Intermediate Financial
Accounting
Postretirement Benefits
Other than Pensions
Accounting for Postretirement
Benefits


Identify the differences between
pensions and postretirement benefits
other than pensions (i.e., health-care
benefits).
To learn the accounting for
postretirement benefits other than
pensions.
The Financial Statements
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About SFAS No. 106

Postretirement benefits other than
pensions include health care benefits
and other welfare benefits (i.e., tuition,
eye care, legal & tax services, day care,
housing assistance) for retirees, their
dependents and spouses.
The Financial Statements
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Accounting Practice of OPEB (Other Post
Employment Benefits) Prior to SFAS 106


Only recognizes them when pay - on a
cash basis.
Reasons of NOT pre-funding these
benefit plans:
1. The payments to pre-fund health
care costs are NOT tax deductible.
The Financial Statements
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Accounting Practice of OPEB (Other Post
Employment Benefits) Prior to SFAS 106
These OPEB were once perceived
to be low cost employee benefits and
could be changed or eliminated at
will, and, therefore, Not a legal
liability.
2.
The Financial Statements
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Accounting Practice of OPEB under
SFAS 106


The liability of OPEB should be
recognized during the employment of
employee, rather than delay to their
retirement. OPEB is a form of deferred
compensation.
Thus, the accounting treatment of
OPEB is on an accrual basis, rather
than on a cash basis.
The Financial Statements
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Accounting Practice of OPEB under
SFAS 106 (contd.)



When IBM adopted SFAS No. 106 in
3/91, it resulted in $2.3 billion charge
and the first ever quarterly loss in IBM
history.
GE disclosed a $2.7 billion liability on
4th quarter of 1993 when adopting
SFAS 106.
AT&T charged $2.1 billion when
adopting SFAS 106.
The Financial Statements
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Differences between Pension
Benefits & Health Care Benefits

Reasons why FASB does not issue one statement for
both pension benefits and OPEB:
Item
Funding
Benefit
Pension
Generally funded
Well-defined & level
dollar amount
Beneficiary
Retiree (may be some
benefits to surviving
spouse)
Benefit Payable Monthly
Predictability
Variables are predictable

Health Care Benefits
Not
Generally uncapped & great
variability
Retiree, spouse, and
dependents
As needed & used
Utilization difficult to predict
Level of Cost varies
Geographically & fluctuates
over time
Because of the substantial differences, FASB issues
different statements for these two benefits.
The Financial Statements
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Obligations under Postretirement
Benefits

Expected postretirement benefits
obligation (EPBO):
 The actuarial present value as of a
particular date of all benefits
expected to be paid to employees
and their dependents after retirement.
 The EPBO is NOT recorded in the
F/S, but it is used in measuring
periodic expense.
The Financial Statements
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Obligations under Postretirement
Benefits (contd.)

Accumulated postretirement benefits
obligation (APBO):
 The actuarial present value of future
benefits attributed to employees’
services rendered to a particular date.
The Financial Statements
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Obligations under Postretirement
Benefits (contd.)



APBO = EPBO for retirees.
APBO = EPBO for active employees
with full date eligibility for benefits (fully
eligible for benefits).
APBO < EPBO for active employees
NOT fully eligible for benefits.
The Financial Statements
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Postretirement Expense (recognized
on I/S)

Postretirement expense (net periodic
postretirement benefit cost):
 The annual expense that employer
recognized on the income statement.
It consists of many similar
components used to compute annual
pension expense.
The Financial Statements
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Postretirement Expense (contd.)

The components are:
+ 1. Service cost . The portion of
EPBO attributed to employee
service during the period.
+ 2. Interest cost. The interest on
APBO attributable to the
passage of time.
- 3. Actual return on plan assets.
The Financial Statements
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Postretirement Expense (contd.)
The components are (contd.):
+ 4. Amortization of prior service
cost.
+ or - 5. Gains and losses.

+ 6. Amortization of transition
obligation.
The Financial Statements
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The Transition Amount

At the adoption of SFAS No. 106, a
transition amount is computed as the
difference between:
(1). The APBO and
(2). The fair value of the plan assets
plus any accrued obligation or less
and prepaid cost(mostly zero at adoption)

Due to most plans are unfunded, larger
transition obligations occur at the
adoption of SFAS No. 106.
The Financial Statements
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The Transition Amount - the
Accounting Treatments

A. Immediate Recognition (IR Method)
Cumu. Eff. of Acct.Change1 xxx
Deferred Tax Assets
xxx
Prepaid/Accrued
Postret. Benefit Cost
xxx
(reported on B/S as a
long-term liability)
1. The tax effect if deferred because only the actual
payment for retiree benefits are tax
deductible.
The Financial Statements
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The Transition Amount - the
Accounting Treatments (Contd.)


The Prepaid/Accrued account can only
be reduced by funding, not by
payments of benefits.
Payments of benefits reduce the APBO
which is only disclosed in the footnote,
not recognized.
The Financial Statements
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The Transition Amount - the
Accounting Treatments (contd.)
B. Deferred recognition:
Amortize the transition amount on
a straight-line basis over the
average remaining service period
to expected retirement of the
employees or 20 years if it is
longer. Similar entry as for the IR
method will be recorded. Once
chosen, the method cannot be
changed.
The Financial Statements
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Off Balance Sheet Items Related to
Postretirement Benefits
1. EPBO
2. APBO
3. Postretirement plan assets
4. Unrecognized transition amount
5. Unrecognized prior service cost
6. Unrecognized net gains or losses
The Financial Statements
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Example 1

1997 Entries & work sheet
Assuming on 1/1/97, Quest adapts
SFAS No. 106 to account for its
health care benefit plan. The
following facts apply to the post
retirement benefits plan for the year
of 1997:
1. Plan assets at fair value on 1/1/97:
$0
The Financial Statements
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Example 1 (contd.)
2. Actual & expected returns on plan
assets in 1997: $0.
3. APBO, 1/1/97 is $400,000
(Transition obligation at the adoption
of 106).
4. Service costs for 1997 is $22,000.
5. Prior service cost: $0.
6. Discount rate: 8%.
The Financial Statements
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Example 1 (contd.)
7. Contributions (funding) to plan in
1997 are $38,000.
8. Benefit payments to employees from
plan in 97 are $28,000.
9. An average remaining service to full
eligibility: 21 years.
10. An average remaining service to
retirement: 25 years.
11. Transition amount to be amortized.
The Financial Statements
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J.E. of Quest
Annual Postretirement
Expense
Items
memo record
Cash
Prepaid/
Accrued
Cost
Balance 1/1/97
400,000(Cr)
(a) service cost
22,000(Dr)
(b) Interest cost
32,000 (Dr)
32,000(Cr)
38,000(Cr)
38,000(Dr)
(d) Benefit payments
J.E. fr 1997
Balance 12/31/97
28,000(Dr)
2
16,000 (Dr)
70,000(Dr)
400,000(Dr)
22,000(Cr)
1
(c) Contributions
(e) Amortization of
Transition
APBO
Unrecognized
Plan Assets
Transition
Amount
28,000(Cr)
16,000(Cr)
38,000(Cr) 32,000(Cr)
32,000(Cr)
426,000(Cr) 10,000(Dr) 384,000(Dr)
1. 400,000 x 8% = 32,000
2. 400,000 / 25 = 16,000
The Financial Statements
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Example 1 (contd.)
Journal entry recorded on
12/31/97
Postretirement benefit expense 70,000
Cash
38,000
Prepaid/accrued Postreti.
Benefit cost
32,000

The Financial Statements
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Example 1 -Reconciliation Schedule
APBO
Plan Assets
Funded Status
Unrecognized
Transition Amo.
($426,000) cr.
10,000 dr.
(416,000) cr.
384,000 dr.
($32,000) cr.
The Financial Statements
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Recognition of Gains & Losses (G/L)

Gains & losses represent change in
APBO or the change in value of plan
assets resulting for actual experience
difference from expected or from
change in actuarial assumptions.
The Financial Statements
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Amortization of G/L



The corridor approach applies.
The corridor is the greater of 10% *
APBO or 10% * market value of plan
assets.
If the unrecognized G/L is greater than
the corridor, the excess amount needs
to be amortized and included in as a
component of the postretirement
expense.
The Financial Statements
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Amortization of G/L (contd.)


If the unrecognized G/L is less than the
corridor, NO amortization of G/L is
needed.
If amortization is required, the minimum
amortization amount is the excess gain
or loss (beyond the corridor) divided by
the average remaining life to expected
retirement of all active employees.
The Financial Statements
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Amortization for G/L (contd.)
Any systematic amortization method
can be used as long as:
(a) The amount amortized in any period
is greater than the minimum amount
calculated above;
(b) the method applied consistently, and
(c ) the method is applied similarly for
both gains and losses.

The Financial Statements
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Example 2

1998 Entries and work sheet
Continuing the Quest illustration to
1998, the following facts apply to the
plan for the year of 98:
1. Actual return on plan assets: $600
2. Expected return on plan assets:
$800
3. Discount rate: 8%
The Financial Statements
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Example 2 (contd.)
4. Increase in APBO due to changes in
actuarial assumptions is $60,000.
5. Service cost for 1998 is $26,000.
6. Contributions (funding) to plan are
$50,000.
7. Benefit payments to employees in
1998 are $35,000.
The Financial Statements
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Example 2 (contd.)
8. Average remaining service to full
eligibility: 21 years.
9. Average remaining service to
retirement: 25years.
The Financial Statements
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The following worksheet presents all the postretirement
benefit entries and information Recorded by Quest in 98
J.E. of Quest
Annual Postretirement
Expense
Items
Cash
Balance 1/1/98
Prepaid/
Accrued
Cost
APBO
memo record
Unrecognized
Plan
Transition
Assets
Amount
32000(Cr) 426000(Cr) 10000(Dr)
(a) service cost
26000(Dr)
26000(Cr)
1
34080(Dr)
34080(Cr)
(c) Actual Return
600(Cr)
(d) Unexpected Loss
200(Cr)
(b) Interest cost
(e) Contributions
384000(Dr)
600(Dr)
200(Dr)
50000(Cr)
50000(Dr)
(f) Benefits
(g) Amortization:
Transaction
(h) Increase in APBOloss
Unrecognized
Net G/L
35000(Dr) 35000(Cr)
16000(Dr)
16000(Cr)
25280(Cr)
60000(Cr)
J.E. fr 1997
75280(Dr) 50000(Cr) 57280(Cr) 511080(Cr) 25600(Dr)
(d) & (h) are components of gains & losses
60000(Dr)
368000(Dr)
60200(Dr)
1. 426,000 x 8% = 34,080
The Financial Statements
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Example 2 (contd.)
Journal entry on 12/1998:
Postretirement benefit expense 75,280
Cash
50,000
Prepaid/accrued cost
25,280
The Financial Statements
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Example 2 -Reconciliation Schedule
APBO
($511,080) cr.
Plan Assets
25,600 dr.
Funded Status
(485,480) cr.
Unrecognized
Transition Amo.
368,000 dr.
Unrecog. Gain/loss 602,000 dr.
Accrued cost
($57,280) cr.
The Financial Statements
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Footnote Disclosures of Postretirement
Benefits other than Pensions
The disclosures for postretirement benefits
other than pensions parallel with those for the
pensions.
Thus, refer to the disclosure notes for
pensions in Chapter 17 for these disclosures.

The Financial Statements
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