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Identify the five components that comprise pension expense. Briefly explain the nature of each component.

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Solution Summary

The solution identifies the five components that comprise pension expense.

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The five components are:

Service cost. Service cost is defined as the actuarial present value of projected benefits earned by employees in the current accounting period. In other words, it is the increase in pension benefits payable to employees because of services performed during the current year. Future salary levels must be taken into consideration when calculating service cost. The measurement of service cost depends upon the assumptions made in estimating the increases in future pension benefits, such as turnover, early retirement, salary increases, and promotion. Revisions in these assumptions can substantially affect the valuation of service cost.

Interest on the projected benefit obligation. The interest on the projected benefit ...

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Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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