How to Calculate Pension Liability

balance sheet image by Darko Draskovic from

In 2006, the independent Financial Accounting Standards Board (FASB) released its Statement of Financial Accounting Standards (SFAS) 158. SFAS 158 changes the reporting requirements for pensions. Now companies must report pension liabilities or assets on their balance sheets.

The asset or liability shows the funded status of their pension plans. Prior to SFAS 158, pension liability was only a note disclosure and not a balance sheet disclosure.

Determine the fair value of the plan assets. The fair value of the plan assets is the market value of the asset, or if the market value is not available, use an estimate of their worth. For example, a company's pension plan asset's fair market value is £325,000.

Determine the projected benefit obligation, which is derived by an actuarial estimate of the current value of benefits the plan will pay. For example, an actuarial estimates the projected benefit obligation to be £520,000, and expected benefit payments for next year are £357,500.

Subtract the projected benefit obligation from the fair market value of plan assets. In the example, £520,000 minus £325,000 equals £195,000.

Determine if there is an asset or liability. If the fair market value of plan assets is greater than the projected benefit obligation, there is an asset. If the projected benefit obligation is greater than the fair value of plan assets, there is a liability. Assets can only be non-current. Liabilities are current or non-current. The amount of current liabilities is equal to the expected benefit payments for the next year not covered by the fair value of the plan assets. In the example, there is a £195,000 liability. Because the plan expects to pay £357,500 next year and only has £325,000 in plan assets, then £32,500 is a current liability, and the remaining £162,500 is a non-current liability.