This chapter looked at how to account for post retirement benefits on
the financial statements and in the general ledger. Post retirement
benefits are those benefits which you are entitled to once the age
requirement has been met (usually 65). After this point you as a
former employee are provided with financial compensation over the
course of retirement generally based on the length of service with the
company and the average of the last 5 years worth of salary
multiplied by the board approved rate.
While working for the company the accounting department must take
these eventual payments into account while presenting financial
information to shareholders and investors. This can be treated as
deferred compensation as there is a more than likely chance that the
agreed upon amounts will be claimed by the employee and therefore
has a material impact on the financial statements which GAAP
requires to be disclosed.
In most instances the above relates to pension plans that the
company provides to the employees, enabling them to plan
accordingly for their post retirement period. This is not the case in all
instances however, sometimes employers will offer additional post
retirement benefits as an incentive to the employees. These need to
be accounted for also as, like pension plans, they can have a material
effect on financial position. The difference however is that other post
retirement benefits can be much more tricky to estimate. For instance
if a company offers post retirement health care as an additional
benefit, there are other implications which need to be taken into
account as various uncertainties arise. The calculation for future
deferred compensation is not only based on the individual employee,
their years of service and their average salary, as pension is, an easy
figure to calculate. When referring to Post retirement health
insurance there are significant estimates which need to be accounted
for, these can include the likelihood of the employee utilizing the
insurance which can be uncertain given the individual health of the
employee. Also we must determine whether or not any dependents
such as spouses or children are covered by the health insurance
which could significantly change the ultimate expense over time.
Some additional difference between the two (pension and post
retirement health care) are that "The interest component of the net
postretirement benefit expense is based on the accumulated
postretirement benefit obligation. However, the interest component
of the pension expense is based on the projected benefit obligation."
(Whalen, J. M., Jones, J. P., & Pagach, D. P. 2017) Not to mention the
attribution period is harder to define given the nature of a pension is
continuous and easily calculable as the date at which the pension can
be claimed is set whereas health care needs are not continuous and
require recalculation when the employee claims health care
compensation.
Other post retirement benefits can have a significant impact on the
quality of employee hired, in terms of qualifications and experience,
and the retention of these employees given the additional incentive
to work for and stay with the company. I believe it to be a good way
of putting a cherry on top of an employment offer. If I were to decide
which would be the most beneficial to the company to offer to
employee post retirement it would be Health Insurance. As health
insurance, specifically in the United States, is extremally expensive
the potential of having to use the system when uninsured is a scary
concept for anyone, even more so for those who have reached a
certain age such that they can retire. Once individuals become elderly
there is a much larger chance that health care might be necessary and
having this as a safety net would certainly put my mind at ease. More
so than life insurance or disability insurance would considering life
insurance is fairly easy to obtain for a reasonable price and disability
insurance, although could be necessary for some, seems to be more
niche than health insurance.
Reference:
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017).
Intermediate
Accounting: Reporting and analysis
. Boston, MA: Cengage Learning
