The 5 Components of Pension Expense Explained Defined benefit plan

What are the five components of pension expense for a defined benefit plan? This lesson breaks down how pension expense is measured on the income statement — a FAR topic in intermediate accounting tested on the CPA exam. Learn how service cost, prior service cost amortization, interest on the obligation, the return on plan assets, and gains and losses each raise or lower pension expense. Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students. Video Timeline & Key Concepts: 0:00 — Introduction: Components of Pension Expense 0:31 — Service Cost for the Year 0:39 — Amortization of Prior Service Cost and Plan Amendments 0:48 — Interest on the Pension Liability 1:24 — Actual Return on Plan Assets 2:14 — Gains and Losses Frequently Asked Questions: What are the five components of pension expense? They are service cost, amortization of prior service cost, interest on the pension liability, the actual return on plan assets, and gains and losses. Together they determine the net pension expense reported for the period. How does service cost affect pension expense? Service cost is the present value of benefits earned by employees for work performed during the current year. It is a primary driver that increases pension expense. Why is prior service cost recorded in other comprehensive income first? When retroactive benefits are granted through a new plan or an amendment, the cost is initially recorded in other comprehensive income and then amortized into pension expense over the employees remaining service period. How do plan assets reduce pension expense? The actual return earned on the investments held in the pension fund, such as interest and dividends, offsets the cost of funding the plan and therefore reduces pension expense. What causes pension gains and losses? Gains and losses arise from unexpected changes in the value of plan assets or in the projected benefit obligation, such as revised actuarial assumptions. They can either increase or decrease pension expense. #CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #FAR #pensionaccounting #definedbenefit #intermediateaccounting #pensionexpense #ProfessorFarhat