how a projected benefit obligation pbo works
companies can provide employees with a number of benefits including a salary when they retire from work the financial accounting standards board s fasb statement of financial accounting standards no 87 states that companies must measure and disclose their pension obligations together with the performance of their plans at the end of each accounting period a projected benefit obligation pbo is one of three ways to calculate expenses or liabilities of traditional defined benefit pensions plans that take into account employee years of service and salary to calculate retirement benefits pbo assumes that the pension plan will not terminate in the foreseeable future and is adjusted to reflect expected compensation in the years ahead as a result it takes into account a number of factors including the following actuaries are responsible for establishing whether pension plans are underfunded these qualified professionals who specialize in the measurement and management of risk and uncertainty determine the benefits needed through a present value calculation actuaries are responsible for comparing the pension plan s liabilities to its assets in general they provide a breakdown of the following establishing whether a company has an underfunded pension plan can be achieved by comparing pension plan assets the investment fund referred to as the fair value of plan assets to the pbo if the fair value of the plan assets is less than the benefit obligation there is a pension shortfall the company is required to disclose this information in a footnote in its 10 k annual financial statement pbo is one of the three approaches firms use to measure and disclose pension obligations the other measures are example of projected benefit obligations pbo in december 2018 general motors u s pension plan had a pbo of 61 2 billion with fair value of plan assets at 56 1 billion in other words this means its plan was 92 funded at that time meanwhile ford s u s benefit obligation in december 2018 was 42 3 billion while its plan assets had a fair value of 39 8 billion that means ford s plan was 94 funded which is slightly better than general motors special considerationsalthough a pbo is classified as a liability on the balance sheet there is considerable criticism about whether it meets the predefined criteria to be defined as such these criteria are the responsibility to surrender an asset from the result of the transactions taking place at a specified future date the obligation for a company to surrender assets for the liability at some future point in time and that the transaction resulting in the liability has already taken place actuarial losses are treated differently by the internal revenue service irs and the fasb 