Question

Jasper Company has a defined benefit pension plan. Effective at the beginning of the current year, the company retroactively amended its pension plan to increase the pension formula's salary percentage. Which of the following statements are correct? (Select all that apply.)
A. The increase in the PBO attributable to applying the more generous terms of the amendment to prior service years is the prior service cost
B. The prior service cost is the difference between the PBO at the end of the previous year that was calculated without regard to the amendment and the recalculated PBO based on the plan amendment
C. Prior service cost includes the increase in the PBO attributable to employee service performed during the current year
D. Since it was effective at the beginning of the year, the change in the pension formula's salary percentage will not impact the current year interest cost

Required Information
The PBO can change due to the accumulation of service cost from year to year, the accrual of interest as time passes, making plan amendments retroactive to prior years (prior service cost), and periodic adjustments when estimates change (gains and losses). The obligation is reduced as benefits actually are paid to retired employees.

Answer 1

Answer: A. The increase in the PBO attributable to applying the more generous terms of the amendment to prior service years is the prior service cost

B. The prior service cost is the difference between the PBO at the end of the previous year that was calculated without regard to the amendment and the recalculated PBO based on the plan amendment

Explanation:

Both options A and Be are correct because as the question says, the PBO can change due to the accumulation of service cost from year to year. This means that the increase in the PBO attributable to applying the more generous terms of the amendment to prior service years is the prior service cost.

This is also the reason why we can calculate the prior service cost by subtracting from the previous PBO that was not yet amended, the new PBO that is amended because the service cost is what the PBO increased by.