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Amortized prior service costs are one of the five components of pension expense. The other components are service cost, interest cost, expected return on plan assets, and amortized gains or losses.

An amortized prior service cost will increase pension expense. This type of service costs often arises when there are plan amendments. For instance, if a company wants to reward an employee by granting an additional three years of service this will increase the amount of the benefit, increasing the projected benefit obligation. This will be amortized using a straight-line method over the amount of service years the employee is expected to work.

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