How to Report Postretirement Benefits in Accounting Statements

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Examples of postretirment benefits provided by companies to employees include health care and life insurance, tuition assistance, legal services and daycare. Reporting on the financial statements involves the disclosure of a net postretirement benefit expense/cost on the income statement and a postretirement benefit plan asset or liability, along with related amounts in accumulated other comprehensive income on the balance sheet. Other details of the plan are included in the footnotes to the financial statements.

Determine the net postretirement benefit expense/cost. The expense is accrued beginning on the employee’s date of hire and ending on the date of full eligibility. The net postretirement benefit expense consists of six items: current service cost; interest cost; expected return on plan assets; amortization of prior service cost; gain or loss amortization due to changes in the present value of benefits vested or earned (the accumulated postretirement benefit obligation); and amortization of the transition obligation due to a change to accrual accounting that records the postretirement benefit obligation as it is incurred. The current service cost, interest cost, amortization of prior service cost, loss amortization of changes in APBO and the amortization of transition obligation increase the expense amount. The expected return on plan assets and gain amortization of changes in the accumulated postretirement benefit obligation reduce the expense.

Report the net postretirement benefit expense/cost on the income statement. The expense is reported as a line item in the income from the continuing operations section.

Determine the funded status of the postretirement benefit plan and report a postretirement benefit plan asset or liability on the balance sheet. The funded status is determined by taking the fair value of plan assets and subtracting the the accumulated postretirement benefit obligation. If the result is positive, record a noncurrent asset on the balance sheet. If the result is negative, record a liability that can be current, noncurrent or both. Only report current liability amounts if the benefits are payable within the next 12 months.

Report postretirement benefit gains or losses, prior service costs, transition assets, or obligations and deferred tax amounts in accumulated other comprehensive income (an equity account) when incurred. Postretirement benefit losses, prior service costs and net obligations increase post retirement benefit expense when recognized for tax purposes; this decrease in future taxable income results in a deferred tax benefit recorded in accumulated other comprehensive income. Postretirement benefit gains and net transition assets will decrease post retirement benefit expense when recognized for tax purposes; this increase in future taxable income results in a deferred tax expense recorded in other comprehensive income. The amounts reported in accumulated other comprehensive income are amortized over time through net post retirement benefit expense.

Disclose additional postretirement benefit information in the financial statements’ footnotes. Additional disclosures include reconciliations of beginning and ending balances of the accumulated postretirement benefit obligation and the fair value of plan assets, the plan’s funded status, the individual components of postretirement benefit expense, and impact on other comprehensive income.

Tips & Warnings

  • Accounting for postretirement benefits is very similar to accounting for pension plans -- don't confuse the two.

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