What are the components of pension expense? How do the components of pension expense differ among the various types of contribution and benefit plans? In the calculation of pension expense for a defined benefit plan, what are the most complicated calculations? Why?
The components of pension expense are made up service costs, service cost, interest on the liability, return on plan assets, amortization of prior service cost, and gain or loss. 1 Service costs is the expense caused by the increase in pension payable to employees based on service rendered during the year. Interest on the Liability is taken in to account because the pension is deferred compensation and the interest expense accrues each year on the projected benefit obligation. Actual return on plan assets needs to be adjusted each year to account for interest and defends paid by the underlying investments of the pension fund. Amortization of prior service cost refers to the recognition of a pension expense in future periods resulting from a retroactive change to the plan's benefit formula. 2 Gain or loss need to be accounted for which can be caused by the difference between the actual return and the expected return and amortization of the net gain or loss from previous periods.

There are two types of defined contribution where the employer and employee both contribute to the plan, or a Defined benefit plan in which the employer funds the plan and the employer agrees to pay the employee a defined benefit upon retirement. In the accounting on a defined contribution plan is simply the expense of the employer’s contributions. The accounting gets much more involved on a defined benefit plan because the employer must account for a future defined benefit while accounting for often unknown variables. 1. www.wileyplus.com/chapter 20/Accounting for Pensions and Postretirement Benefits 2.