A liability (debt obligation) for which there are no sufficient funds set aside to settle. In other words, unfunded liabilities are those not covered or backed up by assets (on the other side of the balance sheet). Such liabilities arise in cases where debt obligations exceed an entity’s existing capital and projected sources of regular income and investment returns.
A prime example is the case of a pension liability (the total amount due to retirees) is larger than the monetary resources and other relevant assets needed to cover or support settlement of due amounts.
Unfunded debt obligations are an alarming indicator of unhealthy financial state of an entity, as it impacts its ability to continue in business as usual, particularly over the mid to long term.
It is also known as an unfunded liability.
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