Prior Service Costs Financial Glossary

What is it? Costs that arise from amendments to defined benefit pension plans that retroactively increase benefits. In rare cases, retroactive amendments that decrease benefits can create negative prior service costs. Under FAS 87 rules, these costs are not added to the minimum pension liability reported on the balance sheets for sponsors of underfunded defined benefit pension plans. Instead, the costs are amortized over the projected remaining service lives for the employees expected to receive benefits. The amortization increases the reported benefit expense of the sponsoring firm. The unamortized portion of this off-balance sheet liability is disclosed as unrecognized prior service costs in a footnote to the financial statements.

Finance Term Definition Added By: Nicholas

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