Accumulated Benefit Obligation (ABO)

What Is Accumulated Benefit Obligation (ABO)?

Accumulated benefit obligation (ABO) is the estimated amount of a company's pension plan liability at a single point in time. ABO is estimated in light of the assumption that the pension plan is to be terminated right away; it considers no future salary increases. This varies from the projected benefit obligation (PBO), which accepts that the pension plan is continuous, and accordingly accounts for future salary increases.

Grasping Accumulated Benefit Obligation (ABO)

Toward the finish of each accounting period, the Financial Accounting Standards Board expects companies to file FASB Statement No. 87, which measures and unveils pension liabilities notwithstanding the financial position and performance of their pension plans. There are three methods for estimating this: accumulated benefit obligation (ABO), projected benefit obligation (PBO), and vested benefit obligation (VBO).

Accumulated benefit obligation is the present value of the amounts that a pension plan hopes to pay employees during retirement in view of accumulated work service and current salary levels (i.e., no future salary increases) at the hour of the pension liability measurement.

Changes in annual ABO are essentially a consequence of changes in service costs, interest costs, contributions by plan participants, actuarial gains or losses, benefits paid during the year, and foreign exchange gains or losses, if applicable.

ABO and PBO are comparable, however ABO doesn't accommodate future salary increases while PBO does. Subsequently, PBO is a more accurate measure of a company's pension liability to its employees, since it expects salary increases over the long run, consequently, an increase in liabilities that it must be prepared to payout.

While contrasting the ABO with the value of the plan's assets, the plan's assets can either be overfunded or underfunded. In the event that ABO is higher than the plan's assets, there is a shortfall and the pension plan is underfunded. In the event that the plan's assets surpass ABO, the pension plan is overfunded.

Accumulated Benefit Obligation (ABO) Calculation Factors

Underfunded plans are booked as a long-term liability on the balance sheet of a company. As ABO is a current value calculation, there are two major drivers that determine assuming a plan is underfunded or overfunded. The two assumptions are the discount rate utilized in the current value calculation and the expected long-term rate of return on the plan's assets.

On the off chance that there is a decline in the assumed discount rate, the estimated underfunded amount will increase (or an overfunded amount will diminish), all else equivalent. Then again, in the event that the assumed rate of return on plan assets is increased, an underfunded amount will fall (or an overfunded amount will rise), holding any remaining factors steady.

Real World Example

A financial statement note in Raytheon Company's 10-K for the fiscal year of 2016 subtleties ABO, PBO, and plan asset amounts. ABO for domestic pension plans was $22.1 billion, implying that the company had a liability to pay its employees a pension amount of $22.1 billion. The current value of the pension plan was $17.8 billion.

As the liability amount of $22.1 billion was higher than the plan's assets of $17.8 billion, the plan was underfunded by $4.3 billion. This amount was recorded as part of "Accumulated retired person benefits and other long-term liabilities" on the company's balance sheet.

Features

• The assumption for the accumulated benefit obligation (ABO) is that the pension plan will be terminated right away, intending that there will be not any more future salary increases.
• Companies are required to measure and report their pension liabilities and the performance of their pension plan by the Financial Accounting Standards Board's Statement No. 87.
• Underfunded or overfunded status can be impacted by the discount rate utilized as well as the expected rate of return on the plan's invested assets.
• Accumulated benefit obligation (ABO) is the surmised amount of a company's pension plan liability at a single point in time.
• On the off chance that the accumulated benefit obligation (ABO) is above the pension plan's assets, the plan is underfunded. On the off chance that the ABO is below the pension plan's assets, the plan is overfunded.
• Accumulated benefit obligation (ABO) is equivalent to the current value representing things to come amount that a pension plan hopes to pay an individual during their retirement.