Recognition of Service Cost in Defined Benefit Plans

Medium Employee Compensation Post-employment Benefits

ABC Corporation has a defined benefit pension plan for its employees. The plan promises to pay retirees a monthly benefit based on their years of service and highest average salary during their last five years of employment. At the end of the fiscal year, ABC Corporation must assess the pension liability and recognize any related expenses.

In managing its post-employment benefits, ABC must adhere to the relevant accounting standards that govern how these benefits should be recorded and disclosed in the financial statements. As part of its assessment, ABC’s management needs to determine how to recognize the service costs and interest costs associated with this post-employment plan for the fiscal year.

What is the correct treatment of the service cost related to this defined benefit plan in ABC Corporation's financial statements for the current year?

The service cost should be recognized as an expense in the period in which the employees provide the related service.

The service cost can be deferred and amortized over the employees' remaining service years.

The service cost is recorded as a liability and does not affect the income statement until payment is made.

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