Pension and Postretirement Benefit Accounting

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.

(footnotes omitted)

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