Amortizing Prior Service Cost
Assume a company amends its pension plan at the beginning of 2007 to provide additional credit for prior service.  The Company employs 100 workers. Within this group of 100 employees, it is expected that workers will retire or terminate at the rate of 5 per year for the next twenty years.The amendment increases the projected benefit obligation by $105,000. Prior service costs should be amortized by assigning an equal amount to each future period of service of each employee active at the date of the amendment who is expected to receive benefits under the plan.

Number of employees at adoption date             100 
 number retiring each year from this group          5 

       number working in: 
                    2007. . . . . . . . . . . . . . . . . . . . . . 100 
                    2008. . . . . . . . . . . . . . . . . . . . . .   95 
                    2009. . . . . . . . . . . . . . . . . . . . . .   90 
                        .                                               . 
                        .                                               . 
                    2025. . . . . . . . . . . . . . . . . . . . . .    10 
                    2026. . . . . . . . . . . . . . . . . . . . . .      5 
 No. of years provided by the 100 employees:   1,050 
 divide by number of employees                         100 
 Average service life of each employee               10.5* 

 
Short-cut approach, using formula: 

              N * (N + 1)
                    2                 *  M 

<>            where N = Number of years over which the employees retire,
            and    M = Number retiring each year 

              20 * (20 + 1)
                            2         * 5  = 1,050;  1,050/100 employees = 10.5 

   
Amortization table:
Year Amount Year Amount
2007 $ 10,000 2017 $  5,000
2008 $  9,500 2018 $  4,500
2009 $  9,000 2019 $  4,000
2010 $  8,500 2020 $  3,500
2011 $  8,000 2021 $  3,000
2012 $  7,500 2022 $  2,500
2013 $  7,000 2023 $  2,000
2014 $  6,500 2024 $  1,500
2015 $  6,000 2025 $  1,000
2016 $  5,500 2026 $    500

 

 
Amortization of prior service cost (para 25-26)

Amount of prior service cost . . . . . . . . .$ 105,000

Divide by number of service/years provided by 
  100  employees (see calculations below). .      1,050

Amount to amortize each year per service year.$     100

Amount to amortize in 2007 (when 100 service
  years will be provided)  . . . . . . . . .  $  10,000
 

 
Alternative amortization (para 26);  could amortize over the average remaining service life of employees if more rapid amortization occurs.

$ 105,000/ 10.5 = $ 10,000 per year for 10 1/2 years