Question

ABC Co. employs knowledge workers and is finding that its employees are retiring closer to age 75 than to age 65. As a result, they recently amended their defined benefit pension plan such that benefits will begin at age 72, with certain exceptions for those employees demonstrating an earlier need, instead of at age 60. Batch Co. has been able to measure the actuarial present value of this amendment, which is the change in the projected benefit obligation (PBO) that results from the change. How will this affect pension expense in current and future periods?

A) It will decrease prior service cost and, as prior service cost is amortized, will decrease pension expense.

B) It will increase prior service cost and, as prior service cost is amortized, will increase pension expense.

C) It will be recognized immediately as a decrease in pension expense.

D) It will be recognized immediately as an increase in pension expense.

Answer 1

A) It will decrease prior service cost and, as prior service cost is amortized, will decrease pension expense.

Step-by-step explanation:

Prior service cost is the cost of additional benefits that an employee is entitled to receive for service rendered over a period of time due to an amendment in pension plan.

Prior service cost is amortized by adding equal amount to each future period of service of each employee that are expected to receive the benefits of the amended pension plan.

Therefore,due to the extended retirement age, the prior service cost will increase and as the service cost is amortized, it will decrease the pension expenses of the company.