Measuring the Defined Benefit Obligation
Three measures of DB plan liabilities under U.S. GAAP are:
- Projected Benefits Obligation (PBO) – PBO is the basis for most pension accounting calculations. PBO represents the actuarial present value of vested and non-vested benefits earned by employees. PBO includes assumptions of future employee pay increases.
- Accumulated Benefits Obligation (ABO) – ABO is the same as PBO with one key exception; ABO is based on current salaries and no consideration is given to future salary increases. Thus, under a pay-related DB plan, ABO < PBO.
- Vested Benefits Obligation (VBO) – VBO represents only the present value of vested benefits, therefore any future pension obligations for employees not currently vested will be excluded from the VBO calculation. Under a pay-related DB plan, for companies with both vested and non-vested employees, VBO < ABO < PBO.
GAAP & Benefit Obligations
U.S. domiciled public companies do not report any of the three plan liabilities, but PBO will be used in calculating a plan’s funded status for financial reporting. If a plan is under-funded, then a balance sheet liability exists; if a plan is over-funded, then a balance sheet asset exists.
IFRS & Defined Benefit Obligation (DBO)
Under IFRS, only one measure of benefit obligation exists – the defined benefit obligation (DBO). The IFRS term DBO and GAAP term PBO will be used interchangeably in this tutorial.
- CFA Level 2: Financial Reporting Part 2 – Introduction
- Intercorporate Investments Accounting - Ownership Categories
- Minority Passive Investments – Accounting Classes
- Minority Active Investments and the Equity Method for Financial Reporting
- Joint Venture Investments
- Controlling Interest Investments: Accounting for Business Combinations
- Purchase Method of Accounting for Controlling Interest Investments or Acquisitions
- Pooling of Interests Method to Account for Controlling Interest Investments
- Purchase Method vs. Pooling of Interest Method
- Acquisition Method to Account for Controlling Interest Investments
- GAAP Purchase Method, IFRS Purchase Method, and GAAP Acquisition Method Accounting
- Variable Interest Entities (VIEs) and Special Purpose Entities (SPEs)
- Defined Benefits Plans vs. Defined Contribution Plans
- Measuring the Defined Benefit Obligation
- Pension Expense (both GAAP & IFRS) for the Income Statement
- Defined Benefit Plans & the Company Balance Sheet
- The Role of Actuarial Assumptions in DB Plan Accounting
- Economic Pension Expense
- Pensions and the Statement of Cash Flows
- Accounting for Stock (or Share) Based Compensation
- Financial Statement Consolidation of Multinational Operations
- Consolidation: Presentation Currency vs. Functional Currency vs. Local Currency
- Foreign Currency Translation
- Temporal Method for Translation of Foreign Statements
- Current Rate Method for Translation of Foreign Statements
- Consolidating Financial Statements: Determining the Functional Currency
- Translation Methods and Financial Statement Effects
- Accounting for Subsidiaries in Hyperinflationary Economies
- CFA Level 2: Financial Reporting 2 - Recommendations
- MBS Weighted Average Life