# What is the formula to calculate net periodic pension expense?

The pension expense, also referred to as the “net periodic pension cost” is the annual increase in the projected benefit obligation (PBO) during the given period. You will be required to know the formula to compute net periodic pension costs.

The calculation of net periodic pension cost, which will be reported on the income statement should be computed as follows:

As an example, let’s say that a company had current service period costs of \$220,000, interest cost of \$90,000, expected return on plan assets of \$112,000 and amortized costs expensed in Year 7 of \$7,000. For Year 7, the net periodic pension expense recorded in the income statement would be \$205,000.

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• ### How is the funded status of a pension plan recorded in the financial statements?

Funded status refers to if the pension plan is overfunded or underfunded. If the pension plan is overfunded, then the difference is recorded in the non-current asset section of the balance sheet. If the plan is underfunded, then the difference is recorded in the liability section of the financial statements. Classification between current and non-current liability is based on what amount of the pension is expected to be due in the next 12 months.

• ### How to calculate the fair value of the pension plan asset?

The fair value of plan assets represents the cumulative investments (plan assets) that are being held for retiree’s (employees) and will be paid out once the pension allows for it. The formula below illustrates how to calculate the ending fair value of plan assets, which would be recorded on the asset section of the balance sheet:

• ### 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).