Business Definition for: accumulated benefit obligation
accumulated benefit obligation
actuarial present value of benefits. Whether vested or nonvested, they are attributed by the pension benefit formula to employee services rendered before a specified date and based on employee service and compensation up to that
date using existing salary levels.
See also
projected benefit obligation
,
pension plan
,
minimum pension liability
Related Terms:
actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service performed before that date. It is measured using assumptions as to future compensation levels if the pension benefit formula is based on those future salary levels (e.g., pay-related, finalpay).
contractual arrangement in which the employer provides benefits to employees upon retirement. Many plans include disability and death benefits. A pension plan involves recognizing the employer's cost and the funding of pension benefits. Pension expense is tax-deductible to the employer. The employee is taxed when the pension annuity is received from employer contributions or originally not-taxed employee contributions. The two most common types of plans are defined contribution pension plan and defined benefit pension plan. Pension plan provisions vary from company to company. For example, the pension plan may be contributory or noncontributory, meaning the employee may or may not also make payments to the pension plan.
condition that is recognized when the accumulated benefit obligation is greater than the fair value of plan assets. However, no recognition is given in the opposite case. When an accrued pension liability exists, only an additional liability for the difference between the minimum liability and the accrued pension liability can be recorded. When an additional liability is recorded, it is offset by recognizing an intangible asset not exceeding the amount of unamortized prior service cost. If it does exceed that amount, the excess is shown as a reduction of stockholders' equity in an account called net loss not recognized as pension expense. Assume an accumulated benefit obligation of $500,000, and a fair value of pension plan assets of $400,000, leaving a minimum pension liability of $100,000. If we assume that the accrued pension liability is $40,000, then the additional pension liability is $60,000. The unamortized prior service cost is assumed to be $50,000. The journal entry to record the additional liability is:
| Intangible Asset - Pension Plan |
50,000 |
| Minimum Pension Liability Adjustment |
10,000 |
| Additional Pension Liability |
60,000 |
Referring Terms:
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