Defined Benefit Plans & the Company Balance Sheet

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A Net Asset or a Net Liability Exists (unless DBO value = value of Plan Assets)

DBO End of Period

Recall that the defined benefit obligation represents the present value of company retirement compensation promises for vested and un-vested employees, with assumptions for future salary increases (GAAP term is projected benefit obligation).

For accounting purposes, the DBO is liability and should be analyzed as such, but GAAP and IFRS require companies to report net position of the plan’s funded status (which can also be positive and thus an asset for public financial reporting purposes).  The funded status is based on the difference between the fair value of plan assets and the DBO.

The ending value for the accounting period’s DBO is outlined below.

Plan Assets End of Period

Plan assets are investments made on behalf of the interests of the pension beneficiaries in order to provide funding of retirement benefits for current and future retirees.

The ending value for the accounting period’s plan assets is outlined below:

A Plan’s Funded Status – the net asset or net liability on the balance sheet

Funded Status = FV of Plan Assets - DBO

Net Balance Sheet Asset: FV Plan Assets > DBO

Net Balance Sheet Liability:   FV Plan Assets < DBO

When appropriate actuarial assumptions are applied, the funded status represents the net economic position of the pension plan.

Funded Status: IFRS & GAAP

Under both IFRS and GAAP, the net position of the pension is shown on a single side of the balance sheet (either an asset or liability).

It can be argued that separately reporting the plan assets as a standalone asset and the DBO as a standalone liability is more useful for analytical purposes.

There are technical differences between GAAP and IFRS reporting for a defined benefit plan’s funded status and other disclosures and these are attempted to be reconciled as part of the IASB-FASB convergence project.

01
CFA Level 2: Financial Reporting Part 2 – Introduction
02
Intercorporate Investments Accounting - Ownership Categories
03
Minority Passive Investments – Accounting Classes
04
Minority Active Investments and the Equity Method for Financial Reporting
05
Joint Venture Investments
06
Controlling Interest Investments: Accounting for Business Combinations
07
Purchase Method of Accounting for Controlling Interest Investments or Acquisitions
08
Pooling of Interests Method to Account for Controlling Interest Investments
09
Purchase Method vs. Pooling of Interest Method
10
Acquisition Method to Account for Controlling Interest Investments
11
GAAP Purchase Method, IFRS Purchase Method, and GAAP Acquisition Method Accounting
12
Variable Interest Entities (VIEs) and Special Purpose Entities (SPEs)
13
Defined Benefits Plans vs. Defined Contribution Plans
14
Measuring the Defined Benefit Obligation
15
Pension Expense (both GAAP & IFRS) for the Income Statement
16
Defined Benefit Plans & the Company Balance Sheet
17
The Role of Actuarial Assumptions in DB Plan Accounting
18
Economic Pension Expense
19
Pensions and the Statement of Cash Flows
20
Accounting for Stock (or Share) Based Compensation
21
Financial Statement Consolidation of Multinational Operations
22
Consolidation: Presentation Currency vs. Functional Currency vs. Local Currency
23
Foreign Currency Translation
24
Temporal Method for Translation of Foreign Statements
25
Current Rate Method for Translation of Foreign Statements
26
Consolidating Financial Statements: Determining the Functional Currency
27
Translation Methods and Financial Statement Effects
28
Accounting for Subsidiaries in Hyperinflationary Economies
29
CFA Level 2: Financial Reporting 2 - Recommendations
30
MBS Weighted Average Life