Positive Funded Status a Liability or Asset?

So do I have this right? A positive funded status means you have a liability? Meaning that a positive funded status means that the pension is underfunded? I am having difficulties finding a straight answer on this.

Funded status = Fair value of the plan assets − PV of the Defined benefit obligation.

If the funded status is positive (overfunded), you have an asset; if negative(underfunded), you have a liability.

This is what makes sense intuitively. But in Elan it says “it is very important for you to understand that the funded status represents the net liability” and it goes on to say that if the plan is underfunded it has a positive funded status and net pension liability. It also says that other textbooks calculate funded status as a net asset (like you posted), but that they are following the curriculum’s lead and putting it as a net liability. But then when I root through the curriculum they have the same formula that you just posted, where funded status is a net asset. Has CFAI gone back and corrected it? Or is Elan incorrect?

I agree with you Sparetime, the CFAI notes were confusing on this. Their formula is Funded Status = PV of PBO - Fair Value of Plan Assets. So this means that if obligations are more than the plan assets, it’s a net liability and we get a positive figure.

I’ve seen other 3rd party notes where it is defined as S2000’s formula and that is more intuitive…anyway, I’m sticking with CFAI notes for the exam. Just gotta be careful in using this in other questions which involves Total Periodic Pension cost on whether it is a liability or asset.

The formula I wrote comes from the CFA Institute text, 2015 edition, Level II, Volume 2, p. 179. Copied verbatim.

I do see in Wiley’s study guide that it has the funded status defined as the negative of what I have above. I’ll check on that.

I’m thinking they must have had it as a net liability, but then changed it recently or something. When I check on the curriculum on my phone and the ebook, they both have it now as a net asset. But obviously it must have been listed as a net liability at some point…

CFA Institute changed the reading it 2013 (I’m told) and had it as a net liability in 2013 and 2014, then changed it to a net asset in 2015 (apparently without announcing any changes to that reading). By the time Wiley discovered the change, it was too late to rewrite their material to incorporate it.

The upshot is that it really doesn’t matter whether you call it positive when it’s a net asset and negative when it’s a net liability, or vice-versa. (The positive/negative label isn’t important.) What is important is that you use your terminology consistently so that you don’t get confused.

So, make sure that you know when it’s a net asset (plan assets > PV Of obligation) and when it’s a liability (PV of obligation > plan assets) and continue from there.

Thanks for clearing this up!

The only thing I was worried about was something like “if a pension’s funded status increases, what does is most likely” appearing on the exam, and then not knowing if they meant an increase in the liability or the asset. Now I’ll know they mean it as a net asset. Thanks for figuring that out!

Thank you S2000 magician for clearing that up and Sparetime for bringing this up, coz I was actually going off the 2014 material and now looking at the 2015 text, it’s Funded Status = FV Plan Assets - PV PBO which makes it more intuitive.