Question

According to the FASB, what factor is considered a more realistic measure of the employer's obligation under the pension plan on a going-concern basis, and why does the FASB suggest that it should be used as the basis for determining service cost? Discuss the rationale behind this perspective and its implications for financial reporting in the context of pension plans.

Answer 1

The FASB considers the Projected Benefit Obligation (PBO) a more realistic measure of pension obligations because it includes future salary increases and aligns expenses with the period benefits are earned, enhancing financial reporting transparency.

Step-by-step explanation:

According to the Financial Accounting Standards Board (FASB), the projected benefit obligation (PBO) is considered a more realistic measure of the employer's obligation under the pension plan on a going-concern basis. The rationale behind this perspective is that PBO better reflects the anticipated future payouts, taking into account variables such as future salary increases and other factors that determine pension benefits. The FASB suggests using PBO as the basis for determining service cost because it aligns the pension expense recognition with the benefits employees are earning during the period, hence matching expenses with revenues. This approach enhances the transparency of financial reporting and better informs users of financial statements about the employer's future commitments.