Cpa Review- Far 6-2 (Postretirement Benefits Other Than Pensions)

Front 1

Postretirement Benefits

Back 1

-Many companies provide benefits to their employees after the employees have retired. Include:

Hint 1

-Health care insurance, life insurance, welfare benefits, tuition assistance, legal services, day care.

Front 2

Accrual Requirement

Back 2

Cost of retiree health and other postretirement benefits must be accrued if:
1. Obligation is attributable to employees' services already rendered*
2. The employees' rights accumulate or vest*
*Liability

Hint 2

3. Payment is probable**
4. The amount of the benefits can be reasonably estimated**
**Contingency rules

Front 3

IFRS vs. GAAP- Postretirement Benefits

Back 3

-Accounting for postretirement benefits mirrors pension accounting under both IFRS and GAAP.

Hint 3

-Differences between the two in pension accounting are also differences here.

Front 4

APBO

Back 4

-(Accumulated Postretirement Benefit Obligation)
-The PV of future benefits that have vested as of the measurement date.
-Discounted using an assumed discount rate.

Hint 4

-Rate should reflect returns on high quality, fixed income investments.
-Used to determine the APBO, EPBO, and the service and interest components of net periodic postretirement benefit cost.

Front 5

EPBO

Back 5

-(Expected Postretirement Benefit Obligation)
-The PV of all future benefits expected to be paid as of the measurement date. Includes:

Hint 5

1. Amount that has vested (APBO) +
2. The PV of expected future benefits that have not yet vested.

Front 6

I/S Approach

Back 6

-Costs are allocated similar to pension costs:
1. The benefit-years-of-service approach is used. The EPBO is attributed to each year of service in the attribution period.

Hint 6

2. The PBO is accrued during the period the employee works (attribution period), generally beginning at the employee's date of hire and ending at the full eligibility date.

Front 7

I/S Formula

Back 7

-"SIR AGE": Current Service Cost + Interest Cost (on APBO) - (Return on Plan Assets) ± (Gains) & Losses

Hint 7

+ Amortization / Expense Transition Amount (Net Obligation) = Net Postretirement Benefit Expense / Cost

Front 8

Service & Interest Cost*

Back 8

-Service cost is the part of the EPBO arising from employee service this period.

Hint 8

-*Increase in APBO due to the passage of time. Calculated as the beg. APBO x the discount rate.

Front 9

Return on Plan Assets

Back 9

-Net postretirement benefit cost is offset either by the actual return on plan assets or the expected return on plan assets.
-Expected Return calculated as Beg. FV of Plan Assets x Expected Rate of Return.

Hint 9

-Actual return on plan assets is based on the difference between the FV of plan assets at the beg. and end of the period, adjusted for contributions and benefit payments.

Front 10

Amortization of PSC

Back 10

-Is the amortization of the cost of retroactive benefits.

Front 11

(Gains) & Losses (2 Sources)

Back 11

1. Changes in APBO due to changes in assumptions or experience
2. Difference between expected and actual return on plan assets when expected is used to calculate the net postretirement benefit cost.

Hint 11

-Similar to pensions, gains & losses under GAAP can be recognized on the I/S in period incurred or recognized in OCI and amortized to net postretirement benefit cost using the corridor approach.

Front 12

Amortization or Expense of the Transition Obligation

Back 12

-Due to effect of adopting SFAS 106 that was generally effective for fiscal years after 12/15/92.
-Transition to accrual accounting done in one of two ways:
1. Immediate expense recognition by recording the entire obligation in one year as the effect of a change in accounting principle.

Hint 12

2. Delayed recognition by using SL amortization over the average remaining service period of active plan participants. If this period is less than 20 years, a 20-year amortization period may be elected.
-Calculation figure below

Front 13

B/S Presentation- Funded Status

Back 13

-Must report on B/S as an asset, liability, or both. Calculated as: FV of Plan Assets - (APBO) = Funded Status.
1. Postretirement Benefit Plan Asset (noncurrent): FV of Plan Assets > APBO, plan is overfunded. All overfunded postretirement benefit plans are aggregated and reported in total as a noncurrent asset on the B/S.

Hint 13

2. Postretirement Benefit Plan Liability (current, noncurrent, or both): FV of Plan Assets < APBO, plan is underfunded. Aggregated and reported as a current, noncurrent liability, or both. Reported as current to the extent that the benefit obligation payable w/in the next 12 months exceeds the FV of the plans' assets.

Front 14

B/S Presentation- AOCI

Back 14

-Companies report postretirement benefits gains & losses, PSC's, and transition net assets or net obligations in OCI when incurred, unless the amounts are recognized on the I/S in the period incurred.

Hint 14

-Tax effects of these items are recognized in OCI.
-Remain in AOCI until recognized in net periodic postretirement benefit cost on the I/S through amortization.

Front 15

Required Disclosures

Back 15

1. Reconciliations of beg. and ending balances of the APBO and FV of plan assets.
-(2) Funded Status, (3) Plan descriptions and FV's, (4) Components of expense, (5) Benefit payments and contributions, (6) impact on OCI
7. Rates and Assumptions: including (1) Discount Rate,

Hint 15

(2) Healthcare Cost Trend Rate, (3) Effect on the APBO, service and interest cost, of a 1% ± in the healthcare trend rate
-(8) Related party transactions, (9) amortization methods, (10) Assumptions and commitments, (11) Termination benefits, (12) Nonpublic = simplified, (13) Can't be combined w/ pension plans.