CPA Pension Accounting Notes: ASC 715, PBO and Funded Status [BAR Guide]

CPA pension accounting is the US GAAP treatment of employer sponsored defined benefit pension plans under ASC 715. Therefore, the employer records net periodic pension cost on the income statement and funded status on the balance sheet as a single net amount. In short, the obligation is the projected benefit obligation, the PBO, and funded status equals the fair value of plan assets minus the PBO. See the CPA notes hub at https://www.studyfromnotes.com/cpa-notes/ for notes.

One fact changes how candidates should file this topic. Under the AICPA Blueprints effective January 2026, employer pension accounting no longer sits in FAR Core: the word pension appears only in the BAR Discipline section. However, older material still labels pensions as FAR, from the prior blueprint.

CPA Pension Accounting: The Direct Answer in 47 Words

CPA pension accounting under ASC 715 records plan cost as net periodic pension cost: service cost plus interest cost minus expected return on plan assets plus amortization of prior service cost and net actuarial losses. The balance sheet shows funded status, assets minus PBO, as one amount.

CPA Pension Accounting: Defined Benefit vs Defined Contribution

The first decision in any pension question is the plan type. In a defined benefit plan, the employer promises a defined benefit at retirement, a salary and service formula, and bears the investment and longevity risk: if assets underperform, or retirees outlive assumptions, the employer funds the gap. However, in a defined contribution plan, the employer promises only a fixed contribution; the employee bears the investment risk, and expense is the contribution.

Overall, ASC 715 covers defined benefit plans. For a defined contribution plan, expense equals the contribution, with a payable for any unpaid amount at year end. Therefore, a benefit formula plus a discount rate plus plan asset values means a defined benefit plan.

CPA Pension Accounting: PBO, ABO and VBO

First, three obligation measures appear in pension questions. The projected benefit obligation, PBO, is the actuarial present value of benefits attributed to service before the measurement date, using FUTURE compensation levels. By contrast, the accumulated benefit obligation, ABO, uses CURRENT compensation levels only. The vested benefit obligation, VBO, counts VESTED benefits only.

In practice, the ordering never changes: PBO is greater than or equal to ABO, and ABO is greater than or equal to VBO. Consequently, funded status uses the PBO, so a question that hands over the ABO is testing whether the candidate swaps in the PBO instead.

CPA Pension Accounting: The Five Components of Net Periodic Pension Cost

Net periodic pension cost, NPPC, is the pension expense on the income statement, built from five components. Specifically, service cost is the present value of benefits earned by working one more year. Next, interest cost is beginning PBO multiplied by the discount rate. Expected return on plan assets reduces cost, using the expected rate applied to plan assets at the start of the period. Prior service cost amortization spreads a plan amendment over remaining service. Net gain or loss amortization brings past assumption misses into expense through the corridor. Finally, the formula is: NPPC equals service cost plus interest cost minus expected return plus prior service cost amortization plus net loss amortization. Overall, the sign on the expected return is the most common error.

Component	Formula	Effect on cost
Service cost	Benefits earned this year	Increases cost
Interest cost	Beginning PBO x discount rate	Increases cost
Expected return on plan assets	Beginning plan assets x expected return rate	Decreases cost
Amortization of prior service cost	Prior service cost / remaining service	Increases cost
Net actuarial loss amortization	Excess over corridor / remaining service	Loss increases, gain decreases cost

CPA Pension Accounting: Worked Example 1, Net Periodic Pension Cost

All figures in this example are illustrations with round numbers. Specifically, Harper Manufacturing has a defined benefit plan with a beginning PBO of $2,400,000 and beginning plan assets of $2,000,000. The discount rate is 5 percent, the expected long term return is 7 percent, service cost is $180,000, prior service cost amortization is $25,000, and net loss amortization is $15,000, computed in Example 2.

First, interest cost: $2,400,000 x 5 percent equals $120,000. Second, expected return: $2,000,000 x 7 percent equals $140,000, a credit against cost. Next, service cost plus interest cost: $180,000 plus $120,000 equals $300,000. Then, less expected return: $300,000 minus $140,000 equals $160,000. Finally, plus amortizations: $160,000 plus $25,000 plus $15,000 equals $200,000. Net periodic pension cost is $200,000.

CPA Pension Accounting: Funded Status on the Balance Sheet

ASC 715 requires the employer to recognize the funded status of the plan: the fair value of plan assets minus the PBO, reported as a single amount. Specifically, assets above PBO mean an overfunded plan and a noncurrent pension asset; PBO above assets mean an underfunded plan and a pension liability.

However, funded status is NOT the same as pension expense: cost reflects one year of service and interest, while funded status reflects the entire obligation against all assets set aside. Do not add unrecognized prior service cost or the unrecognized net loss, which sit in accumulated other comprehensive income.

CPA Pension Accounting: Worked Example 2, Funded Status and the Corridor

Harper again; all figures are illustrations. Specifically, during the year, an actuarial loss of $60,000 increased the PBO, benefits paid were $150,000, actual return was $130,000, and the employer contributed $220,000.

First, ending PBO: $2,400,000 plus $180,000 service cost plus $120,000 interest cost plus $60,000 actuarial loss minus $150,000 benefits paid equals $2,610,000. Next, ending plan assets: $2,000,000 plus $130,000 actual return plus $220,000 contributions minus $150,000 benefits paid equals $2,200,000. Finally, funded status: $2,200,000 minus $2,610,000 equals negative $410,000, a net pension liability of $410,000.

Next, the corridor test. The unrecognized net actuarial loss at the start of the year is $300,000. Specifically, the corridor is 10 percent of the greater of beginning PBO ($2,400,000) or beginning plan assets ($2,000,000): $240,000. The excess is $300,000 minus $240,000, or $60,000. With average remaining service of 4 years, amortization is $60,000 divided by 4, or $15,000, the same $15,000 used in Example 1. Actual return of $130,000 fell short of expected return of $140,000 by $10,000, an actuarial loss deferred in other comprehensive income.

CPA Pension Accounting: Presentation, OCI and Disclosures

Presentation changed with ASU 2017-07. Specifically, service cost sits in the same income statement line as other employee compensation costs, inside operating income. In contrast, every other component sits outside a subtotal of income from operations, typically in other income or expense. Only service cost may be capitalized.

In addition, actuarial gains and losses and prior service cost enter other comprehensive income first, then amortize into net periodic pension cost. Consequently, that two step path is the smoothing mechanism of ASC 715: the balance sheet always shows the full funded status immediately, while the income statement receives the volatility gradually. Disclosures include the discount rate, the expected return rate, and a reconciliation of the PBO and plan assets.

CPA Pension Accounting: Settlement and Curtailment

A settlement is an irrevocable action that relieves the employer of primary responsibility for part or all of the PBO and eliminates significant risk, lump sum payments to participants or annuity contract purchases. However, settlement accounting applies only when settlement costs for the year exceed service cost plus interest cost. The settlement gain or loss is a proportionate share of the unrecognized net gain or loss in other comprehensive income.

By contrast, a curtailment significantly reduces expected future service of present employees, or eliminates benefit accrual for many employees, such as a plant closing or plan freeze. Consequently, it triggers a PBO remeasurement and accelerates prior service cost recognition, because that future service will no longer happen. The PBO change is first offset against unrecognized actuarial gains or losses in other comprehensive income.

CPA Pension Accounting: Exam Traps to Avoid

1. First, expected return, not actual return, enters pension cost. The $10,000 gap in Example 2 goes to other comprehensive income.

2. Next, funded status uses the PBO, not the ABO or the VBO.

3. The corridor uses the GREATER of beginning PBO or plan assets.

4. Therefore, only the EXCESS over the corridor amortizes, over average remaining service.

5. Prior service cost amortizes; it is never expensed at once.

6. Service cost is operating income; the other four components sit outside it.

7. Therefore, contributions are not pension cost. Specifically, a $220,000 contribution raises plan assets, but it never enters net periodic pension cost.

One-Page Revision Box: CPA Pension Accounting

First, defined benefit: employer promises a benefit, bears the risk. Defined contribution: expense equals the contribution. PBO uses future salaries; ABO uses current salaries; VBO counts vested benefits only. Therefore, NPPC equals service cost plus interest cost minus expected return plus prior service cost amortization plus net loss amortization. Interest cost is beginning PBO x discount rate; expected return is plan assets x expected rate and REDUCES cost. Consequently, funded status equals plan assets minus PBO; negative means a net pension liability. Corridor is 10 percent of the greater of beginning PBO or plan assets; only the excess amortizes, over average remaining service. Moreover, gains, losses, and prior service cost park in OCI first; only service cost is operating income.

Specifically, settlement needs lump sums above service cost plus interest cost. Curtailment cuts future service and accelerates prior service cost. FAR: 4 hours, 50 MCQs, 7 TBSs, pass 75. Finally, blueprint: pensions sit in BAR. Overall, Harper: NPPC $200,000, PBO $2,610,000, assets $2,200,000, liability $410,000, corridor $240,000, amortization $15,000.

Finally, read our deferred tax note at https://www.studyfromnotes.com/asc-740-deferred-tax-accounting-far-notes/ and see our CPA notes hub.

Sources

AICPA, Uniform CPA Examination Blueprints, approved August 18, 2025, effective January 2026. Full text read at https://www.dokoblog.com/wp-content/uploads/2025/10/CPA-Exam-Blueprints-2026.pdf (mirror of the AICPA document; AICPA article page: https://www.aicpa-cima.com/resources/article/learn-what-is-tested-on-the-cpa-exam). FASB Accounting Standards Codification Topic 715, Compensation, Retirement Benefits, as summarized in the sources below. LegalClarity, FAS 87: Employers Pension Accounting and Disclosures, https://legalclarity.org/how-fas-87-accounts-for-defined-benefit-pension-plans/. Also from LegalClarity, Pension Accounting Under US GAAP: Defined Benefit Plans, https://legalclarity.org/pension-accounting-under-us-gaap-defined-benefit-plans/. Finally, LegalClarity, Pension Plan Curtailment: Gains, Losses, and ERISA Rules, https://legalclarity.org/how-to-account-for-a-pension-plan-curtailment/. Ranadey Consultants, Special events in accounting of Employee Benefit Plans, https://www.ranadeyconsultants.com/special-events-in-accounting-of-employee-benefit-plans/.