Pension expense in corporate finance involves the costs a company incurs to fund employee pension benefits. It includes service cost, interest cost, expected return on plan assets, amortization of prior service cost, and recognition of actuarial gains or losses. These components are essential for accurate financial statements and reflect a company's future pension commitments.
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Pension expense is a crucial concept in corporate finance and accounting that reflects a company's commitment to fund employee pension benefits
Pension expenses are meticulously recorded in financial statements to ensure the accuracy of financial reporting
Understanding pension expense requires knowledge of its five main components: service cost, interest cost, expected return on plan assets, amortization of prior service cost, and recognition of actuarial gains or losses
Service cost is the present value of pension benefits earned by employees in the current year
Interest cost is the interest on the projected benefit obligation (PBO) that accrues over time and increases the pension liability
Expected return on plan assets is an estimate of the pension fund's projected earnings and serves to offset pension expenses
Amortization of prior service cost spreads the cost of retroactive benefits from plan changes over the service periods of affected employees
Recognition of actuarial gains or losses accounts for differences between plan assumptions and actual experience or changes in assumptions about the plan
A defined benefit pension plan guarantees a certain pension payment based on employee factors and requires the calculation of annual pension expenses by combining its components
If a company has a service cost of £200,000, interest cost of £120,000, expected return on plan assets of £80,000, amortization of prior service cost of £3,000, and an actuarial loss of £10,000, the total pension expense for the year would be £253,000
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The five key elements of pension expense include service cost, interest cost, expected return on ______ ______, amortization of prior service cost, and actuarial gains or losses.
plan assets
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Service Cost in Pension Expense
Present value of benefits employees earn in current year for pension calculations.
02
Interest Cost on PBO
Interest accruing on Projected Benefit Obligation, increasing pension liability over time.
