Funded Status and Minimum Liability

These 2 items confuse me: 1. The funded status (difference between PBO and Fair Value of Plan Assets) must be reported on the balance sheet. 2. If ABO exceeds fair value, the difference must be reported on the balance sheet. My question: if a company already has to disclose the funded status, isn’t this more conservative than 2? Also, wouldn’t they be disclosing the same thing twice?

you are correct. the minimum liability wouldn’t come up under new standards.

oh, good question. I’m glad maratikus clarified this.

That is what I thought. Thanks for the clarification

Wait a second. From Schweser Book 2 page 201: “In order to partially compensate for this smoothing, both the old and new US GAAP standards require that if the ABO exceeds the FV of plan assets, at least that difference must show on the balance sheet as a liability.” But I can’t find anything in the CFAI curriculum to support this??? Is Schweser wrong? I always thought that it didn’t make sense reporting an additional Minimum Liability when the actual Funded Status is already accounted for on the balance sheet. Right now I am thinking that Schweser is flat out wrong. Any ideas? Maratikus?

I was confused by this too (by schweser).

there is a distinction that needs to be made here. minimum liability (difference between ABO and plan assets) is a pre-SFAS 158 balance sheet entry. the funded status (plan assets less PBO) is a post-SFAS 158 balance sheet entry.

Funded Status = Fair value - PBO Min. Pension Liabilty if and only if FV < ABO by the amount of shortfall.

So when Schweser says that the difference between the ABO and FV plan assets must be shown as a liability on the BS under the new standards, it is really irrelevant because the funded status already shows that liability. No further adjustment needed.

skumar: keep in mind minimum pension liability is only reported pre 158.

if schweser is telling you that then its wrong. but all that matters is what CFAI says. i looked it up: pg 137 (volume 2) US Standards for Years BEFORE 15 Dec 06 FASB requires that when the ABO exceeds the fair valoue of the plan assets, the sponosr disclose a minimum liability equal to that deficit. US Standards for Years AFTER 15 Dec 06 for pension plans, the funded status is measured as the difference between the fair value of plan assets and the PBO. For other post-retirement benefit plans, there is no PBO, so the accumulated post-retirement benefit obligation is compared with the fair value of the plan assets.

I think a firm will only use one of the above (PBO or ABO) to calculate its pension obligation for the year. What the SS tries to say is … if the company uses ABO to calculate its pension obligation, and arrives at a figure of say 10 and has a FV of 8; then net pension liab = 2. If originally, in the BS you have <2 in pension liability (say 1), then all u r needed to do is recognize this additional 1 liability. i think its this.

This doesn’t sound right to me.

They say that if ABO exceeds FV plan assets (under old and new standards), at LEAST that amount must show up on the BS as a liability. So under old standards the difference shows up as a liability (ABO - FV), and under the new standards an amount GREATER than that amount shows up as a liability (PBO - FV). I guess technically their statement quoted above is still correct.

So if I am understanding you McLeod then we will never have to make a ML adjustement under the new standards right?

If you have to put a minimum liability, do you have to make any adjustments to equity aswell?

I don’t think you would to because the additional liability (and then some) would already be reflected in the funded status. Correct me if I’m wrong.