We conduct simulations on the value of the project to the claimants of the firm while varying the amount of financial leverage, the size of the projected benefit obligation
, and the asset allocation of the pension fund.
For these failing firms, and for those the market thinks might be approaching failure, the projected benefit obligation
becomes much less relevant than the accumulated benefit obligation, because the projection of future salary increases is not relevant.
These represent changes in the value of either the projected benefit obligation
or plan assets resulting from 1) differences between actuarial assumptions and actual experience, or 2) a change in actuarial assumptions (e.g., retirement age, mortality, employee turnover, discount rate).
Under current accounting in the United States for defined benefit plans (formerly SFAS 158, now Accounting Standard Codification [ASC] Topic 715, Compensation--Retirement Benefits), companies with defined benefit pension plans must recognize the difference between the plan's projected benefit obligation
and its fair value of plan assets as either an asset or a liability.
For our company above, here is how the FAS 88 impact might work: Before Settlement Impact of Settlement Projected Benefit Obligation
$ (100,000,000) $ 40,000,000 Assets 120,000,000 (42,000,000) Funded Difference 20,000,000 (2,000,000) Transition Obligation 5,000,000 0 Prior Service Cost 0 0 Unrecognized Gain (35,000,000) 15,588,000 (Accrued)/ Prepaid Pension Expense $ (10,000,000) $13,588,000 After Settlement Projected Benefit Obligation
$ (60,000,000) Assets 78,000,000 Funded Difference 18,000,000 Transition Obligation 5,000,000 Prior Service Cost 0 Unrecognized Gain (19,412,000) (Accrued)/ Prepaid Pension Expense $ 3,588,000