Accounting for Other Postretirement Benefit Plans


Many retirement benefits are enjoyed by the employees on retirement other than the pension distribution. For purposes of accounting, these benefits are referred to as other post-retirement benefits because they denote other benefits of retirees other than the pension income or benefits. Life insurance and medical plans are the main components of other post-retirement benefits enjoyed by retirees. These benefits are mostly employer-paid, however, the employees are sometimes obliged to share in the costs involved in these benefits. The employees share in these costs through several ways like paying deductibles, making contributions, or even through co-payments. They are all noncash benefits enjoyed by retirees. They may include vision care, legal services, and dental care among others. Where these plans are fully funded by the company, they may incur the company a lot of expenditure. The costs of other post-retirement mostly appear as notes in the financial statements. This also helps in disclosing the extent of the commitment of the company to the fund and how it is funded. The objective of this research is to discuss Accounting for Postretirement Benefit Plans Other Than Pensions in the current trends in intermediary accounting.

Accounting for other postretirement benefit plans

Accounting for other post-retirement benefits is well stipulated in statement number 106 of FASB. This statement requires that these benefits payable to the retiree should be accounted for using the accrual method of accounting where they are recognized and recorded as accruals in the year they are incurred but not when they are settled. According to Overman (1993), the large companies with at least 500 employees had to comply with the new FASB rule by 1993 and small companies by 1995. Before this provision, the companies were expensing these benefits costs as they are paid and therefore they were not recorded as liabilities in the balance sheet. Currently, the promise of the employers to pay these benefits qualifies them as liabilities worth recording in the balance sheet. The major component of other post-retirement benefits is health benefits because of the high cost associated with them. For large companies, it has been estimated that these benefits account for about one-third of the net profit of the company. For purposes of accounting for these benefits, three individuals are defined to assess the extent of their benefits. The first group is for those retirees already receiving benefits. The other category is for those employees who are eligible for the benefits in terms of age and period of service but are yet to retire. The final category comprises active employees whose age is below 55 years hence not eligible for benefits at the moment.

FASB suggests two benefits obligations related to other postretirement benefits that are considered for accounting purposes. There are expected postretirement benefit obligations that define the total benefits that an organization expects to pay to the employees on retirement date estimated as the present value of future benefits obligations. An accumulated post-benefit obligation on the other hand defines the total accumulated benefit obligations to be paid by the company as at the measurement date. FASB does not require the EPBO (expected post benefit obligations) to be shown in the financial statement but APBO (accumulated postretirement benefits) are liabilities and must be disclosed in the financial statements in the year they are determined. The difference between APBO and EPBO gives the benefits that are entitled to the actively serving employees but who are currently or at the date of measurement not qualified for them. They are still obligations to the company because they are payable at a future date when the retirees become eligible and when the payments fall due.

According to Harold, commenting on the FASB provisions for the accounting for the post-retirement benefits, “the accrual for future benefits should take place during an employee’s working period, not at the time of retirement or after retirement” (Harold, 1989, 1). This is deducted from the FASB argument that these benefits are a form of deferred compensation and are earned in the course of service offered to the company. According to Wilbert & Dakdduk (1991, 1), FASB refutes the use of cash or terminal accrual bases in accounting for health and other postretirement benefits. Postretirement benefits should be recognized as liabilities in the course of service and as at the measurement date. These benefits for current and future retirees are recorded as accruals in the years of service. According to Micheal (1993), the new FASB accounting rules oblige the employees to estimate all the benefit costs associated with the other postretirement benefits which must be added to the medical costs applying currently and recognized for purposes of accounting as accrued expenses. This should be done on yearly basis and recorded as appropriate in the balance sheet in the year they are recognized. The total obligations accumulated over the years should be recorded in the income statement. In this case, the obligations are either shown as one-time charges or are spread through a period of 20 years and record in each year the applicable amount. The new accrual accounting practices apply to both the new and former employees of an organization after and before the adoption of the FASB statement 106.

According to Atha (1991, 1), SFRS has it that the costs of these benefits should be accrued ratably over the fully eligible period of service. After obtaining EPEO and APEO, the periodic costs can be determined for purposes of accounting. The periodic costs of benefits are computed as an aggregate of six net cost components including interest cost, service cost, prior service cost amortization, unfunded APBO, and the net loss or gain on net period OPEB (other postretirement expected benefits).

For companies adopting FASB statement 106 for the first time (latest by 1995), they shifted from cash basis of accounting to accrual basis. Since the statement considered retired employees as at the date of adoption, there were transition obligations incurred by the company. There are the unfunded APBO and are recorded as off-balance sheet items. They could be recognized once of be accrued over twenty years and record as accrued expenses the amount that applies to each year.


The accounting procedure for postretirement benefits plans other than pension plans is comprehensively addressed in a statement no. 106 that was developed by FASB in December 1990. The statement represented a shift from cash basis to the accrual basis of accounting. These benefits are therefore accounted for on an accrual basis. Paying the transition obligation in a single installment can result in a huge cash drain to the company. A company should amortize it over 20 year period to ease the burden. Amortization would at least ensure there is no material financial implication in the financial position of the company.

Reference List

Atha, B. (1991). Postretirement benefits other than pensions: a look at the new Rules. US: National Society of Public Accountants. Web.

Harold, D. (1989). Financial statements and the FASB retiree health proposal. USA: Financial Executives Institute. Web.

Micheal, D. (1993). All inc.: FASB 106: ready or not, here it comes. USA: business credit. Web.

Overman, S. (1993). Time to rethink retiree benefits. Us: HRmagazine. Web.

Wilbert, J.R. & Dakdduk, K.E. (1991).The New FASB 106: How to Account for Postretirement Benefits; New Rules Will Have a Major Impact on Most Companies’ Bottom Lines, Journal of Accountancy, Vol. 172, 1991. Web.

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