[Matt]

With regard to pension expensing, I’ve never understood the conceptual theory behind why an amortization of prior service cost accompanies crediting OCI. Does this not increase an expense and income at the same time? I don’t understand the logic behind this.

Am I right to understand that OCI is like Net Income and Accumulated OCI is like Retained Earnings? I can’t imagine increasing any of these in conjunction with increasing an expense.

Thanks in advance to anyone who can explain this to me.

By the way, my FAR exam is tomorrow, so this is kind of urgent. 😀

AUD: 88
BEC: 79
REG: 81
FAR: 72 » 74 » 88

Study method: 100% watching videos, including solving problems covered therein; no books, paper, or pencils

[M.O.D.]

OCI is like net income but in a hidden dimension. And AOCI is like retained earnings in the alternate universe, where OCI adds up. Eventually, though there is a transfer to net income.

Definition: Past service cost is the change in the present value of defined benefit obligations caused by employee service in prior periods. This cost arises from changes in post-employment benefits or other long-term employee benefits. The change in this cost may either be positive or negative.

Because changes can be reversed due to changes in investments, they are considered temporary fluctuations which can be hidden in AOCI. However the fair value has to be reported on the balance sheet, thus the accounting.

This is my interpretation anyway.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Anonymous]

My understanding is that it's really just a reclassification. Initially, it's put into OCI which reduces OCI (debit). Then when some of it needs to come out of OCI and into income, we have to debit expense (to reduce NI) and credit OCI. If we didn't credit OCI, then we would sort of be taking the expense twice. I'm not sure if that makes sense outside of my mind or not. 🙂 There is a link below that hopefully will help you. It talks about this at the bottom of page 21 and top of page 22.

https://www.cengage.com/resource_uploads/downloads/0324300980_74166.pdf

[Anonymous]

OK this is my understanding of OCI and I know it's silly so forgive me.

When you initially recognize PSC as one big amount, you debit OCI and credit obligation.

The way I think of it, the amount is now sitting at a train station a waiting to get in the train to go to IS. It's not there yet, but the amount is reserved and users who look at your BS see that, they know that eventually it's gonna become an expense.

All these $$ can't fit one train, so once a year let's say 1/10 th of them gets in the train and goes to expense.

Dt Pension expense

Ct OCI

[Matt]

Thanks all!

@BillfromAccounting: That PDF you provided especially helped. I had missed the fact that initial recognition of PSC involves an upfront reduction of OCI for the full amount. This was the fundamental element of the equation that I was missing, and now that I understand that income was already reduced upfront, this all makes sense.

It also helps me to think of the transaction as involving four entries rather than just two sets of two entries:

Expense (effectively reducing Net Income) <–subsequent parking of PSC

Liability (paid off by cash)

__Cash (paying off the liability)

__OCI (offsetting the reduction in Net Income) <–initial parking of PSC

AUD: 88
BEC: 79
REG: 81
FAR: 72 » 74 » 88

Study method: 100% watching videos, including solving problems covered therein; no books, paper, or pencils

[Author]

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