Measuring the Defined Benefit Obligation
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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.
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