Question

What is meant by “prior service cost”? When is prior service cost recognized as pension expense?

Short answer

A multi-employer pension plan is the type of pension plan offered by the organization where multiple employers of the company contribute towards an employee's pension plan.

Step-by-step solution

Prior service cost

Prior service costs or PSC are incurred by an organization when a certain sum of money is paid to the employees beforehand to the defined benefit plan initiation.

Prior service cost recognized

Prior service costs are not recognized during the number of years of service of an employee in the organization since employers of the company grant these pension benefits after the service tenure of the employee is over, i.e., after their retirement, which will be in the future. Therefore, the amount of unrecognized prior service cost will be amortized for the number of years left for employee retirement.