EX 11-18 Defined benefit pension plan terms

In a recent year’s financial statements, Procter & Gamble showed an unfunded pension liability of $3,706 million and a periodic pension cost of $341 million.
Explain the meaning of the $3,706 million unfunded pension liability and the $341 million periodic pension cost.

Answer:
The $3,706 million unfunded pension liability is the approximate amount of the pension obligation that exceeds the value of the accumulated net assets of the pension plan. Apparently, Procter & Gamble has underfunded its plan relative to the actuarial obligation that has accrued over time. This can occur when the company contributes less to the plan than the annual pension cost.  The obligation grows yearly by the amount of the periodic pension cost. Thus, the periodic pension cost is an actuarial measure of the amount of pension earned by employees during the year. The annual pension cost is determined by making actuarial assumptions about employee life expectancies, employee turnover, expected compensation levels, and interest.

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