Comparison of Historical and Current Accounting for Pensions and Life Insurance Benefits

Accounting for Pensions and Other Postretirement Benefits
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Accounting for Pensions and Other Postretirement Benefits
Abstract
The research paper compares and contrasts several post-retirement healthcare and life insurance benefits based on the Financial Accounting Standard Board (FASB) standard of “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” linked with financial accounting and reporting. In addition, the report predicts the future of accounting for benefits depending on the potential changes in businesses and the political environment. Finally, the report’s recommendations are based on the changes to the guidance in improving the reporting of pension and related post-retirement benefits.
Comparison of Historical and Current Accounting for Pensions and Life Insurance Benefits
Employers need to disclose plans and feature them in documents based on the historical post-retirement of healthcare and benefits. In the past, employers needed to disclose the pension as an expense. That is why it is the part of net assets and liabilities, which are not booked in the income; instead, they are booked in the comprehensive income. Usually, these retirement benefits are fixed based on the contracts, and estimation is difficult. However, according to FASB, changes need to be made on the future cost and non-pension benefits to make hard choices (FASB, 1). Therefore, the current emphasis is on health costs for treating pension costs while preparing financial statements. On the other hand, the state and local governments emphasize benefits accrued for past and current employees.
Post-retirement benefit plans are usually designed to meet the after-retirement demands of employees. Employees usually demand pension plans, insurance, and healthcare plans to avoid significant expenses and smoothly meet their ends. Post-retirement benefits have been in demand over the years. However, most benefit plans have changed because of different legal mandates and accounting policy changes. Some post-retirement benefits that do not fall into pensions are treated in other post-retirement benefits (OPBRs). These post-retirement benefits are part of SFAS No. 106, addressed under ASC 715 of FASB. According to the new rule, businesses have to include more benefits for post-retirement rather than cash (FASB, 2). Before the approval of FASB 106, most companies rely on a cash basis and known as a pay-as-you-go basis. It means that the employee does not have to face any expense until they are retired.
According to FASB 715, the post-retirement benefit cost over the working lives is accrued over the working tenure of employees. Therefore, these employees do not require the disclosure of the minimum liability balance sheet. Although OPBRs are linked with pension plans, they have different accounting considerations. Prominent differences as highlighted in Sec 171 are:
* Unlike pensions, OPRBs do not vest; when employees leave the organization, they do not have the right to claim future benefits. That is why defined benefits are covered under minimum vesting, funding standards, and Pension Benefit Guaranty Corporation. In addition, it falls under ERISA, whereas OPBRs are not part of ERISA (FASB, 3).
* The pensioned benefits are usually accumulated with employees’ years of service; however, this is not the case with additional OPRB benefits (EBRI, 4).
* The formula mainly determines the benefit pension plans in the past. However, now, the emphasis of OPRBs is based on the services, medical care, and other related benefits received by employees. Employers are not bound to set a cap on employee benefits like pension plan payments. That is why it is not easy to predict the future cash flows linked with OPRBs (EBRI, 4).
As researched in FASB ASC 715, six components are included in pension expenses; however, their measurement procedure is different because of previously set differences between pensions and other post-retirement benefits. The accounting policy also indicates a need to include more post-retirement benefits to measure the expected post-retirement benefits liabilities. Further, it is expected that the healthcare cost is expected to increase under the new policies. Previous historical accounting for these benefits asked employers to disclose the plans in the financial documents (Glaum et al., 5). Therefore, it can be observed that Postretirement Healthcare and OPRBS did not improve verifiability in the past.
The Accounting for Stock-based Compensation allows options to choose between financial statement recognition and footnote, which is a method of accounting. Here, the stock is maintained at the cost of employee stock options. However, as employees earn these benefits, businesses need to emphasize accrual accounting and expenses (FASB, 3). Therefore, there is a need to have two adoption alternatives known as one-time change and deferred recognition, which can be considered over future periods every year for the same period.
The historical accounting is based on the Healthcare and Life Insurance Benefits; hence, the retirement benefits are fixed. Therefore, there is a need to disclose market values of assets and obligations of plans which needs to recognize on the balance sheets. In addition, the unrecognized transition assets are based on initial adaption, which would make it difficult for businesses to recognize service costs. The gains and losses are from plan asset performance which makes that information understanding is beneficial about volatility (Robson & Laurin, 6). Here are significant changes toward the net pension liability where assumptions differ from expectations. The change in volatility leads to the market valuation of assets.
Recommended Changes to Rules to Improve the Financial Accounting and Reporting
There are several changes based on the post-retirement benefits due to users’ financial reports, which leads to frustrations of reporting inconsistencies in organizations. However, it is necessary to rely on financial reports to compare companies and determine investing in a business. The prior standards do not emphasize reporting the pensions to overfund and underfund of a defined benefit post-retirement plan. These rarely focused on recognizing earnings and comprehensive incomes and their impact on funded status. Here are two recommendations:
Recommendation 1: Improve Financial Transparency
The first recommendation in this regard is improving financial transparency. The p...