Q: Why wouldn't the liability for pension benefits be included on the balance sheet?
A: The liability for unfunded pension obligations is included on the balance sheet of governmental entities but not, so far, on the balance sheet of not-for-profit organizations.
There is no good rationale for excluding the unfunded pension liability from the balance sheet of a not-for-profit. The argument in favor of excluding it is twofold.
- First, the unfunded obligation is always mentioned in a footnote, so the donor, investor, or lender is aware of the size and potential impact of the liability on the company' s cash and net asset position.
- Second, the estimated pension obligation and the projected asset value available to meet the projected pension obligation are very rough estimates subject to significant alteration as market conditions change.
Therefore, based on these two considerations, it is prudent to report the projected unfunded liability only in a footnote rather than include it on the balance sheet since it may require frequent re-statement. Even so, the majority of donors, investors, and lenders would very likely prefer to see the unfunded pension liability reported explicitly on the balance sheet, along with the associated adjustments to the organization’s cash and net asset position.
Course overview: Not for Profit Analysis