How to record the periodic postretirement expense


Integrating Case : Postretirement benefits

Compensation-Retirement Benefits-Defined Benefit Plans-Other Postretirement (previously Statement of Financial Accounting Standards No. 106) establishes accounting standards for postretirement benefits other than pensions, most notably postretirement health care benefits. Essentially, the standard requires companies to accrue compensation expense each year employees perform services, for the expected cost of providing future postretirement benefits that can be attributed to that service. Typically, companies do not prefund these costs for two reasons:

(a) unlike pension liabilities, no federal law requires companies to fund nonpension postretirement benefits and

(b) funding contributions, again unlike for pension liabilities, are not tax deductible. (The costs aren't tax deductible until paid to, or on behalf of, employees.)

Required:

1. As a result of being required to record the periodic postretirement expense and related liability, most companies now report lower earnings and higher liabilities. How might many companies also report higher assets as a result of GAAP for postretirement plans?

2. One objection to current GAAP as cited in the chapter is the omission of requirements to discount deferred tax amounts to their present values. This objection is inappropriate in the context of deferred tax amounts necessitated by accounting for postretirement benefits. Why?

 

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Financial Accounting: How to record the periodic postretirement expense
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