Hello and welcome everyone to our lesson. Today, we will consider more precisely in today's lesson what is meant by pension obligation versus pension plan assets in details. The obligation is the liability, funds are the plant assets. We will start with discussing three different ways to measure the pension obligation and then decide which one of those that we are going to use more. And then proceed to understand the structure of the pension plan assets and get the details of measuring it also. Let's start with the pension liability, we have three different measures. Let's start with the first one, accumulated benefit obligation, ABIO. And that represents 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 level today, okay? Number two, vested benefit obligation VBO. Which represent the portion of the accumulated benefit application that we calculate in the previous one that plan participants are entitled to receive regardless of their continued employment. Finally, the third one, which is the projected benefit obligation. Which represent the actuary's estimate of the total retirement benefits and their discounted present value earned so far by employees, applying the pension formula using estimated future compensation levels. If the pension formula does not include future compensation levels, the PBO and the ABO are going to be the same. Here after when we mentioned the pension obligation, we are referring to the PBO, projected benefit obligation. The PBO measurement maybe less reliable than the ABO, but is more relevant and representation only faithful. Obviously, because you have to expect and predict the future salaries that are going to be when each employee retire. Let's get into more details of the steps since we're going to focus on the projected benefit application. Let's take the steps of calculating this projected benefit obligation. We will use the pension formula including a projection of the future salaries to determine the retirement benefits earned today, that's I calculated that number. Number two, we are going to discount it back present value calculation of the retirement benefits as of the retirement date. So on a timeline, I am expecting an annuity and I'm going to discount it, get the present value, add the retirement date now the retirement date. That is something in the future, then I need the last step is to find the present value of the retirement benefits as of the current date. So three steps projected benefit, obligations are going to get to the retirement, the benefits that will be laid out. Get the present value of it at retirement, and then move present value from the retirement to the current date. We turn our attention now to the resources with which the company will satisfy that obligation, what is that? That is obviously, the pension funds the pension plan assets. The assets of a pension plan fund must be held by a trustee, what is a trustee? A trustee, as an institution that accepts employer contributions, invests those contributions and accumulate the earnings as a result of those investment activities. And then finally, pay the benefits from the plant assets to retired employees or their beneficiaries. The trustee can be an individual or a bank or a trust company. Plant assets are invested in stock bonds or other income producing assets. Any assets and sometimes the employee will decide the way those funds to be invested. The cumulative balance of the annual employer contributions plus the return on the investment whether in terms of dividends, interest, or market appreciation must be enough to pay the benefits as they come due. Like the PBO, the projected benefit obligation. The pension plan assets are not reported separately in the employer's balance sheet. The process that we do is we net those together, PBO versus the plant asset, when the PBO, is higher than the pension liability we'll have a credit balance. If the opposite, when the plant assets are more than the obligation, then we obviously have a net position in terms of assets. This net position is referred to as funded status of the pension plan. So if the liability is more than the asset, its underfunded while of the assets, the plan assets are more than the obligation, then it's over funded. It's separate plant asset balance must be reported in the disclosure notes to the financial statements, so we're netting them in terms of the financial statements. But for the disclosure notes, we need to list each one as a separate the balance of each one, I mean, the PBO versus the plant asset. When an employer ask them, it's how much it must set aside each year to accumulate the sufficient funds to pay their retirement benefits as they come due. It is necessary to estimate the return those investments will produce because it's an element that will be taken into consideration. This is what we refer to as the expected return on line assets. The higher the return, the less the employer must actually contribute. On the other hand, a relatively low return means the difference must be made up by higher contributions from the employer. In summary, it is important to note that the net pension liability is not an actual account balance. Instead, it is the PPO account balance and the plant assets account balance simply reported in the balance sheet as a single net amount. A company must report in its balance sheet a liability for the underfunded plans and report an asset for those over funded plans that are, when we actually assets are more than the liabilities. Hopefully, that explains and illustrate more in depth the obligation, the liability, and the plant assets for pensions. Thank you very much.
