How is past service cost handled differently under IFRS versus US GAAP?

Past service cost (also called prior service cost under US GAAP) arises when a company amends its pension plan — for example, by increasing the benefit formula — and the amendment grants benefits for services already rendered by employees.

IFRS (IAS 19R) — Immediate Recognition:

Under IFRS, past service cost is recognized entirely in P&L in the period of the plan amendment. There is no deferral or amortization.

US GAAP (ASC 715) — Amortization:

Under US GAAP, prior service cost is initially recognized in OCI and then amortized to pension expense over the average remaining service period of the employees expected to receive the benefits.

Worked Example:

On January 1, 2026, Pemberton Manufacturing amends its pension plan, increasing the benefit multiplier. The amendment increases the PBO by $3,000,000 (past service cost). The average remaining service period of affected employees is 12 years.

IFRS treatment:

• 2026 P&L: $3,000,000 pension expense (full amount)
• 2027 onward: No further past service cost impact

US GAAP treatment:

• 2026 OCI: $3,000,000 recognized
• Annual amortization to P&L: $3,000,000 / 12 = $250,000 per year
• 2026 P&L: $250,000
• 2027 P&L: $250,000
• ... continuing for 12 years

Impact comparison:

Negative past service cost (plan curtailment):

If the plan is amended to reduce benefits, the treatment follows the same logic:

• IFRS: Gain recognized immediately in P&L
• US GAAP: Negative prior service cost in OCI, amortized as a reduction to pension expense

Analytical implications:

When comparing companies cross-border:

1. An IFRS reporter that amends its pension plan will show a large one-time pension expense hit
2. A GAAP reporter with the same amendment will show a smooth, smaller annual increase
3. Analysts should adjust for this when computing core or normalized earnings

Exam tip: This IFRS vs. GAAP difference is a classic CFA Level II item set question. You may be given a plan amendment amount and asked to compute pension expense under each standard. Remember: IFRS = immediate P&L, GAAP = OCI first, then amortize to P&L.

Explore our CFA Level II employee compensation module for more pension scenarios.