{"id":10007,"date":"2023-02-13T11:47:34","date_gmt":"2023-02-13T11:47:34","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=10007"},"modified":"2026-03-30T19:13:12","modified_gmt":"2026-03-30T19:13:12","slug":"components-companys-defined-pension-costs","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/components-companys-defined-pension-costs\/","title":{"rendered":"Components of a Company\u2019s Defined Pension Costs"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"A hypothetical company ABC has a DB plan. Which component of ABC\u2019s periodic pension cost is most likely to be shown in OCI rather than P&L?\",\r\n    \"text\": \"A hypothetical company ABC has a DB plan. Which component of ABC\u2019s periodic pension cost is most likely to be shown in OCI rather than P&L?\\n\\nA. Remeasurements.\\nB. Net interest (income expense).\\nC. Service cost.\",\r\n    \"answerCount\": 3,\r\n    \"suggestedAnswer\": [\r\n      { \"@type\": \"Answer\", \"text\": \"A. Remeasurements.\" },\r\n      { \"@type\": \"Answer\", \"text\": \"B. Net interest (income expense).\" },\r\n      { \"@type\": \"Answer\", \"text\": \"C. Service cost.\" }\r\n    ],\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"A. Remeasurements.\",\r\n      \"commentCount\": 1,\r\n      \"upvoteCount\": 0,\r\n      \"url\": \"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/components-companys-defined-pension-costs\/\"\r\n    },\r\n    \"author\": {\r\n      \"@type\": \"Organization\",\r\n      \"name\": \"AnalystPrep\"\r\n    }\r\n  }\r\n}\r\n<\/script><\/p>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/qIEMq5H3QEI\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>The periodic pension cost of a company\u2019s defined benefit plan is the change in the net pension liability or asset adjusted for the employer\u2019s contributions.<\/p>\r\n<p>The following make up a company\u2019s defined pension costs:<\/p>\r\n<h2>1. Service Costs<\/h2>\r\n<p><b>Current service cost<\/b> refers to the present value of benefits during the\u00a0<b>current period<\/b> based on salary growth levels. <b>A past service cost <\/b>is a change in the amount of pension obligation relating to <b>prior periods<\/b> due to changes in plan amendments or plan curtailment.<\/p>\r\n<h4>IFRS Recognition<\/h4>\r\n<p>The company recognizes service costs in profit and loss.<\/p>\r\n<h4>GAAP Recognition<\/h4>\r\n<p>The company recognizes current service costs in profit and loss. However, it recognizes past service costs in OCI and amortizes the subsequent costs to profit and loss over the years of service.<\/p>\r\n<h2>2. Net Interest Income\/Expense<\/h2>\r\n<p>The net interest expense is the financial cost of deferring benefits related to the plan.<\/p>\r\n<p>The net interest income is the financial income from prepaying amounts related to the plan.<\/p>\r\n<h4>IFRS Recognition<\/h4>\r\n<p>Under IFRS, the company recognizes this component in P&amp;L as:<\/p>\r\n<p>$$ \\text{Net interest income \/expense = Net pension liability or net pension asset \u00d7 Discount rate} $$<\/p>\r\n<h4>GAAP Recognition<\/h4>\r\n<p>The company records the interest expense on pension obligation in P&amp;L and recognizes the expected return on plan assets in the P&amp;L as an amount given by:<\/p>\r\n<p>$$ \\text{Net interest income\/expense = Plan assets \u00d7 Expected return} $$<\/p>\r\n<h2>3. Remeasurement<\/h2>\r\n<p>Remeasurement includes:<\/p>\r\n<ul>\r\n\t<li style=\"font-weight: 400;\">Actuarial gains and losses.<\/li>\r\n\t<li style=\"font-weight: 400;\">The actual return on plan assets and the amount included in the net interest expense\/income calculation differ.<\/li>\r\n<\/ul>\r\n<p>$$ \\text{Actuarial gains and losses = Changes in a company\u2019s pension an obligation arising from changes in actuarial assumptions} $$<\/p>\r\n<p>$$ \\text{Difference in the expected and actual return on assets = Actual return &#8211; (Plan assets \u00d7 Expected return)} $$<\/p>\r\n<h4>IFRS Recognition<\/h4>\r\n<p>A company recognizes remeasurement in OCI.<\/p>\r\n<p>$$ \\text{Net return on the plan assets = Actual return &#8211; (Plan assets \u00d7 Interest rate)} $$<\/p>\r\n<p>$$ \\text{Actuarial gains and losses = Changes in the company\u2019s pension obligation arising from changes in actuarial assumptions} $$<\/p>\r\n<h4>GAAP Recognition<\/h4>\r\n<p>Under GAAP, the company reports remeasurements in P&amp;L. Additionally, it can amortize the subsequent costs to P&amp;L using the corridor approach.<\/p>\r\n<blockquote>\r\n<h4>Question<\/h4>\r\n<p>A hypothetical company ABC has a DB plan. Which component of ABC\u2019s periodic pension cost is <em>most likely<\/em> to be shown in OCI rather than P&amp;L?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li data-tadv-p=\"keep\">Remeasurements.<\/li>\r\n\t<li data-tadv-p=\"keep\">Net interest (income expense).<\/li>\r\n\t<li data-tadv-p=\"keep\">Service cost.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is A<\/strong>.<\/p>\r\n<p>A company recognizes remeasurements in OCI rather than P&amp;L under IFRS.<\/p>\r\n<\/blockquote>\r\n<p>Reading 12: Employment Compensation: Post-Employment and Share-Based<\/p>\r\n<p><em>LOS 12 (c) Describe the components of a company\u2019s defined benefit pension costs.<\/em><\/p>","protected":false},"excerpt":{"rendered":"<p>The periodic pension cost of a company\u2019s defined benefit plan is the change in the net pension liability or asset adjusted for the employer\u2019s contributions. The following make up a company\u2019s defined pension costs: 1. Service Costs Current service cost&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,312],"tags":[216,108,313],"class_list":["post-10007","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-financial-reporting-and-analysis-fra","tag-cfa-level-2","tag-components-of-a-companys-defined-pension-costs","tag-financial-reporting-and-analysis-fra","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Defined Pension Costs and Expense Components<\/title>\n<meta name=\"description\" content=\"Learn the components of pension expense, including service cost, interest cost, and past service cost, and how they are calculated.\" \/>\n<meta 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