What distinguishes Projected Benefit Obligation (PBO) from Accumulated Benefit Obligation (ABO)?

Projected Benefit Obligation (PBO) and Accumulated Benefit Obligation (ABO) are both measures used in the accounting of defined benefit pension plans, but they differ significantly in how they account for present and future compensation.

The correct choice reflects that the PBO takes into account not only the employee's service to date but also reflects expected future compensation levels, such as salary increases that employees might receive over time. This means that when calculating PBO, actuaries project future salary increases and potential future service benefits that may be granted to employees, thereby providing a more comprehensive and forward-looking estimate of what the plan obligations will be based on these increased compensation values.

In contrast, the ABO is based solely on the value of the obligations determined at the current salary levels, without taking into account any future salary increases. This means that the ABO reflects benefits that have been accrued up to the present date, calculated using the employee's current salary rather than any anticipated future increases.

This differentiation is crucial for understanding the financial obligations of a defined benefit plan and reflects how expectations regarding compensation growth can impact the measurement of pension obligations.