Can someone please simplify in a sentence or so the difference between PBO and pension expense, both in a mathemtical sense and in an intuitive sense? Thanks
PBO is a liability on the balance sheet… PBO is most frequently used (out of ABO/VBO/PBO) because it reflects future value of the obligation Pension Expense (net periodic benefit) is an expense on the Inocme statement
Under U.S. GAAP, you only show the funded status of the plan as an asset or liability. You won’t see PBO, AVO, VBO, etc., directly on the B/S. All details go to the footnotes. VBO is what’s due to employees who have served long enough. ABO is what’s due to all employees based on current prices. PBO is same as ABO, but it is not based on current salary, rather salary when employees qualify for the pension. I think that’s correct.
To add: PBO is changed every period by increase in service cost (due to employees working one more period) increase in interest cost (which is the interest on the beginning of period balance of the PBO) increases amortized prior service costs decrease by benefits paid (once you pay benefits these employees have truly retired and are out the system). pension expense: Service Cost + Interest Cost - Expected return on Plan Assets Expected return --> employer saves money in a fund somewhere - which is invested and supposed to earn returns. The employer (trust fund) expects to earn the Expected return on the assets. Those go towards reducing the pension expense.
there is also a difference between Current US GAAP and old US GAAP. (both of which we are responsible for)… What dreary has written above is current US GAAP (where the Funded Status is shown on the Balance sheet).
that was a great help…thanks all for your answers.
cpk123 Wrote: ------------------------------------------------------- > To add: > > PBO is changed every period by > increase in service cost (due to employees > working one more period) > increase in interest cost (which is the > interest on the beginning of period balance of the > PBO) > increases amortized prior service costs > decrease by benefits paid (once you pay > benefits these employees have truly retired and > are out the system). > > pension expense: > Service Cost + Interest Cost - Expected return > on Plan Assets > > Expected return --> employer saves money in a fund > somewhere - which is invested and supposed to earn > returns. The employer (trust fund) expects to earn > the Expected return on the assets. Those go > towards reducing the pension expense. this is wrong. (my background is in accounting) let t-1 = begining of period let t = end of period PBO t-1 service cost +interest cost + PSC (prior service cost) + PBO loss - PBO gain - retiree payouts = PBOt or simply PBO plan assets t-1 + contributions to pension plan trustee + actual ROA - retiree payouts = plan assets service cost +interest cost + amortized portion of PSC + amort portion of net loss (over 10% corridor, which is not covered in CFA material) - amort net gain - E(ROA) = pension expense
^ sure, this is more accurate, but here: PBO t-1 service cost +interest cost + PSC (prior service cost) + PBO loss - PBO gain - retiree payouts = PBOt or simply PBO PSC is only that arising from current amendements, so if they show you two PSC’s (current and last year’s for example), you only include the current one in calculating the DBO/PBO. Another thing, yes, the 10% threshold is covered, at least I’ve seen it in Stalla. Is it not in CFAI studies?