Question

For calculating interest expense on pensions, why do you not use the current year service cost increase in PBO, and only use the beginning balance of PBO+any increase in PBO from prior service costs multiplied by the settlement rate?

Answer 1

Pension :- A regular payment is provided to any retired official , family members of Govt. officials if any uncertainity occurs to the employee to provide the support of family; like Widow, disabled person.

Employee Provident Fund interest is tax free. The employer and employee contribute some % each of the basic salary and dearness allowance to the pension fund every month.
Generally, A pension plan is a type of retirement plan where an employee adds money into a fund that includes contributions by the employer. Pension amount is calculated by evaluating the length of the employee's working years and the annual income they earned on the job leading up to retirement.

Employees who are participating in pension plan; With passes of each year are closer avail the benefits. Therefore, the company incurs a cost that is equal to the discount rate multiplied by the balance in the Projected Benefit Obligation at the start of the year. Employer pension contributions and wages are deductible business expenses under the corporate income tax. From a tax perspective, employers are indifferent between paying wages and contributing to pension plans.

PBO

The projected benefit obligation (PBO) is a pension concept in accounting. The PBO is the present value of an employee's pension. A projected benefit obligation (PBO) is an actuarial measurement of what a company will need at the present time to cover future pension liabilities.The PBO takes into account how long the employee will work and any increased future obligations to the employee's pension.

In pension accounting, funded status refers to the extent to which the plan's liabilities are covered by plan assets. It equals the net liability or net asset of the pension plan, which in turn equals the fair value of total plan assets minus the projected defined benefit obligation.