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Lesson details
- Estimated study time
- 135 min
Learning objectives (4)
Cedar Trail has $16.15 million of plan assets and a $20.0 million PBO. The plan is underfunded by $3.85 million. That statement does not say how much the company must contribute, whether the trust can pay next month's benefits, or whether the sponsor is solvent.
Compute the financial-statement measure
funded status = fair value of plan assets - PBO
= $16,150,000 - $20,000,000
= ($3,850,000)
A negative funded status is a pension liability. A positive funded status is a pension asset, subject to current presentation, classification, and aggregation guidance.
Do not add unrecognized prior service cost or net loss to the $3.85 million. Those items are represented in AOCI and change future cost through the applicable recognition path. Adding them again creates an obsolete “reconciliation to prepaid/accrued pension” model and double counts the difference.
Keep six similarly named ideas apart
| Question | Measure | Owner |
|---|---|---|
| What benefits are attributed to service? | PBO | Actuary and accounting |
| What restricted resources are in the trust? | Fair value of plan assets | Trustee, custodian, valuation |
| What does the sponsor recognize? | Funded-status asset or liability | Accounting |
| What cash did the sponsor transfer? | Contribution | Treasury and trustee |
| What cost belongs in earnings? | Net periodic benefit cost | Accounting |
| Is statutory funding compliant? | Legal and regulatory funding measure | Legal, actuary, plan administration |
A $1.2 million contribution increases plan assets and reduces sponsor cash. It does not prove the contribution was legally required, sufficient, deductible, or equal to expense.
Reconcile the change in funded status
Opening funded status was:
$15,000,000 plan assets - $18,000,000 PBO = ($3,000,000)
Ending funded status is ($3,850,000), so the recognized liability increases by $850,000. The change can also be recovered from the two rollforwards:
| Change driver | Improves / (worsens) funded status |
|---|---|
| Service cost | ($1,200,000) |
| Interest cost | (900,000) |
| Prior service cost | (600,000) |
| Obligation actuarial loss | (400,000) |
| Actual return | 1,050,000 |
| Employer contribution | 1,200,000 |
| Benefit payments, net effect | — |
| Net change | ($850,000) |
Benefits paid reduce PBO and plan assets equally, so they do not change funded status in this simplified case. That cancellation does not permit omitting them from either rollforward.
Read the funded status without overclaiming
Financial-statement funded status is a point-in-time accounting measure. It is not:
- the plan's termination liability;
- a statutory minimum or maximum contribution;
- a PBGC funding result;
- unrestricted cash available to the employer;
- proof that benefit payments can be made on every future date;
- a probability of default;
- a measure of sponsor enterprise solvency; or
- investment advice.
A plan can be overfunded on the accounting measure and still face liquidity, asset-liability, legal, or concentration risks. An underfunded plan can have substantial liquid assets and a viable contribution program. Analysis needs the benefit-payment schedule, asset allocation, assumptions, sponsor cash capacity, legal funding information, and plan terms.
For example, $22 million of plan assets against a $20 million PBO produces a $2 million accounting asset. If $14 million of those assets are illiquid while the trustee expects $6 million of near-term lump-sum payments, the positive funded status has not answered the liquidity question. Conversely, Cedar Trail's $(3.85) million accounting liability does not show that its $16.15 million trust lacks liquid assets or that an approved contribution program will fail. The additional evidence, not the funded-status sign, resolves those questions.
Cross-check ABO information
If ABO exceeds plan assets, current disclosure can require additional information. Do not use that comparison to replace the PBO funded-status liability. Preserve both measures and label why each is shown.
The funded-status bridge is released only after PBO and plan assets use the same plan and measurement date, benefits match, special events are reflected, and the resulting asset or liability ties to the statement and note.