What indicates an overfunded status of a defined benefit pension plan under US GAAP?

• A. FV of plan assets equals PBO
• B. FV of plan assets is less than PBO
• C. FV of plan assets is greater than PBO
• D. FV of plan assets is uncertain

Answer: (C)

A defined benefit pension plan is considered overfunded when the fair value (FV) of the plan assets exceeds the projected benefit obligation (PBO). The projected benefit obligation is the actuarial present value of benefits earned by employees to date, taking into account future salary increases. When the assets set aside to fund these benefits surpass the PBO, it indicates that there are sufficient resources to meet the pension obligations, along with a surplus.

This overfunded status can be advantageous for employers, as it may reduce future contribution requirements and can impact the financial statements positively by showing a net asset rather than a liability on the balance sheet. Under US GAAP, this understanding aligns with the accounting treatment and reporting requirements for defined benefit plans.

In contrast, if the FV of plan assets is equal to or less than the PBO, it indicates that the plan is either fully funded or underfunded, respectively. Uncertainty regarding the FV of plan assets does not provide a clear status about funding, and thus does not meet the criteria for determining whether a plan is overfunded.