What Is Accumulated Benefit Obligation (ABO) – Definition and meaning
Accumulated Benefit Obligation (ABO) is a measurement of the risk of an organization’s annuity plan, assuming that the arrangement will end right away.
The OECD Glossary of Statistical Terms defines ABO as:
“The present actuarial estimation of benefits, vested and non-vested, ascribed to the annuity formula to worker administration delivered to a specific date, based on current compensations.”
Accumulated Benefit Obligation ascertains how much cash the organization would have to pay currently resigned workers in annuity benefits.
Moreover, it computes the number of benefits acquired by current representatives. Besides, with present representatives, it likewise considers their compensations and time working for the organization.
Accumulated Benefit Obligation centers around the present.
Accumulated Benefit Obligation doesn’t consider future compensation increases. In contrast, the Projected Benefit Obligation (PBO) remembers the impact of future ascents for pay.
As per Arizona State University, liabilities in annuity books come in two structures: accumulated benefit obligation and extended benefit obligation.
Accumulated benefit obligation is a measurement of annuity risk considering the benefits for vested and non-vested workers at current pay rates.
Extended benefit obligation, then again, considers benefits for vested and non-vested workers, remembering any future increases for pay.
In the United States, the FASB Statement of Financial Accounting Standards No. 87 expects organizations to measure and uncover benefits obligations.
Furthermore, US firms must compute and report the financial condition and execution of their arrangements. They should do this before the finish of each accounting period.
** The FASB (Financial Accounting Standards Board) is an American private, non-profit association standard-setting body.
“The main distinction between the organization’s extended benefit obligation (PBO) and its accumulated benefit obligation (ABO) is the worth utilized for the representative’s pay.”
“While the estimation of the ABO utilizes the representative’s current pay, the PBO utilizes the worker’s extended pay at retirement.”