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Hi,
In the Kaplan textbook, there is an illustration for past service cost charge:
Originally, the pension plan was to provide 2% of final salary for each year of service, but on 1 Jan 20X5, the entity increased the percentage to 2.5%, conditional that the employees must have worked for the entity for at least 5 years by the provision date.
At the date of improvement, the PV of the additional benefits for service from 1 Jan 20X1 to 1 Jan 20X5, is as follows:
Employees > =5 years’ service at 1.1.X5: 150K
Employees < 5 years’ service at 1.1.X5: 120K
(average lenth of service: two years)
The total service amount chargeable to P/L is 150+120=270K in the book.
What I don’t get is why use the full amount of 120K for those employees not meeting the vesting condition yet. I know we should use accrue method even if the vesting condition is not met yet, but why shouldn’t they provide 2/5 years of service to calculate the accrual amount, ie 2/5 * 120K?
Thank you.I seem to remember seeing that example and being puzzled. My best guess is that the 120 value already takes account of the short service period. Perhaps there are lots of staff with short service which explains why the number is so big!
Best I can do on that one.
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So do you mean 120K is already the result after we take into account of the 2 years average service length of these employees, ie the original amount would have been 120K *5/2 =300K?
Thanks.
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