Post-Employment Benefits

Post-Employment Benefits Retirement Benefits Accounting Standards Defined-Benefit Pension Scheme Defined-Contribution Pension Scheme Financial Statements International Accounting Standard 19 Accrual Basis
Benefits provided by an employer to former employees, typically those who have retired. The accounting treatment for these benefits, including health care and pensions, varies based on whether they are part of a defined-contribution or defined-benefit pension scheme.
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What are Post-Employment Benefits?

Post-employment benefits are benefits provided by an employer to former employees after their retirement. These benefits can include pensions, health care, and other types of support. The accounting treatment of these benefits requires careful attention and varies based on whether the benefits are part of a defined-contribution pension scheme or a defined-benefit pension scheme.

Examples of Post-Employment Benefits

  1. Pensions: Regular payments made to retirees based either on contributions made by employees and employers or based on salaries and years of service (defined-benefit plans).
  2. Health Care Benefits: Medical coverage provided to retirees, often extending into their years of retirement.
  3. Life Insurance: Life insurance policies that remain active even after the employee has retired.

Frequently Asked Questions

Q1: How are post-employment benefits accounted for in the USA?
A1: In the USA, the Statement of Financial Accounting Standards (SFAS) 106 requires post-employment benefits to be accounted for on an accrual basis rather than a cash basis. This means recognizing expenses related to these benefits over the period during which employees provide service, rather than when cash payments are made.

Q2: What is the main distinction between defined-contribution and defined-benefit pension schemes?
A2: In a defined-contribution pension scheme, contributions are made by the employer, employee, or both, but the future benefits are not guaranteed. In a defined-benefit pension scheme, the future benefits are determined by a formula based on factors such as salary history and duration of employment, placing the investment risk on the employer.

Q3: What accounting standards apply to post-employment benefits in the UK?
A3: In the UK, the accounting treatment for post-employment benefits is laid out in Section 28 of the Financial Reporting Standard applicable in the UK and Republic of Ireland. Since 1 January 2005, listed companies in Europe have been required to comply with International Accounting Standard 19 (IAS 19), which deals specifically with employment benefits.

Q4: What are actuarial assumptions in the context of post-employment benefits?
A4: Actuarial assumptions are estimates concerning future conditions that impact the cost of providing post-employment benefits. These include assumptions about mortality rates, employee turnover, and the rate of salary increase.

Q5: Why is the accrual basis of accounting used for post-employment benefits?
A5: The accrual basis of accounting is used to provide a more accurate reflection of an employer’s liabilities. It ensures that the costs of post-employment benefits are recognized during the periods in which employees render their services, rather than when payments are made after retirement.

  • Accrued Benefits: Benefits earned by employees up to a certain date, creating an obligation for the employer to pay these benefits in the future.
  • Actuarial Assumptions: Assumptions made by actuaries to estimate the future financial cost of post-employment benefits.
  • Actuarial Gains and Losses: Changes in the actuarial assumptions or actual results differing from these assumptions, impacting the cost calculations.
  • Vested Benefit: The portion of a retirement benefit that an employee has earned a legal right to receive, contingent on the employee meeting specific service requirements.

Online References

Suggested Books for Further Studies

  • “Accounting for Pensions and Postretirement Benefits” by Joseph F. Castellano
  • “Wiley GAAP 2021: Interpretation and Application of Generally Accepted Accounting Principles” by Joanne M. Flood
  • “Employee Benefits Design and Compensation” by Bashker D. Biswas

Post-Employment Benefits Fundamentals Quiz

### Which basis of accounting does SFAS 106 require for post-employment benefits in the USA? - [ ] Cash Basis - [x] Accrual Basis - [ ] Hybrid Basis - [ ] Modified Cash Basis > **Explanation:** SFAS 106 requires that post-employment benefits be accounted for on an accrual basis, recognizing expenses over the period when employees provide their services, not just when cash payments are made. ### What type of pension plan guarantees a specific payment amount based on salary history and years of service? - [x] Defined-Benefit Pension Scheme - [ ] Defined-Contribution Pension Scheme - [ ] Hybrid Pension Scheme - [ ] Cash Balance Plan > **Explanation:** In a Defined-Benefit Pension Scheme, the future benefits are determined by a formula that generally includes salary history and years of service, unlike in a Defined-Contribution Pension Scheme where future benefits are based on contributions and investment returns. ### Since which date have listed companies in Europe been required to comply with IAS 19? - [ ] 1 January 2004 - [x] 1 January 2005 - [ ] 23 December 1994 - [ ] 31 December 1992 > **Explanation:** Listed companies in Europe have been required to comply with International Accounting Standard 19 (IAS 19), Employment Benefits, since 1 January 2005. ### What is the purpose of actuarial assumptions? - [ ] To decide employee salaries - [x] To estimate future financial costs of post-employment benefits - [ ] To set annual bonus levels - [ ] To determine tax liabilities > **Explanation:** Actuarial assumptions are used to estimate the future financial costs associated with providing post-employment benefits, and they may involve assumptions about mortality rates, employee turnover, and salary increases. ### Which term refers to the portion of a retirement benefit that an employee has earned a legal right to receive? - [ ] Actuarial Gain - [x] Vested Benefit - [ ] Deferred Benefit - [ ] Accrued Profit > **Explanation:** A Vested Benefit refers to the portion of a retirement benefit that an employee has earned the right to receive, provided they meet the specified service requirements. ### What is the primary difference between defined-benefit and defined-contribution pension schemes from an investment risk perspective? - [ ] Defined-contribution plans pose greater risk to the employer - [ ] Both present zero risks to any party - [x] Defined-benefit plans place investment risk on the employer - [ ] Both present the same level of risk to the employee > **Explanation:** Defined-benefit pension schemes place the investment risk on the employer as they guarantee specific future benefits, whereas defined-contribution plans place the investment risk on employees since the future benefits depend on contributions and investment performance. ### What are 'accrued benefits'? - [x] Benefits earned by employees up to a certain date - [ ] Benefits possibly granted based on future conditions - [ ] Immediate cash payouts upon retirement - [ ] Benefits deducted from the current payroll > **Explanation:** Accrued benefits are those that employees have earned up to a certain point in time and represent an obligation for the employer to pay these in the future. ### Why do employers need to make actuarial assumptions? - [ ] For settling current-period wages - [x] For estimating long-term costs of providing benefits - [ ] To manage daily operational expenses - [ ] To calculate short-term investment gains > **Explanation:** Employers make actuarial assumptions to estimate the long-term costs associated with providing post-employment benefits, such as pensions or health care, based on various risk factors and future conditions. ### What does IAS 19 address? - [x] Employee Benefits - [ ] Tax Acts - [ ] Company Audits - [ ] Public Sector Accounting > **Explanation:** International Accounting Standard 19 (IAS 19) specifically deals with issues concerning the recognition and measurement of employee benefits, including post-employment benefits like pensions. ### If an employee's service period benefits are recognized incrementally, this is consistent with which accounting basis? - [ ] Hybrid Basis - [ ] Cash Basis - [x] Accrual Basis - [ ] Current Value Basis > **Explanation:** Recognizing benefits incrementally over an employee’s service period aligns with the accrual basis of accounting, ensuring expenses are matched with the periods in which the related services are rendered.

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