Question

If a pension plan amendment is adopted and retroactive benefits are granted to employees, the amount of the prior service cost at the date of grant is accounted for?

1) as an intangible asset and liability that are recognized on the plan amendment date
2) as a prior period adjustment for the total amount of the prior service cost that is reported on the statement of retained earnings
3) as the total amount of the prior service cost that is recognized as an expense on the current period's income statement
4) initially as an unamortized amount to be included in the computation of pension expense over future periods

Answer 1

The correct treatment for the amount of the prior service cost when a pension plan amendment is adopted is to recognize it initially as an unamortized amount and include it in the computation of pension expense over future periods.

If a pension plan amendment is adopted and retroactive benefits are granted to employees, the amount of the prior service cost at the date of grant is accounted for as an initial unamortized amount to be included in the computation of pension expense over future periods. This means that the cost associated with past services provided by employees before the plan amendment is not recognized immediately as an expense, but is instead deferred and amortized over the remaining service lives of the employees. This approach recognizes the fact that the pension plan benefits are earned gradually over the employees' tenure with the company, and therefore the costs should be matched with the period of service.