How To Compute Amortization Of Unrecognized Prior Service Cost?
A company may decide to give pension benefits retroactively to employees who performed services prior to the initiation of the pension plan. For example: if the pension plan was created in 20X5, it may give pension credits to employees for their services prior to 20X5. Thus when these employees retire, say, in 20X9, they will be entitled to benefits both for services performed from 20X5 to 20X9 and for services performed before 20X5. These are called “prior service costs”. Similarly, a company may decide to make retroactive amendments to its pension plan which increases the amount of benefits to be paid. These are also called “prior service costs”. The question is: Should these prior service costs be recognized entirely in the year they are adopted? Or should they be recognized gradually (amortized) over several years? The accounting profession decided in favor of the latter option. Thus these costs must be amortized over the remaining service life of these employees. This can be done
