Do these gains or losses impact the benefits the employee will eventually receive?
Pension expense components include interest costs, service costs, related fees, gains and losses on the plan, and amortization from the prior service costs on the plan. The interest rate for pension expense is determined by using the projected benefit obligation that is outstanding for the current period. The amount of the projected benefit expense is calculated using the interest rate for the period to determine the total amount of interest. Prior service costs are amortized because the firm cannot receive credit for a future benefit unless it is amortized based on the credit in the future. The components of pension expense differ among the various types of contribution and benefit plans in terms of gains and losses. Most companies use an actuary approach, which allows management to use the expected rate of return on the plan and the total asset value from the pension assets, which is then calculated to determine the expected return. Although this isn't the only method used, it is by far the most common method used. Each factor is basically weighted separately to determine the final pension expense for the accounting period.