Identify the five components that comprise pension expense. Briefly explain the nature of each component.
What is a private pension plan? How does a contributory pension plan differ from a noncontributory plan.
Components of pension expense
The first component is service cost which is referred to as increase in projected benefit obligation (PBO) due to employee service over the current year. Projected Benefit Obligation (PBO) is the actuarial present value of total benefits from pension as a result of employee service determined through the plan's benefit formula (Parker, 2009).
The second component is interest component which includes interest accrued on the beginning projected benefit obligation for the current year.
Actual return on plan assets is a component of pension expense and is termed as return generated from accumulated pension fund assets over a year. It is also refereed to as the decrease in cost of pension for actual investment income from pension fund assets and change in market value of plan assets (Parker, 2009).
Amortization of prior service cost component is the cost of retroactive benefits given in a pension plan amendment. The increase in cost is amortized over the period in which employees are expected to serve and is usually the average remaining service life of the employee.
The final component includes gains and losses which is the increase or decrease between actual returns from the pension plan's ...
Five components of pension expenses for the United States GAAP versus IGAAP are examined.