CFA Level II Exam · Employee Compensation: Post-Employment and Share-Based

Pension Obligations and Plan Assets on the Balance Sheet

Updated 7 October 2026 · Fact-checked

A defined benefit plan's balance sheet figure is its funded status: fair value of plan assets minus the projected benefit obligation (PBO). A negative result is a net pension liability; a positive result is a net asset. Solve questions by rolling the PBO and plan assets forward, then subtracting.

Understand Pension Obligations and Plan Assets on the Balance Sheet

A defined benefit (DB) plan promises employees a benefit in retirement. The employer carries the risk. So the employer must show two things: what it owes and what it has set aside to pay.

What it owes is the projected benefit obligation (PBO). It is the present value of benefits earned to date, using expected future salary increases. The accumulated benefit obligation (ABO) is a US GAAP measure. It is the same idea but uses current salary levels with no future raises, so ABO is never above PBO for a pay-based plan. Under US GAAP the balance sheet uses the PBO. IFRS has no ABO. It has only the defined benefit obligation, which is calculated on a projected basis like the PBO. So the ABO versus PBO comparison applies to US GAAP only.

What it has set aside is the fair value of plan assets. These are held in a separate fund, often a trust, and are not available to the employer's creditors. Assets and obligations are not shown gross. Only the net amount appears.

Funded status = fair value of plan assets − PBO. If it is negative, the plan is underfunded and the company reports a net pension liability. If it is positive, the plan is overfunded and the company reports a net pension asset. Under IFRS, an asset is limited by the asset ceiling: the present value of economic benefits available as refunds or lower future contributions. US GAAP has no ceiling.

The balance sheet figure changes each year. The PBO grows with service cost, interest cost and actuarial losses, and falls with benefits paid. Plan assets grow with actual return and employer contributions, and fall with benefits paid. Learning these two roll forwards is the core skill for exam questions.

Key formulas to remember

Funded status: Funded status = Fair value of plan assets − PBO; Negative = net pension liability. Positive = net pension asset (subject to the asset ceiling under IFRS).
PBO roll forward: Ending PBO = Beginning PBO + Current service cost + Interest cost + Past service cost + Actuarial losses (− gains) − Benefits paid; Interest cost = Beginning PBO × discount rate. Include past service cost only if the plan was amended in the period.
Plan assets roll forward: Ending plan assets = Beginning plan assets + Actual return + Employer contributions − Benefits paid; Actual return is the return actually earned on the plan assets (in the exhibit, or expected return plus the difference between actual and expected return). Employee contributions, if any, are also added.
Net interest under IFRS: Net interest = Discount rate × (Beginning PBO − Beginning plan assets); IFRS applies the discount rate to the net pension liability (asset); the P&L includes this net interest, and the difference between actual return and the amount of interest on assets goes to OCI as a remeasurement.
Balance sheet amount: Net pension liability (asset) = PBO − Plan assets; Same number as funded status, with the sign reversed. Check the sign before answering.
ABO vs PBO: ABO ≤ PBO when future pay increases are expected; US GAAP only. ABO uses current pay. PBO uses projected pay.

How to solve Pension Obligations and Plan Assets on the Balance Sheet questions

Use this method on any question about pension balance sheet amounts. Read the vignette exhibit carefully to see which items are given.

1Identify the framework (IFRS or US GAAP) and whether the question asks for the PBO, plan assets, funded status or the balance sheet asset or liability.
2Find the beginning balances for the PBO and plan assets in the exhibit.
3Roll the PBO forward: add service cost, interest cost, past service cost and actuarial losses, then subtract benefits paid. Compute interest cost as beginning PBO × discount rate if it is not given.
4Roll plan assets forward: add the actual return and employer contributions, then subtract benefits paid. Use actual return, not expected return, for the balance.
5Compute funded status as assets − PBO. Then label it a liability if negative or an asset if positive.
6Under IFRS, check for an asset ceiling if the plan is overfunded. Under US GAAP, report the full overfunding.
7Check the answer: the sign, the units and whether the question wants the amount before or after tax, or the change over the year.

Quickest way: Two-column roll forward

When to use it: Use it when the exhibit gives beginning balances and a list of flows. It takes under two minutes.

Write the PBO in one column and plan assets in another.
Enter the beginning balances.
Add each increase and subtract benefits paid in both columns. Benefits paid reduces both sides, so it leaves funded status unchanged.
Subtract the two ending figures. The sign tells you liability or asset.
If only the change in funded status is needed, skip benefits paid. Use: actual return + contributions − service cost − interest cost − past service cost − actuarial losses.

Common mistakes in Pension Obligations and Plan Assets on the Balance Sheet

Using the ABO instead of the PBO to compute funded status.
Both measure obligations and the exhibit may show both numbers.
Fix: For the balance sheet, use the PBO (IFRS: the defined benefit obligation). Use the ABO only when the question asks for it.
Using the expected return on plan assets rather than the actual return in the asset roll forward.
Students remember the expected return from the P&L discussion.
Fix: The asset balance reflects what really happened. Use the actual return, which is the return actually earned on the plan assets (in the exhibit, or expected return plus the difference between actual and expected return). The expected return is a P&L assumption under US GAAP.
Subtracting benefits paid from only one side.
Benefits paid feel like a cash outflow for assets only.
Fix: Benefits paid cut both the PBO and plan assets by the same amount. Do it in both columns.
Reversing the sign of funded status.
Funded status is assets − PBO but the balance sheet liability is PBO − assets.
Fix: Write the result as a word: underfunded means a liability, overfunded means an asset.
Including past service cost every year.
It is listed in the roll forward formula.
Fix: Past service cost arises only when a plan amendment grants credit for earlier service. If the vignette mentions no amendment, it is zero.
Applying the asset ceiling to US GAAP or ignoring it under IFRS.
The two frameworks look similar on the balance sheet.
Fix: The ceiling applies only to IFRS overfunded plans. US GAAP reports the full overfunded amount.

Worked examples

Example 1

A company reports under IFRS. Beginning PBO is €800 million and the discount rate is 5%. Current service cost is €60 million, there is no plan amendment, and actuarial losses are €20 million. Benefits paid are €50 million. Beginning plan assets are €700 million, actual return is €45 million, employer contributions are €40 million. (1) What is the ending PBO? (2) What are ending plan assets? (3) What is the balance sheet amount?

Show the solution

Interest cost = 800 × 5% = €40 million.
Ending PBO = 800 + 60 + 40 + 0 + 20 − 50 = €870 million.
Ending plan assets = 700 + 45 + 40 − 50 = €735 million.
Funded status = 735 − 870 = −€135 million. It is negative, so the plan is underfunded.

Answer: (1) €870 million. (2) €735 million. (3) A net pension liability of €135 million.

Example 2

A US GAAP company has a plan with ABO of $540 million and PBO of $690 million at year end. Fair value of plan assets is $610 million. A colleague says the company reports a net pension asset of $70 million because assets exceed the ABO. (1) What amount does the company report? (2) Is the colleague right? (3) Would your answer change if the company applied IFRS and the plan was overfunded?

Show the solution

US GAAP uses the PBO for the balance sheet.
Funded status = 610 − 690 = −$80 million, so a net pension liability of $80 million.
The colleague compared assets with the ABO (610 − 540 = +70). That is the wrong obligation measure.
Under IFRS the obligation measure is also projected, so the plan here would still be underfunded. If a plan were overfunded under IFRS, the asset recognised would be capped at the asset ceiling. US GAAP has no ceiling.

Answer: (1) A net pension liability of $80 million. (2) No, the colleague used the ABO instead of the PBO. (3) Not for this plan, it is underfunded either way. For an overfunded plan under IFRS the reported asset could be lower because of the asset ceiling.

Exam tips

Read the exhibit labels carefully. Items such as service cost, interest cost and actuarial loss are often given separately, and the question may add distractors such as ABO or expected return.
The vignette may give only the discount rate. Compute interest cost yourself as beginning PBO × discount rate.
When asked for the change in funded status, you can skip benefits paid since it hits both sides equally.
Know the ABO versus PBO difference and the IFRS asset ceiling. They are commonly tested concepts.
State the answer with its label: liability or asset. Options often differ only in sign.

Pension Obligations and Plan Assets on the Balance Sheet: frequently asked questions

What is the difference between PBO and ABO?

The PBO is the present value of earned benefits using projected future salaries. The ABO uses current salaries only. So the PBO is normally higher for a pay-based plan, and the PBO is used for the balance sheet.

How do I calculate funded status of a pension plan?

Subtract the PBO from the fair value of plan assets. A negative number is an underfunded plan reported as a net pension liability. A positive number is an overfunded plan reported as a net asset, limited by the asset ceiling under IFRS.

How does the PBO roll forward work?

Start with the beginning PBO. Add current service cost, interest cost, past service cost and actuarial losses. Subtract actuarial gains and benefits paid. The result is the ending PBO.

How do IFRS and US GAAP differ on the pension balance sheet?

Both report the net funded status, using a projected obligation. IFRS limits a net asset to the asset ceiling. US GAAP has no such ceiling. The two also differ in how they treat items in the P&L and other comprehensive income.