What is Prior Service Cost?

Prior service cost is the cost associated with additional benefits that have been granted via an amendment to a pension plan. This cost applies to employee services rendered in prior periods.

Example of Prior Service Cost

Owl Corporation has a defined benefit pension plan. In the current year, it increases the benefit that the plan participants will receive, which also expands the benefits associated with prior service years. This represents a $100,000 prior service cost, which the company initially recognizes in other comprehensive income, and gradually shifts into its net periodic pension cost over the remaining service period of the affected employees.