Accumulated Benefit Obligation (ABO)

Definition

The term accumulated benefit obligation refers to the present value of retirement benefits earned by employees using current compensation levels. A company’s accumulated benefit obligation (ABO) is one of three ways to calculate expenses or liabilities associated with pension plans. The other measures include vested benefit obligations (VBO) and projected benefit obligations (PBO).

Explanation

Companies provide employees with a pension plan as part of a larger array of employment benefits. The FASB Statement of Financial Accounting Standards No. 87 requires firms to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period. Generally, there are three approaches to this measure, including: accumulated, vested, and projected benefit obligations.

Also known as ABO, the accumulated benefit obligation is the present value of the estimated retirement benefits earned by plan participants using their current salaries. In practice, these calculations are complex and an actuarial will perform this task using the pension plan’s benefit formula. The only difference between the company’s projected benefit obligation (PBO) and its accumulated benefit obligation (ABO) is the value used for the employee’s compensation. While the calculation of the ABO uses the employee’s current compensation, the PBO uses the employee’s projected compensation at retirement.

Related Terms

pension plan, defined benefits plan, defined contributions plan, pension obligation, vested benefit obligation, projected benefit obligation, pension service cost, pension interest cost, return on plan assets, amortization of prior service cost, accreting principal swap