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 increase in salaries, discount rate and a number of other factors.
Projected benefit obligation (PBO) is a term used primarily in US GAAP. In IFRS, it is called present value of defined benefit obligation (PVDBO).
PBO is estimated by actuaries by applying complex statistical modeling.
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|
|Closing projected benefit obligation||XXX|
OBP Ltd. had a PBO of $400 million as at 1 January 20X1. 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 20X1. 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 20X1 is of $415 million. Reconcile the opening PBO with closing PBO.
The opening projected benefit obligation is $400 million. The service cost represents the present value of benefits earned during the current year and it equals $20 million. Interest expense equals the product of opening PBO and interest rate and in this case 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|
|Closing projected benefit obligation||415|