ACCT120B

Question 1

Projected Benefit Obligation (PBO)

Answer 1

The actuary’s estimate of the total retirement benefits (at their discounted present value) earned so far by employees, applying the pension formula using estimated future compensation levels

Question 2

Accumulated Benefit Obligation (ABO)

Answer 2

The actuary’s estimate of the total retirement benefits (at their discounted present value) earned so far by employees, applying the pension formula using existing compensation levels

Question 3

Vested Benefit Obligation (VBO)

Answer 3

The portion of the accumulated benefit obligation that plan participants are entitled to receive regardless of their continued employment

Question 4

Service Cost

Answer 4

The service cost is the actuarial present value of the benefits attributed by the pension benefit formula to services of the employees during the current period. Each year’s service adds to the obligation to pay benefits

Question 5

Interest Cost

Answer 5

The interest cost is the increase in the projected benefit obligation due to the passage of time. The interest cost is the projected benefit obligation at the beginning of the period multiplied by the discount rate used by the company.

Question 6

Prior Service Cost

Answer 6

The cost of retroactive benefits granted in a plan amendment or at the initial adoption of the plan. The cost is the present value of the additional benefits attributed by the pensions benefit formula.

Question 7

Gain or Loss on the PBO

Answer 7

Number of estimates are necessary to derive the PBO. When one or more of these estimates requires revision, the estimate of the PBO also will require revision. The resulting decrease or increase in the PBO is referred to as a gain or loss respectively

• a change in estimate of future compensation levels
• a change in life expectancies
• the expectation that retirement will occur earlier or later than previously thought
• a change in the assumed discount rate