Question

Accounting regulators opted to recognize the liability and reduce other comprehensive income, then amortize the prior service cost as a component of pension expense. The liability is reduced and other comprehensive income is increased as the prior service amount is amortized. This method was chosen even though it violates the matching concept due to constituent arguments. What method did accounting regulators choose to recognize the liability and amortize the prior service cost as a component of pension expense?

1) Recognize the liability and amortize the prior service cost as a component of pension expense
2) Recognize the liability and reduce other comprehensive income
3) Recognize the liability and increase other comprehensive income
4) Recognize the liability and match it with other expenses

Answer 1

The method chosen by accounting regulators to recognize liability and amortize prior service cost in pension expense is to recognize the liability and reduce other comprehensive income initially, then amortize the cost over time.

Step-by-step explanation:

The accounting regulators chose to recognize the liability and reduce other comprehensive income, then amortize the prior service cost as a component of pension expense.

The liability is reduced and other comprehensive income is increased as the prior service amount is amortized.

This method may not adhere strictly to the matching concept, which aims to match expenses with revenues in the period in which they are incurred.

However, the regulators decided upon this approach even though it may violate the matching principle, choosing to prioritize the arguments of their constituents.