The accumulated benefit obligation, or ABO, is a measure of an employer’s defined benefit pension obligation: the actuarial present value of benefits, whether vested or nonvested, attributed by the pension benefit formula to employee service rendered before a specified date, and based on employee service and compensation, if applicable, prior to that date. It differs from the projected benefit obligation in that it includes no assumption about future compensation levels, and for plans with flat-benefit or non-pay-related pension benefit formulas the accumulated benefit obligation and the projected benefit obligation are the same (FASB Statement No. 87, paragraphs 11 and 264).
Actuarial present value is a defined term inside that sentence, and it is doing most of the work. It is the value, as of a specified date, of an amount or series of amounts payable or receivable thereafter, with each amount adjusted to reflect the time value of money through discounts for interest and the probability of payment through decrements for events such as death, disability, withdrawal or retirement (FASB Statement No. 87, paragraph 264). The ABO is therefore not a sum of the benefit payments a plan expects to make. It is those payments discounted and weighted for the chance they are ever made.
How the ABO Differs From the Projected Benefit Obligation
One assumption separates the two measures. The projected benefit obligation, or PBO, is the actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date, measured using assumptions as to future compensation levels if the pension benefit formula is based on those future compensation levels, which is the case in pay-related, final-pay, final-average-pay and career-average-pay plans (FASB Statement No. 87, paragraph 264).
Set the two definitions beside each other and the only moving part is compensation. Both cover service already rendered, and both use the same population and the same discount rate. Where the benefit formula is pay related, the ABO stops at pay levels reached so far and the PBO carries the actuary’s assumption about pay to come, so the ABO is the smaller number. Where the formula is flat or otherwise not pay related, there is nothing to project and the two are equal.
A third, narrower measure sits below both. The vested benefit obligation is the actuarial present value of vested benefits (FASB Statement No. 87, paragraph 264), so it leaves out benefits an employee has earned but not yet made nonforfeitable, which is the line vesting draws. The ABO includes both the vested and the nonvested side of that line, and still no future pay.
Say a pay-related plan credits a fixed percentage of an employee’s pay level for each year of service, and the actuary assumes pay will keep rising until retirement. On stated inputs the two attributed benefits fall out like this.
Benefit rate per year of service 1.5%
Completed years of service 10
Current pay level $80,000
Assumed pay level at retirement $120,000
Annual benefit on current pay 10 x 1.5% x 80,000 12,000
Annual benefit on assumed pay 10 x 1.5% x 120,000 18,000The first line is what the ABO attributes to service already rendered, the second is what the PBO attributes to the same service, and each is then discounted and weighted for probability of payment. The gap between the two lines is the compensation assumption, and nothing else.
Where a CPA Firm Meets the Number
Not on the face of the balance sheet. An employer recognizes the funded status of a benefit plan, measured as the difference between plan assets at fair value and the benefit obligation, and for a pension plan the benefit obligation is the projected benefit obligation (FASB Statement No. 158). An unfunded ABO used to drive an additional minimum liability under FASB Statement No. 87, paragraph 36, and the Board noted that the recognition requirements of Statement No. 158 eliminate any need to recognize a minimum pension liability (FASB Statement No. 158, paragraph B36).
The ABO lives on in the disclosures. Where aggregate disclosures are presented, an employer discloses, as of the date of each statement of financial position presented, the projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets, and the accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets (ASC 715-20-50-3, as amended by FASB Accounting Standards Update 2018-14).
That disclosure came close to being withdrawn. The proposed Update would have removed the disclosure of the amount of the ABO for defined benefit pension plans, on the basis that the ABO, as an alternative measure, is not considered clearly useful in assessing prospects for cash flows. Financial statement users said in outreach that it is clearly useful in their analyses, and the Concepts Statement supports it on the basis that it gives a relevant understanding of the uncertainties driven by future compensation increases inherent in the PBO. Considering that conceptual basis and the feedback received, the Board decided to retain the disclosure, along with the requirement about plans with ABOs in excess of plan assets (FASB Accounting Standards Update 2018-14, paragraphs BC32, BC34, BC35, BC36 and BC37). Respondents also made the practical case, that the difference between the ABO and the PBO provides a quantitative measure of the uncertainty of the benefit obligation and lets a reader assess the effect of the compensation increase rate assumption on the PBO (FASB Accounting Standards Update 2018-14, paragraph BC33).
The vocabulary changes on the plan side. The annual financial statements of a defined benefit pension plan report information regarding the actuarial present value of accumulated plan benefits, which are those future benefit payments attributable under the plan’s provisions to employees’ service rendered to the benefit information date (FASB Statement No. 35, paragraphs 6 and 16). That is the plan’s own measure, required of the plan by its own standard, and it is what an employee benefit plan audit reports on. The ABO belongs to the employer’s financial statements instead, so a number lifted from one engagement into the other is the wrong measure.
Common Questions
In two moves. Pension benefits are ordinarily attributed to periods of employee service based on the plan’s benefit formula, to the extent that the formula states or implies an attribution, and the service cost component, the projected benefit obligation and the accumulated benefit obligation are then built on that attribution and on actuarial assumptions that reflect the time value of money through the discount rate and the probability of payment through assumptions as to mortality, turnover and early retirement (FASB Statement No. 87, paragraphs 39 and 40).
The discount rate is shared. Assumed discount rates reflect the rates at which the pension benefits could be effectively settled, and they are used in measuring the projected, accumulated and vested benefit obligations and the service and interest cost components of net periodic pension cost (FASB Statement No. 87, paragraph 44). A change in the discount rate therefore moves all three obligations, while a change in the assumed rate of compensation increase moves the projected benefit obligation and leaves the accumulated benefit obligation where it was.
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