What is Accumulated Benefit Obligation (ABO)?
Accumulated Benefit Obligation (ABO) is a measurement of the liability of a company’s pension plan, assuming that the plan will terminate immediately.
The OECD Glossary of Statistical Terms defines ABO as:
“The actuarial present value of benefits, vested and non-vested, attributed to the pension formula to employee service rendered to a particular date, based on current salaries.”
Accumulated Benefit Obligation essentially calculates how much money the company would need to pay currently retired employees in pension benefits.
Additionally, it calculates the amount of benefits earned by current employees. Moreover, with current employees, it also takes into account their salaries and time working for the company.
Accumulated Benefit Obligation focuses on the present
Accumulated Benefit Obligation does not take future salary increases into account. In contrast, Projected Benefit Obligation (PBO) does include the effect of future rises in pay.
According to Arizona State University, liabilities in pension books come in two forms: accumulated benefit obligation and projected benefit obligation.
Accumulated benefit obligation is a measurement of pension liability taking into account the benefits for vested and non-vested employees at current salaries.
Projected benefit obligation, on the other hand, takes into account benefits for vested and non-vested employees, including any future increases in pay.
In the United States, the FASB Statement of Financial Accounting Standards No. 87 requires companies to measure and disclose pension obligations.
Additionally, US firms must calculate and report the financial condition and performance of their plans. They must do this by the end of each accounting period.
** The FASB (Financial Accounting Standards Board) is an American private, non-profit organization standard-setting body.
“The only difference between the company’s projected benefit obligation (PBO) and its accumulated benefit obligation (ABO) is the value used for the employee’s compensation.”
“While the calculation of the ABO uses the employee’s current compensation, the PBO uses the employee’s projected compensation at retirement.”