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Hi Dear Sir Mike,
I have a question regarding adding of the “past service cost” figure to “PV of Obligation at the start of the year” when working out Interest cost.
I have done 2 questions in first one when working out the Interest cost, it adds past service cost to PV of the obligation and then times by the respected % and in second one it interest cost is worked out just % times by the PV of the obligation, it did not add the past service cost figure this time.
Please explain this?
Many Thanks
It depends upon the date that the past service cost was acknowledged. If it was at the start of the year, then the obligation as at the start of the year will be increased and interest cost calculated on that increased obligation
I can only assume that, for the second one that you mention, past service costs were not acknowledged until the year end
Does that do it?
Many Thanks Dear Sir Mike
Could you also please explain the following terms in their simplest form.
What is actually Current and Past Service cost?
When do we recognise them in Income statement?
Thanks
As the name “current” suggests, this is recognised each year and the figure will be given in an exam question
“past service costs” recognition depends on the period over which it is to be recognised. If the past service costs relate to periods gone by, ie it’s a retrospective adjustment in respect of current employees, then it’s recognised in the year in which that adjustment is made. If it relates to future periods ie it has not yet vested, then it’s recognised over those future periods
An exam question might say something like “During the year, past service costs of $60,000 were awarded of which $20,000 relates to prior periods. The remainder will vest over the next 5 years”
In that case, $20,000 will be recognised this year and $40,000 / 5 will be recognised through the statement of profit or loss in each of the next 5 years
There is an example of that (Jolanta?) in the course notes, free on this site.
OK?
Thanks but I just wanted to know what actually they are?
Past service cost?
Current service cost?The reason i am asking the term meanings because sometimes examiner give figures which actually relate to past & current service cost but the wording is different and i get confuse like which is figure relate to which term?
Thanks Again
Current service costs are the amounts that the employees have earned by working for us for another year. Last year, they had worked for us for, say, 12 years. Now, one year later, they have worked for us for 13 years so their pension entitlement has increased by this year’s entitlement. That’s the current service cost
Past service costs are where the employer changes / amends the pension scheme and improved the benefits for the employees under the scheme. Sometimes that amendment will only work prospectively ie from the date of the amendment going forward. But sometimes, the amendment has a retrospective affect. In that situation, the current employees who earned benefits in the last, say, 12 years will be told that those benefits already earned are going to be increased. That increase relating to years that have already past are past service costs ie costs that relate to past services received by the employer from the employees
Better?
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