Pension and Postretirement Benefit Accounting

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...

...

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... [R]egardless 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 [The Financial Accounting Standards Board, The Accounting Standards Codification, Topic 715, Compensation - Retirement Benefits] 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.

,,,

Under the Accounting Standards Codification, all post-retirement plans require extensive financial statement disclosures. However, the disclosure requirements for multiemployer were recently expanded. The FASB expanded disclosures to respond to concerns regarding the lack of transparency regarding employer participation in multiemployer pension plans. Multiemployer plans have many unique characteristics including, possibly, a requirement to pay a final payment or withdrawal penalty if the employer withdraws from participation in the plan. These expanded disclosures provide for full disclosure of all of the commitments and risks involved in multiemployer plan participation. The remainder of this article will discuss multiemployer plans in detail, including the new expanded disclosure requirements.

Multiemployer Plans

In a multiemployer plan, two or more unrelated employers contribute to a plan. While multiemployer plans typically are formed under collective bargaining agreements, they may also be sponsored by professional organizations. In these situations, the assets one employer contributed may be used to pay benefits to employees of another company. A trustee or a board of trustees administers the plan, which is beyond the direct control of the sponsoring employers...

Determining if the Plan is a Multiemployer or Single Employer Plan

All pension plans involving more than one employer are not necessarily multiemployer plans. Multiple employers may simply pool pension plan assets for investment and administrative cost reduction purposes. The individual employers may have different funding, benefit, and contribution formulas. Topic 715 considers such arrangements to be single-employer plans and they are accounted for as such by individual employers...

Determining if the Plan is a Defined Benefit or Defined Contribution Plan

When a company has one or more single-employer plans, it must determine whether the plan is a defined contribution plan or a defined benefit plan. Many factors are involved in making this distinction. The primary characteristics of a defined contribution plan are:

(1) The funds the employer contributes are assigned to individual employee accounts. The funds may be pooled for investment purposes, but the pooled funds must be allocated back to the individual employee accounts.

(2) The annual contributions are determined by management discretion or by a formula, such as contributing 6 percent of the employees' salary for the year or 20 percent of net income for the year in a profit sharing plan.

(3) The benefits to be received by the employee upon retirement are not fixed or determinable; they are based on the funds available to the specific employee at the time of retirement...

Disclosures Related to Multiemployer Plans

Because the employer does not bear the primary responsibility for providing retirement benefits in a multiemployer plan, the accounting requirements for these plans are predicated on the employer's contractually required periodic contributions. Thus, the employer satisfies its current obligation by making this periodic contribution, and the required contribution for the period is recognized as the amount of the net pension cost. To the extent the amount is unpaid at the balance sheet date, it should be accrued as a liability. The sponsor should make disclosures for any multiemployer plans separately from its single-employer plans...

...

Lexis users can access the complete commentary HERE.  Additional fees may apply. (Approx. 18 pages)

Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store