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.
In addition, for each year presented and each benefit plan, companies must show reconciliations of the beginning and ending balances of the plan assets and the projected benefit obligation
, as well as detail of the calculation of the benefit expenses.
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.
The Projected Benefit Obligation
(PBO) is the actuarial present value of all pension benefits attributed to prior employee service calculated using the plan's benefit formula.
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).
The accumulated benefit obligation differs from the projected benefit obligation
in that it includes no assumption about future compensation levels.
The amount by which the pension plan is underfunded (i.e., projected benefit obligation
exceeding the market value of the plan assets) must be recognized in full on the balance sheet of the sponsoring firm.
Second, a reconciliation of the funded status of the plan (i.e., the difference between the projected benefit obligation
and the fair value of the plan assets) with the prepaid asset or accrued liability reported in the balance sheet is no longer required.
Franciscan Alliance's defined benefit pension plan was 96% funded on an accumulated benefit obligation (ABO) basis and 89% funded on a projected benefit obligation
(PBO) basis at Sept.
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.
This unfunded pension obligation would be calculated based on the projected benefit obligation
(in the case of pensions) and the accumulated benefit obligation (in the case of other postretirement benefits).
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