Employee Benefit Plan Accounting

Obligations

Projected benefit obligation (PBO) = future salaries (used for funded status). Accumulated benefit obligation (ABO) = current salaries.

Funded status

Fair value of plan assets − PBO. Overfunded → noncurrent asset; underfunded → liability.

Net periodic pension cost

1. + Service cost (only item in operating income)
2. + Interest cost (beginning PBO × discount rate)
3. − Expected return on assets
4. + Amortization of prior service cost
5. ± Amortization of net loss or gain above the 10% corridor ÷ average remaining service

Other comprehensive income (OCI)

New prior service cost · actuarial gains and losses · actual vs expected return differences → recycled through amortization.

Roll-forwards

• PBO: + service + interest + amendments ± actuarial − benefits paid.
• Assets: + actual return + contributions − benefits paid.

Other postretirement benefits

Same model; accumulated postretirement benefit obligation (APBO); usually unfunded.

Exam traps

• Prior service cost from a plan amendment goes to OCI and is amortized — it isn't expensed immediately.
• Employer contributions don't change pension cost directly; they increase plan assets.
• Benefits paid reduce both the PBO and plan assets, so they don't change the funded status.