Page 25 - CFA Lecture Day 10 Slides

Session Unit 8:
31. Non-Current (Long-Term) Liabilities, p.292

Financial reporting for a defined benefit plan is much more complicated than for a defined
contribution plan because the employer must estimate the value of the future obligation to its

employees; it involves forecasting a number of variables:
• future compensation levels,
• employee turnover,

• average retirement age,
• mortality rates, and an
• appropriate discount rate tanties

For a defined benefit plan:
• net pension asset (overfunded) if the fair value of the plan’s assets is greater than the

estimated pension obligation;
• net pension liability (underfunded) if the fair value of the plan’s assets is less than the

estimated pension obligation.

The change in the net pension asset or liability is recognized on the firm’s financial statements

each year; some components are included in net income while others are recorded as other
comprehensive income as per Figure 10.