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Pension and postretirement benefits represent a significant
cost to employers. The Financial Accounting Standards Board has specified that
postretirement benefits are a form of deferred compensation. FASB concluded
that the obligation to provide postretirement benefits is incurred as the
employee renders services. In this Analysis, Donald Resseguie provides an
explanation of the basic types of benefits and the differences in risks and
obligations incurred by employers. He writes:
This article focuses on certain general information regarding the
general Codification model regarding pension and postretirement plan
accounting. This article provides an explanation of the basic types of plans
and the differences in risks and obligations. This article, however, primarily
focuses on accounting and reporting for multiemployer plans as the FASB
recently updated and expanded the disclosure requirements for such
multiemployer plans to provide more transparency regarding the risks and
obligations of such arrangements.
The conceptual basis for these accounting standards assume that, on a
going-concern basis, benefits currently made available to participants will
continue to be provided in the future unless there is information to the
contrary. Thus, regardless of whether the employer has a legal obligation or
not, the actions of the employer give an indication that it will provide
certain benefits to employees after retirement. As a result if an employer has
a pattern and practice of providing some sort of pension or postretirement
benefit it is assumed that these benefits will continue unless there is clear
evidence of a contrary intent. Therefore, regardless of the funding pattern
associated with the plan, the current period costs should be accrued and
recognized in the periods of employee service rather than when the employer
actually funds those benefits or when the employee retires. The amounts funded
are not the basis for the accounting principles they are a matter of financial
management. On the other hand, the costs accrued each period are based on
accounting principles and should be recorded in a reasonable and consistent
way. To achieve this end, the FASB has provided detailed guidance in recording
the net pension cost for the period.
Accounting Standards Codification Topic 715 provides guidance for the
proper recognition, measurement, presentation and disclosure regarding
retirement benefits. The accounting model that the accounting standards
originally used to define proper pension accounting, is an expense recognition
model that concentrates mostly on remeasurement. This model is preserved in the
current Codification Topic. As such the bulk of the requirements are included
in the Subsequent Measurement sections of Topic 715. This model contrasts with
the bulk of the Codification topics that primarily follow an asset and
liability measurement model.
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