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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Companies often provide their employees with postretirement benefits other than pensions. These benefits may include health insurance, life insurance, and disability benefits.

Required:

Explain how the accounting for these other postretirement benefits is similar or dissimilar to accounting for pensions.

To determine

Indicate the manner in which the accounting for other postretirement benefits is similar (dissimilar) to accounting for pension.

Explanation

Pension plan: This is the plan devised by corporations to pay the employees an income after their retirement, in the form of pension.

Other postretirement benefits: The postretirement benefits which are provided by employers, other than pensions, like medical insurance, life insurance, and legal services, and healthcare benefits, are referred to as other postretirement benefits.

The accounting principles for both pension expenses and other postretirement benefits (OPRBs) are very similar. Both pension expenses and other postretirement benefits involve the concept of a liability, as a result the company provides deferred compensation in both situations. The benefits that are received during retirement were earned during the period of employment. Moreover, the components of the two expenses are very similar.

The following are the major differences in accounting for pensions and OPRBs:

    1. Attribution period: Even though the attribution period for both pension expenses and (OPRBs) are defined in the same way, the effect is different. Because the benefit formulas for most pension plans link benefits to years of service and salary levels. As a result, the date of expected retirement and the date of full eligibility are the same for pension plans. However, for several OPRBs, the attribution period starts from the date hired and ends on the date the employee attains full eligibility benefits.

    2. Interest component: For the net postretirement benefit expense, the interest component is calculated based on the accumulated postretirement benefit obligation...

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