Employee benefit plans
Area 2: Technical Accounting and Reporting (35-45%)
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Topics
- Pension obligation components
- Net periodic pension cost
Lessons
Study Frameworks
Net Periodic Pension Cost (ASC 715)
Service Cost + Interest Cost − Expected Return on Plan Assets ± Amortization of Prior Service Cost ± Amortization of Net Gain/Loss
Only service cost is in operating income. All other components are below the line (other income/expense). The expected return reduces cost; actual vs. expected difference goes to OCI.
Corridor Amount (Gain/Loss Amortization)
Corridor = 10% × max(PBO, Fair Value of Plan Assets at beginning of year)
Amortize only the excess of cumulative unrecognized net gain/loss over the corridor. Divide excess by average remaining service period of active employees.
Pension Cost Components — Income Statement vs. OCI
| Component | Where Reported | Effect on Pension Cost |
|---|---|---|
| Service cost | Operating income | Increases expense |
| Interest cost | Other income/expense | Increases expense |
| Expected return on plan assets | Other income/expense | Decreases expense |
| Amortization of prior service cost | Other income/expense | Increases expense |
| Amortization of net loss (gain) | Other income/expense | Increases (decreases) expense |
| Actuarial gains/losses (current year) | OCI | Deferred — amortized via corridor |
| Prior service cost (plan amendment) | OCI | Deferred — amortized over service period |