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CFA Level II Exam · Employee Compensation: Post-Employment and Share-Based

Pension Cost Recognition: IFRS vs US GAAP

Updated 7 October 2026

Total periodic pension cost = service cost + past service cost + net interest + remeasurement losses − gains, so it includes OCI items. Under IFRS, P&L expense is only service cost, past service cost and net interest; remeasurements go to OCI and are never recycled. Under US GAAP, P&L has the expected return and OCI items are amortized.

Understand Pension Cost Recognition: IFRS vs US GAAP

A defined benefit plan promises employees a pension. The employer must record the cost of that promise each year. The cost is not the cash paid into the plan. It is the economic cost of the benefits earned plus the financing cost of the obligation, adjusted for how the plan assets performed.

Both frameworks split the periodic cost into three groups. Service cost is the present value of benefits earned by employees this year (current service cost), plus past service cost when a plan amendment grants credit for earlier years. Net interest is the interest on the net pension liability (or asset). Remeasurements are actuarial gains and losses on the obligation, plus the gap between actual return on plan assets and the amount implied by the discount rate.

Under IFRS (IAS 19), current service cost, past service cost and net interest go to P&L. Net interest equals the discount rate × the net defined benefit liability (asset) at the start of the year. Remeasurements go to OCI and are never reclassified to P&L later, though they can be moved within equity. Because net interest uses the discount rate on the net position, the return on plan assets in P&L equals the discount rate × plan assets, not the expected return. Keep two measures apart: P&L expense is service + past service + net interest only, while total periodic cost also includes the OCI remeasurements.

Under US GAAP, current service cost goes to P&L. Interest cost on the obligation and the expected return on plan assets also go to P&L, so P&L gets the expected return, not the discount-rate return. Past service cost goes first to OCI and is then amortized into P&L over the remaining service period of employees. This amortization applies regardless of the corridor. Actuarial gains and losses, and the difference between actual and expected asset return, go to OCI.

The corridor applies to net actuarial gains and losses only. Under the corridor approach, the excess of the accumulated net balance over 10% of the greater of the obligation and plan assets is amortized into P&L, and the amortization is recycled from OCI. Other systematic methods, including immediate recognition in P&L, are also permitted if applied consistently.

For analysis, the key difference is volatility and smoothing. IFRS keeps P&L cleaner of asset-return noise, but a high assumed return cannot inflate income. US GAAP lets a higher expected return reduce reported pension cost, so analysts often adjust it.

Key formulas to remember

IFRS total periodic pension cost
Total cost = Current service cost + Past service cost + Net interest expense + Remeasurement losses − Remeasurement gains
Total cost includes OCI items. P&L expense is only the first three items. Remeasurements go to OCI and are not recycled. A remeasurement loss increases total cost. A remeasurement gain (for example, asset return above the discount rate × opening assets) decreases it.
IFRS net interest
Net interest = Discount rate × (Obligation − Plan assets) at start of year
Use the opening funded status. Positive means expense, negative means income.
IFRS remeasurement on plan assets
Asset remeasurement = Actual return − (Discount rate × Opening plan assets)
A positive amount is a gain in OCI and reduces total cost.
US GAAP P&L pension cost
P&L cost = Current service cost + Interest cost on obligation − Expected return on plan assets + Amortization of past service cost + Amortization of actuarial losses (gains) beyond corridor
Amortization is recycled from OCI into P&L.
US GAAP total periodic pension cost
Total cost = Current service cost + Interest cost − Actual return on plan assets + Past service cost and actuarial losses (less gains) arising in the period
Total cost uses the actual return on assets, not the expected return. Equivalently, Total cost = P&L cost + OCI items arising this year (new past service cost, actuarial losses, and actual-minus-expected asset return shortfall, less gains) − amortization recycled from OCI. Subtracting the amortization avoids double counting, because it is already in P&L.
Change in funded status
Ending funded status = Opening funded status − Total periodic pension cost + Employer contributions
Funded status = plan assets − obligation. Cost lowers it and contributions raise it. The net pension liability moves in the opposite direction.

How to solve Pension Cost Recognition: IFRS vs US GAAP questions

Use this order for any item-set question on pension cost. It works for both frameworks and for questions asking about P&L, OCI or total cost.

  1. 1Identify the framework from the vignette. IFRS is the default unless the question says US GAAP.
  2. 2Pull the opening obligation, opening plan assets, discount rate, expected return (if given), actual return, service cost, contributions and any amendment.
  3. 3Compute opening funded status = plan assets − obligation, and note whether it is a net liability or asset.
  4. 4Under IFRS, compute net interest = discount rate × opening net liability. Do not use the expected return.
  5. 5Under US GAAP, compute interest cost = discount rate × opening obligation and expected return = expected rate × opening plan assets.
  6. 6Allocate each item: P&L versus OCI, and for US GAAP include amortization from OCI into P&L.
  7. 7Compute remeasurement or gain/loss on assets as actual return minus the amount already in P&L.
  8. 8Check the answer asked for: P&L expense, OCI amount or total periodic cost. For total cost under US GAAP, use the actual return on assets (or add the OCI items and subtract the amortization already in P&L).

Quickest way: Sort-and-sum shortcut

When to use it: Use when the question gives numbers and asks for one figure such as P&L pension expense or OCI amount.

  1. Write three buckets: service, financing, remeasurement.
  2. Under IFRS, P&L = service + past service + (rate × opening net liability). Everything else is OCI.
  3. Under US GAAP, P&L = service + interest on obligation − expected return on assets + amortization.
  4. Total cost under US GAAP = service + interest − actual return on assets + past service cost and actuarial losses arising this year. Or use P&L items + OCI items arising this year − amortization recycled from OCI.
  5. Sanity check: a net liability gives net interest expense under IFRS.

Common mistakes in Pension Cost Recognition: IFRS vs US GAAP

  • Using the expected return on plan assets in IFRS net interest

    Students carry US GAAP habits into IFRS.

    Fix: Under IFRS the return on assets in P&L is the discount rate × opening assets. Only the excess or shortfall of actual return goes to OCI.

  • Putting IFRS remeasurements into P&L or recycling them later

    Students assume OCI items eventually reclassify, as with some other OCI items.

    Fix: IFRS remeasurements stay in OCI and are never reclassified to P&L.

  • Treating past service cost as immediate P&L under US GAAP

    That is the IFRS treatment.

    Fix: Under US GAAP it goes to OCI and is amortized over employees' remaining service period. Under IFRS it is expensed in P&L when the plan is amended.

  • Using closing balances for net interest

    Students grab the nearest number in the exhibit.

    Fix: Net interest uses the opening net liability or asset.

  • Confusing total periodic pension cost with cash contributions

    Both appear in the same exhibit.

    Fix: Cost is the economic expense. Contributions are cash paid and only change the funded status.

  • Applying corridor amortization to every actuarial loss

    Students forget the threshold.

    Fix: Under US GAAP, amortize only the part of the accumulated balance beyond the corridor.

Worked examples

Example 1

Vignette: A firm reports under IFRS. At the start of the year, the defined benefit obligation is 800 million and plan assets are 700 million. The discount rate is 6%. Current service cost is 50 million. Actual return on plan assets was 56 million. (a) What is net interest expense? (b) What is the pension cost in P&L? (c) What is the remeasurement on plan assets in OCI?

Show the solution
  1. Opening net liability = 800 − 700 = 100 million.
  2. (a) Net interest = 6% × 100 = 6 million expense.
  3. (b) P&L = service cost 50 + net interest 6 = 56 million. No past service cost is given.
  4. (c) Interest implied on assets = 6% × 700 = 42 million.
  5. Remeasurement = actual 56 − 42 = 14 million gain in OCI.

Answer: (a) 6 million; (b) 56 million; (c) 14 million gain in OCI, not reclassified to P&L.

Example 2

Vignette: A firm reports under US GAAP. Opening obligation is 500 million, opening plan assets are 450 million. Discount rate 8%, expected return on assets 10%, actual return 40 million. Current service cost is 30 million. Amortization of past service cost is 5 million. No actuarial amortization is required. (a) What is the P&L pension cost? (b) What is the asset gain or loss taken to OCI?

Show the solution
  1. Interest cost = 8% × 500 = 40 million.
  2. Expected return = 10% × 450 = 45 million.
  3. (a) P&L = service 30 + interest 40 − expected return 45 + amortization 5 = 30 million.
  4. (b) Actual return 40 − expected return 45 = −5 million, a loss.
  5. The 5 million loss goes to OCI and is amortized later only if it exceeds the corridor.

Answer: (a) 30 million P&L pension cost; (b) 5 million loss in OCI.

Exam tips

  • Read the first line of the vignette for the framework. Many wrong answers come from using the wrong one.
  • For IFRS, only one rate matters: the discount rate. Ignore any expected return in the exhibit.
  • Expect a 'which item goes to OCI' question. Remeasurements are OCI under both frameworks, but only US GAAP recycles via amortization.
  • Write the opening funded status first. It drives net interest and tells you whether it is expense or income.
  • When asked for total periodic cost, check whether OCI items are included before you add, and subtract any amortization already in P&L.

Pension Cost Recognition: IFRS vs US GAAP: frequently asked questions

What are the components of periodic pension cost?

They are service cost (current and past), net interest or interest cost, and remeasurements such as actuarial gains and losses and asset return differences. Where each goes depends on IFRS or US GAAP.

Are remeasurements in OCI recycled under IFRS?

No. IFRS remeasurements of the net defined benefit liability stay in OCI and are not reclassified to P&L. Under US GAAP, parts are amortized from OCI into P&L.

How is past service cost treated under US GAAP?

It is recognized in OCI when a plan amendment occurs and then amortized into P&L over the remaining service period of the affected employees. Under IFRS it is expensed immediately in P&L.

Why does US GAAP allow the expected return in P&L?

US GAAP smooths asset performance by recording the expected return in P&L and the difference from actual return in OCI. Analysts often adjust for aggressive expected-return assumptions.