Hi folks,
I'm hung up on a point with pensions and the distinction between accrued pension cost and unfunded pension liability. I want to see if I'm on the right track here.
Assume the plan was fully funded until the current period. If actual and expected returns on assets are the same, then in theory, if I contribute my pension expense, the FV of assets = PBO. Accrued pension cost results if I contribute less than my net periodic pension expense. IE. if net periodic pension expense is 80k and I contribute 60k, then my journal entry is:
Dr Pension expense 80
Cr cash 60
Cr accrued pension cost 20
However, if, simultaneously, I give credit for prior service resulting in 100k worth of benefits, then my PBO is greater than FV of plan assets by 120k. 20k is already recorded as accrued pension cost, so I need to accrue an additional 100k to an unfunded pension liability with the following journal entry:
Dr OCR – prior service cost 100
Cr unfunded pension liability 100
So on my balance sheet at the end of the period, I have two separate pension liabilities, one for under-contributing, and the other for the difference between PBO and FV less what is already accrued as pension cost.
Does that sound correct?
.