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.
