What is unrecognized prior service cost in relation to pensions?
Unrecognized prior service cost occurs when a company has to fund pension plans for employees that occurred in prior service years. This typically happens when a company makes changes to a pension plan and they have to adjust prior year of service or if they begin to offer a pension plan and have to recognize historical service years.
Unrecognized prior service cost cannot be reflected in the current year, so the total amount is capitalized and amortized over the remaining service life for the employee. The offset is to other comprehensive income.
The visual below illustrates the journal entry that would be recorded for an employee that had a prior service cost of $100 and a remaining useful service life of 5 years. This would be if the plan was underfunded (pension liability and not a pension asset).
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How to calculate the project benefit obligation?
Basically, you need to roll forward the obligation balance from the beginning of the year (i.e. which equals end of prior year), and then factor in the items listed in the rollforward below. That will get you to your ending PBO, and that is what is recorded on the balance sheet as the ending liability […]
How to calculate whether or not the plan asset is overfunded or underfunded?
A company’s funding status will relate to the required disclosure that companies must make regarding the status of its existing pension funds. The funded status of a pension plan will be computed as follows: Overfunded status: If the fair value of the plan’s assets are greater than the projected benefit obligation, the funded status will […]
What items increase the pension benefit obligation and what items decrease the pension benefit obligation?
There are five main items that either increase the PBO (increase the liability) or decrease the PBO (decrease the liability. The items that will increase the PBO include interest cost, service cost, and actuarial losses. The items that decrease the PBO (reduce the liability) include actuarial gains and benefits paid to retirees.