Final answer:
The statement that recognizing prior service following an amendment to a defined benefit plan increases the projected benefit obligation is true. This reflects the enhanced benefits for the service period before the amendment, creating an additional liability for the company.
Option 'a' is the correct.
Step-by-step explanation:
When a company amends its defined benefit plan, the question is whether recognizing prior service would increase the projected benefit obligation (PBO).
The statement provided in the question is true. An amendment to a defined benefit pension plan that recognizes prior service typically results in an increase in the PBO because the amendment reflects enhanced benefits for the service period prior to the amendment. These enhancements are essentially additional promises made to employees for their past service, creating an increase in liability that the company must reflect on its financial statements.
The measurement of the PBO includes all benefits employees have earned to date, with assumptions about future salary increases, and when companies add benefits for past service, they are required to account for this increase immediately.
The additional prior service costs are recognized as a component of pension expense over the service period of the affected employees, which means the obligation is recognized gradually on the company's financial statements as the employees work through their remaining service period up to retirement.
Under the guidelines of accounting standards, when this type of amendment occurs, companies report a past service cost which is the value of the increased pension benefits for employee service in prior periods. The past service cost increases the PBO and therefore will affect the company's pension expense calculations.