How does defined benefit pension funded status appear on the balance sheet?

Pension accounting is notoriously tricky, but let me simplify it. The balance sheet reports the funded status of the pension plan:

Funded Status = Fair Value of Plan Assets - Projected Benefit Obligation (PBO)

• If plan assets > PBO → Net pension asset (rare)
• If PBO > plan assets → Net pension liability (common)

Example: Halcyon Industries has:

• PBO at year-start: $480M
• Plan assets at year-start: $410M
• Service cost: $28M
• Interest cost (discount rate 5%): $24M
• Expected return on plan assets: $32.8M (8$410M)
• Actual return on plan assets: $29M
• Employer contribution: $35M
• Benefits paid: $22M

PBO Roll-Forward:

Item	Amount
Beginning PBO	$480.0M
+ Service cost	$28.0M
+ Interest cost	$24.0M
- Benefits paid	($22.0M)
Ending PBO	$510.0M

Plan Assets Roll-Forward:

Item	Amount
Beginning assets	$410.0M
+ Actual return	$29.0M
+ Employer contributions	$35.0M
- Benefits paid	($22.0M)
Ending assets	$452.0M

Funded Status = $452M -$510M = ($58M) → Net pension liability on balance sheet

Pension Expense (Income Statement under IFRS):

• Service cost: $28M (in operating income)
• Net interest cost: ($510M start? No — use beginning funded status) = PBO$480M x 5% - Assets $410M x 5$24M - $20.5M = **$3.5M** (in finance costs)

Note: Under IFRS, the return on plan assets used is the discount rate applied to plan assets, not the expected return. The difference between actual and expected returns flows through OCI as a remeasurement gain/loss.

Actuarial gains/losses ($29M actual return -$20.5M expected = $8.5M gain) go to OCI under IFRS. Under US GAAP, they accumulate in AOCI and may be amortized via the corridor approach.

For comprehensive pension accounting walkthroughs, check our CFA Level II course on AcadiFi.