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I’m wondering if anyone can help explain some of these concepts in plain English. For the below problem I chose A. For a previous problem, I didn’t add PSC in the calc. for interest cost. When do you add and when do you not add? My calc. was 3 million x 6%; answer said 3.4 million x 6%. Which leads me to another thing. I thought you amortize or use the corridor and compare to AOCI when there’s a gain. For example, take the greater of 10% of beg. FV Plan Assets is 400,000 and beg. PBO is 700,000 and AOCI is 90,000, so 10% of PBO is less than AOCI of 90,000, so you take the difference of that which is 20,000 and amortize by remaining service period of 20 years. In this problem, there is no AOCI so I got confused so obviously there’s a concept I am missing here. Can anyone help explain when do I need to add the PSC to the PBO and 2) why do we amortize the PSC now?

On January 1, Year 1, an entity has a projected benefit obligation of $3 million and plan assets of $2 million. On that date, the entity amends its pension contract to make the benefits larger, and this change creates a prior service cost of $400,000. The discount or interest rate in connection with the projected benefit obligation is 6%, and the expected earnings rate on plan assets is 4%. The average remaining service life of those employees impacted by the amendment is estimated to be 10 years. The service cost for the year is $290,000. No funding occurred during the year. What is the net pension cost (the pension expense figure) to be recognized for Year 1?

$430,000 is incorrect. A defined benefit pension plan can have up to five components that must be used to determine net pension cost each year [service cost for the period, plus interest cost on the projected benefit obligation, minus expected return on plan assets, plus prior service cost amortization, and plus (or minus) amortization of actuarial unrealized losses (or gains)].
A. 430,000
B. 454,000 (Correct Answer)
C. 790,000
D. 814,000

Answer Explanation
Here, there are four of these components. (1) The service cost for the year is $290,000. (2) The projected benefit obligation is increased from $3 million to $3.4 million by the prior service cost, so the interest on the projected benefit obligation is $3.4 million multiplied by 6%, or $204,000. (3) The income on the plan assets is $2 million multiplied by 4%, or $80,000. (4) The prior service cost is amortized to the net pension cost over the average remaining service life of the employees. That amortization increases the cost by $40,000 ($400,000 / 10 years). Hence, the net pension cost is $290,000 plus $204,000 less $80,000 plus $40,000, or $454,000.

[Biff Tannen]

You should memorize the SIRAGE mnemonic. I got a few pension questions on my actual exam and this mnemonic saved my ass. You don’t really need to understand all the different components of the mnemonic. Just memorize SIRAGE and remember that return on plan assets is a minus. You should be good for exam day with that knowledge

[capitanestevan]

A
S
P
I
D
E
R

This is the mnemonic i used.

[Author]

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