Pension Plans: Funded Status
The term pension plan funded status refers to the net difference between the assets held in the plan and its projected benefit obligation. The reconciliation between the plan's assets and liabilities will appear in the notes to the company's financial statements.
Companies will provide employees with a pension plan as part of a larger array of employment benefits. Pension plans are structured by companies to provide a periodic and reliable source of income when the employee reaches the plan's normal retirement age.
The FASB Statement of Financial Accounting Standards No. 87 requires firms to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period. The liabilities associated with pension plans and the assets the company has set aside to fund those costs are not disclosed on the company's balance sheet. Instead, companies will compare the fund's assets to its projected benefit obligation (liability) to derive the plan's funded status, which will fall into two broad categories:
- Overfunded Plan: if the plan's assets are greater than its projected benefit obligation, the plan is termed overfunded.
- Underfunded Plan: if the plan's assets are less than its projected benefit obligation, the plan is termed underfunded.
The following example illustrates how a pension's funded status might appear in the notes to a company's financial statement.
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