vested portion of past service cost

Can someone more clearly define what is included in the past service cost? maybe the source of my confusion on this is somewhere below: I was reading through my notes and found the following describing the Ammortization cost of past service cost (also called plan changes for some reason): When a company changes their DB policies, past service cost =DBOnew – DBOprevious . - Under GAAP, the total past service cost is a component of OCI for the statement of the amendment period. That value is then amortized as a pension expense over the remaining service lives of affected employees. - Under IFRS, the vested portion of the past service cost is recognized as a pension expense immediately, and the unvested portion is accumulated and amortized over remaining service life of those employees. The non vested portion is just disclosed in footnotes, and that is the key difference. - To summarize the above two bullets, GAAP puts the total past service cost in OCI to be amortized, and IFRS makes you expense the vested portion immediately, and the unvested portion goes in footnotes, but is still amortized to pension expense as the years go on. ‘vested’ means owed for service already performed, so one could conclude (wrongly, but still logically) that a past service cost should be 100% vested since it’s from past performance. Clearly this assumption is incorrect because IFRS wouldn’t bother making the distinction if there were no unvested part included in past service cost. Is this just a case of me getting confused by the term ‘past service cost’ when I should just be thinking of it as ‘net change in DBO from previous year’? I think it may be a case that the term is misleading with respect to its actual meaning. A DBO, I think, is the present value of

vested is with relation to employees affected by the plan. They have already been “vested” spent enough time in the company. So if there is a change in the DB Plan assumptions and it applies to employees who have already been vested - that needs to be paid immediately.

that makes sense… worded a little funny, but I get it. To break that down, I’m gonna make a terrible example. Consider a payroll for a year of $1,000,000 on which some DB will be owed. Of that payroll, 50% of it was paid to employees who are already vested, and the rest will be vested in future years (unless a bunch of them quit, but whatever). At the end of year, mngmt decides to change the plan resulting in a new DB figure of $500,000 vs old plan’s figure of $400,000. past service cost = 500 - 400 = $100K Under GAAP, the full $100K goes to OCI and gets amortized to pension expense over the expected service life of the employees currently in the plan (some portion of that past service cost amortization expense being added to the pension expense for the current period) Under IFRS, I split the $100K two ways: $50k gets recognized and expensed right away (put in pension expense). the remaining $50k gets put in footnotes (not OCI) but that figure will be amortized into future pension expenses over the expected service life of the employees currently in the plan. I think that should be about right

past service cost : I read this one carefully in Schweser . They mean any plan changes such as going from 2% of final pay to 3% of final pay at retirement . Under both GAAP and IFRS , the increases in PBO due to such one-shot changes that were not planned in advance are to be amortized over the remaining term of employment. Reading the posts above , you seem to imply that it affects vested or non-vested employees . I don’t think it affects them differently . All employees get the retirement hike , irrespective of vested or not , and the company amortizes the additional benefit for everyone.

it does not affect them differently, it is just timing. Under IFRS the vested employees get the money quicker. But in US GAAP it does not matter whether you are vested or not. you might not even get the money when you die. [joking]. additionally company has the option of showing extra expenses in the period of change - (not necessarily good) and thus reducing its earnings. In US GAAP - no matter what this goes into OCI and slowly gets amortized.