan.
-Amortize to pension expense.
-When amortize, charge to pension expense. increases pension exp. decreases PSC.
-Increase Pension expense