Pension Accounting Under US GAAP: Defined Benefit Plans
By SimplyCPA · 11 October 2026
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- Defined contribution vs defined benefit: A DC plan's expense is simply the required contribution. A DB plan promises a benefit, so the employer bears the investment and actuarial risk.
- Funded status: Projected benefit obligation (PBO) − fair value of plan assets. Underfunded means a liability; overfunded means an asset.
- Net periodic pension cost: Service cost + interest cost − expected return on plan assets ± amortisation of prior service cost and of net gain or loss.
- OCI: Actuarial gains and losses and prior service cost go to OCI first, then are amortised into pension cost (gains and losses beyond a 10% corridor).
- Presentation: Service cost sits with other compensation costs in operating income; the other components are presented outside operating income.
Key measures
- Projected benefit obligation (PBO) — the actuarial present value of benefits earned to date, using expected future salary levels.
- Accumulated benefit obligation (ABO) — the same but using current salary levels.
- Vested benefit obligation (VBO) — the portion employees keep even if they leave now.
- Plan assets — assets held in a trust to pay benefits, measured at fair value.
The balance sheet shows the funded status: PBO − fair value of plan assets. Under ASC 715, an underfunded plan is a liability and an overfunded plan an asset.
Net periodic pension cost: the five components
| Component | Effect | Calculation |
|---|---|---|
| Service cost | Increase | Actuarial PV of benefits earned by employees this year |
| Interest cost | Increase | Opening PBO × discount (settlement) rate |
| Expected return on plan assets | Decrease | Market-related value of plan assets × expected long-term rate of return |
| Amortisation of prior service cost | Usually increase | Cost of retroactive plan amendments, spread over the remaining service period of affected employees |
| Amortisation of net gain or loss | Increase or decrease | Only the excess over the corridor, spread over average remaining service |
Worked example
Opening PBO $1,000,000; plan assets $900,000; discount rate 5%; expected return 7%; service cost $80,000; amortisation of prior service cost $10,000; no gain or loss amortisation.
Net periodic pension cost = $80,000 + $50,000 (5% × $1,000,000) − $63,000 (7% × $900,000) + $10,000 = $77,000.
The corridor approach
Actuarial gains and losses (from changes in assumptions, or actual returns differing from expected returns) are first recognised in other comprehensive income. Amortisation into pension cost is required only if the opening accumulated net gain or loss exceeds 10% of the greater of the opening PBO or the market-related value of plan assets. The excess is amortised over the average remaining service period of active employees.
Opening net loss in AOCI is $180,000; PBO $1,500,000; plan assets $1,200,000; average remaining service 12 years.
Corridor = 10% × $1,500,000 = $150,000. Excess = $30,000. Amortisation = $30,000 ÷ 12 = $2,500 added to pension cost.
Presentation (ASU 2017-07)
- Service cost is presented with other employee compensation costs, within operating income.
- The other components (interest cost, expected return, amortisations) are presented outside operating income, separately.
- Only the service cost component is eligible for capitalisation (for example, in inventory).
Reconciling the PBO and plan assets
| PBO roll-forward | Plan assets roll-forward |
|---|---|
| Opening PBO + Service cost + Interest cost + Plan amendments ± Actuarial losses (gains) − Benefits paid = Closing PBO | Opening fair value + Actual return + Employer contributions − Benefits paid = Closing fair value |
Exam trap: Benefits paid reduce both the PBO and the plan assets by the same amount, so they don't change the funded status. Employer contributions increase plan assets only.
Pensions are tested mainly in the BAR Discipline.