List and describe the five components of annual pension expense

What will be an ideal response?

Answer:
1. Service cost—Service cost is the increase in projected benefit obligation resulting from one additional year of service from employees. It is measured as the present value of the cost of providing pension benefits for one additional year of service using all employees and estimated future salary rates.
2. Prior service costs—Prior service costs represent service benefits provided to current employees on the initial adoption or amendment of an existing defined-benefit pension plan. Prior service costs increase the liability balance.
3. Interest on the projected benefit obligation—This is computed by multiplying an appropriate interest rate by the balance of the projected benefit obligation at the beginning of the year. An actuary determines the settlement rate, which is the interest rate used to compute the interest on the PBO.
4. Expected return on pension plan assets—This amount decreases the pension expense
5. Current year net gains and losses—There are two sources of current year net gains and losses: a) The difference between the expected return and the actual return on plan assets and b) Changes in actuarial assumptions related to the projected benefit obligation. In general, companies only amortize the accumulated amount of the net actuarial gain or loss if it exceeds the corridor. The corridor is defined as 10% of the larger of the beginning balance of the projected benefit obligation or the beginning balance of the plan assets at market related value.