How to Calculate a Net Pension Obligation
In 2006, the Financial Accounting Standards Board (FASB), which sets accounting rules in the United States, released its Statement of Accounting Standards (SFAS) 158 to address pension reporting requirements. SFAS 158 requires companies to report pension assets and liabilities on their balance sheets. Prior to SFAS 158, companies only needed to report the funded status of their pensions as a note disclosure. The pension funded status now appears as either a balance sheet asset or liability. Pension assets only appear as non-current assets while pension liabilities can be either be current or non-current.
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Instructions
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Determine the fair market value of the plan assets. If a fair market value is unavailable, make an estimate of its worth. For example, a company determines the plan's fair value at $1 million.
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Determine the projected benefit obligation, which uses actuarial assumptions for how much in benefits the plan will pay to pensioners. For example, an actuarial estimate projects the benefit obligation to be $750,000 and expects benefit payments of $600,000 in the following year.
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Subtract the projected benefit obligation from the fair market value of plan assets. For example, $1,000,000 minus $750,000 equals $250,000.
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Determine if there is a pension asset of liability. If the fair market value exceeds the projected net benefit obligation, there is an asset. In this case, because the fair value of the assets exceeded the projected benefit obligation by $250,000, the company records this amount as an asset on its balance. Conversely, if the projected benefit obligation is greater than the plan's fair market value, the company records a liability. Liabilities can be current or non-current.
A current liability is the difference between the fair value of the assets and what the plan expects to pay next year. The company records the remaining balance as a non-current liability.
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