How are pension plan amendments and the resulting past service cost recognized under IFRS vs. US GAAP?
My CFA Level II materials explain that when a company amends its pension plan (e.g., increasing the benefit formula), it creates 'past service cost.' But the treatment seems different under IFRS and US GAAP. Can someone explain both approaches?
When a company amends its defined benefit pension plan to increase (or decrease) benefits, the change in the PBO attributable to employee service in prior periods is called past service cost (PSC). The accounting treatment diverges significantly between IFRS and US GAAP.
IFRS (IAS 19 Revised):
Past service cost is recognized immediately in profit or loss in the period of the plan amendment. There is no deferral or amortization.
Rationale: IAS 19 (revised 2011) simplified pension accounting by eliminating the option to defer PSC.
US GAAP (ASC 715):
Past service cost is recognized in Other Comprehensive Income (OCI) at the date of the amendment, then amortized from AOCI to pension expense over the remaining service period of employees expected to benefit from the amendment.
Worked Example — Ashcroft Manufacturing:
Ashcroft amends its pension plan on January 1, 2026, to increase the benefit multiplier from 1.5% to 1.8% of final salary per year of service. This retroactively increases benefits for all years of past service.
| Data | Amount |
|---|---|
| Increase in PBO (past service cost) | $6,400,000 |
| Average remaining service life of active employees | 8 years |
Under IFRS:
Full $6,400,000 recognized in P&L in 2026:
| Account | Debit | Credit |
|---|---|---|
| Past Service Cost (Pension Expense) | $6,400,000 | |
| PBO | $6,400,000 |
Under US GAAP:
PSC goes to OCI initially, then amortized:
Year of amendment (2026):
| Account | Debit | Credit |
|---|---|---|
| OCI — Prior Service Cost | $6,400,000 | |
| PBO | $6,400,000 |
Annual amortization (2026-2033):
$6,400,000 / 8 years = $800,000/year
| Account | Debit | Credit |
|---|---|---|
| Pension Expense (P&L) | $800,000 | |
| OCI — Prior Service Cost | $800,000 |
Comparison of Income Statement Impact:
| Year | IFRS P&L Impact | US GAAP P&L Impact |
|---|---|---|
| 2026 | ($6,400,000) | ($800,000) |
| 2027 | $0 | ($800,000) |
| 2028 | $0 | ($800,000) |
| ... | $0 | ($800,000) |
| Total over 8 years | ($6,400,000) | ($6,400,000) |
Total impact is the same — only the timing differs.
Negative Past Service Cost (Plan Reduction):
If the amendment reduces benefits, the PSC is negative:
- IFRS: Immediate gain in P&L
- US GAAP: Credit to OCI, amortized as a reduction of pension expense
Key Exam Points:
- IFRS — PSC immediately in P&L. US GAAP — PSC in OCI, amortized over remaining service life.
- Both positive (benefit increase) and negative (benefit decrease) PSC follow the same framework.
- If a plan amendment triggers a curtailment, the curtailment rules may override the PSC treatment.
- For CFA Level II, know how to calculate the difference in reported pension expense between IFRS and US GAAP for the same amendment.
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