The projected benefit obligation is the actuarial present value of the benefits attributed to employ- ee service rendered to date. The projected benefit obligation is based on the present value of ves- ted and nonvested benefits accrued to date using employees' future salary levels. Identify arguments that can be advanced for and against the use of the projected benefit obliga- tion concept in accounting for pensions.

 

ANS:

Opponents of the projected benefit obligation concept argue that based upon the definition of a li- ability, pension benefits dependent on future increases in compensation cannot be a present oblig- ation. The liability measurement, therefore, should be based only on actual compensation experi- ence to date. The opponents also note that if the pension plan were terminated or if an employee with vested benefits did not render future services, the employer's obligation would be limited to amounts based on compensation to date.

Proponents of the projected benefit obligation concept argue that estimated future compensation levels should be considered if a pension plan's formula incorporates them. These proponents ar- gue that a promise to pay benefits based on a percentage of the employee's future salary is far dif- ferent from a promise to pay a percentage of the employee's current salary. The projected benefit obligation is an estimate of a present obligation to make future cash payments as a result of past events. The going-concern assumption supports the use of future compensation levels in calculat- ing the projected benefit obligation.