Accumulated benefit obligation definition
/What is an Accumulated Benefit Obligation?
An accumulated benefit obligation is the present value of an employee’s pension, based on the employee’s accumulated work to date. The value of future changes in a person’s compensation is not considered; instead, it is calculated based on current compensation levels. Since a person continuing to work will likely experience several increases in pay over the term of his employment, this means that the accumulated benefit obligation is lower than the pension obligation that will eventually be payable to an employee.
Significance of the Accumulated Benefit Obligation
The accumulated benefit obligation can be a significant liability of a business, and so is inspected by an investor or lender as part of the due diligence process when examining the obligations of an organization. If the obligation seems low, a potential acquirer could reduce its bid for a business, on the grounds that the target company has not recognized the full extent of its pension liability.
Accumulated Benefit Obligation vs. Projected Benefit Obligation
The accumulated benefit obligation is the present value of a pension liability based on the accumulated work to date, while the projected benefit obligation covers the expected future work to be conducted by employees. When combined, these two values constitute the total pension obligation of an employer. The key differences between the two are as follows:
Includes salary increases. The projected benefit obligation includes salary increases, while the accumulated benefit obligation does not.
Conservativeness. The projected benefit obligation is a more realistic and likely higher amount, while the accumulated benefit obligation is a more conservative and likely lower amount.
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FAQs
What Assumptions Affect the Accumulated Benefit Obligation Measurement?
The accumulated benefit obligation is primarily affected by the discount rate, which determines the present value of future pension payments. Other key assumptions include employee turnover, mortality rates, and expected retirement ages. Unlike the projected benefit obligation, the accumulated benefit obligation does not consider future salary growth assumptions.