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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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