Measuring the Defined Benefit Obligation

Three measures of DB plan liabilities under U.S. GAAP are:

1. 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.
2. 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.
3. 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.