Projected Benefit Obligation

Projected benefit obligation is the present value of the expected future payments to employees in accordance with the plan terms keeping in view the expected future increases in salaries, discount rate and a number of other factors.

Projected benefit obligation (PBO) is a terminology used by US GAAP while IFRS calls it present value of defined benefit obligation (PVDBO).

PBO is estimated by actuaries by applying complex statistical modelling.

Projected benefit obligation (PBO) at the start of a year is reconciled with the PBO at the end of the year as follows:

Opening projected benefit obligation (PBO)XXX
Service costXXX
Interest costXXX
Contributions made(XXX)
Actuarial gains(XXX)
Actuarial lossesXXX
Closing projected benefit obligationXXX

Example

OBP Ltd. had a PBO of $400 million as at 1 January 2011. Their actuaries estimated that the company's employees earned benefits worth a present value of $20 million as a result of the services they provided during the financial year ended 31 December 2011. The interest rate is 8% and the company contribution an amount of $30 million to the fund. The fresh actuarial estimate of PBO as at 31 December 2011 is of $415 million. Reconcile the opening PBO with closing PBO.

The opening projected benefit obligation is $400 million. The service cost represents PV of benefits earned during the current year and it equals $20 million. Interest expense equals product of opening PBO and interest rate and in this situation it equals $32 million. Since the closing PBO is $435 million, the actuarial gains should equal $7 million (=$415 million + $30 million − $400 million − $20 million − $32 million)

The closing PBO reconciles with opening PBO as follows:

USD in million
Opening projected benefit obligation (PBO)400
Service cost20
Interest cost32
Contributions made(30)
Actuarial gains(7)
Actuarial losses-
Closing projected benefit obligation415

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork