[JT]

Becker Question –

Parker Co. amended its pension plan on January 2 of the current year. It also granted $600,000 of unrecognized prior service costs to its employees. The employees are all active and expect to provide 2,000 service years in the future, with 350 service years this year. What is Parker’s unrecognized prior service cost amortization for the year under U.S. GAAP?

The answer is not $0 but that is what I chose because I thought that prior service cost wasn’t amortized until the FOLLOWING year and no amortization is taken in the first year. Would someone please tell me what I am obviously missing? Thank you!!!

 

 

[Spartans92]

the idea of unrecognized PSC is that it goes into the OCI then into AOCI which eventually goes into the I/S. So you have 600,000 total unamortized PSC and you have 350 hours current / 2000 hours total for future years then you take this weight (350/2000) x 600,000 = 105,000 which will be amortized into the current year's pension expense.

Pension Expense is SIR AGE (the unamortized portion of AGE) goes into OCI. That is, unamortized PSC, Gains, and existing obligation.

BEC- PASS

[JT]

Hi Spartan, sorry but can you confirm then that the amortization of PSC takes place in the year of the amendment? Becker has another example (as per below) which shows that the amortization is calculated in the following year (Year 2) because the amendment happened on October (Year 1) versus the “January amendment” from the Parker Co example. What if the amendment happens in May or July of the current year?

“ABC company has an underfunded pension plan that is reported on its balance sheet as a noncurrent pension benefit liability. On October 1, year 1, ABC Company amended its pension pan and increased the annual benefits to be paid to retired employees from 50% to 55% of their last year’s salary with the company upon retirement. The amendment was applied retroactively and resulted in prior service cost of $1,000,000. This was ABC Company’s first plan amendment; its effective tax rate is 30%”.

The following JEs will be recorded on 10/01/Y1:

D) OCI
C) Pension benefit liability – $1,000,000

D) Deferred tax asset
C) Deferred tax benefit – OCI $300,000

The prior service cost will be amortized over the 20 years average remaining service period of ABC Company’s employees starting in year 2. No amortization will be recorded in year 1 because amortization is calculated using beginning (January 1) unrecognized prior service cost.

The following JEs will be recorded in Year 2:

Reclassification adjustment from OCI to the IS for the Year 2 amortization of prior service cost – ($1,000,000/20 years = $50,000):

D) Net periodic pension cost
C) OCI – $50,000

Reclassification adjustment of the related deferred tax benefit ($300,000/20 years = $15,000):

D) Deferred tax benefit OCI
C) Deferred tax benefit Income Statement – $15,000.00

[Spartans92]

Nostromo, the only difference I can see for the reason to amortize beg 2nd year is because there is no services provided in the year of amendment. Comparing the 2nd example to Parker's there were services provided in that year so you will have to reclassified and amortize to the I/S. I am totally unsure if that is the reason.

BEC- PASS

[JT]

Hi Spartans92, I got an answer from Becker, here you go:

“Subject: Prior service cost amortization

Hi Nostromo,

Thanks for contacting us.

Since this problem is telling you that the unrecognized service cost at the beginning of the year is $600,000, then it would be safe to assume that part of it should be amortized as soon as it is recorded. Be careful when using the term ALWAYS. There are always exceptions to every rule.

In this problem they state that the unrecognized prior service is $600,000 AND the number of future service hours is 2,000. Instead of year, they are giving you hours. Since we had 350 service hours this year, it seems reasonable that we would amortize the prior service ratable.

$600,000/ 2,000 hours =$300 per hour

$300 per hour X 350 hours is $105,000.

I hope that this helps.”

[Author]

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