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Penny Pincher Co defined benefit pension plan: Calculate funded status, obligation

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Penny Pincher Company has a defined benefit pension plan for its employees. The following pension data are available at year end (in millions):

Accumulated benefit obligation $142
Projected benefit obligation 205
Fair value of plan assets 175

There is no balance in prepaid/accrued pension costs.

Required:

a. Calculate the funded status of the plan (see definition under ASC (was old SFAS 158 for funded status). Is the plan overfunded or underfunded?

b. If the projected benefit obligation provides the appropriate measure of the company's obligation for pension benefits and the assets in the fund are viewed as satisfying all or part of that obligation, what is Penny Pincher's liability, if any, for the pension plan at year-end? Briefly explain, citing the conceptual framework's definition of liabilities in your explanation.

c. What amount will Penny Pincher have to report in its balance sheet? Is it an asset or liability?

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Solution Summary

Your tutorial is 309 words and explains underfunding, how to compute it, how to report it, how to classify it and whether it qualifies as a liability based on the conceptual framework.

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a. Calculate the funded status of the plan (see definition under ASC (was old SFAS 158 for funded status). Is the plan overfunded or underfunded?

The overfunded or underfunded status is measures as the difference between the projected benefit obligation and the fair value of the assets at the period end date.

The accumulated benefit obligation does not include the present value of the future benefits for non-vested employees. FASB requires that the funding status be determined using the projected benefit obligation that includes the non-vested benefits.

Fair value of assets.........................$175
Projected benefit obligation.........$205 ...

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Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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