FRF for SMEs--Retirement and Other Post-Employment Benefits
The principles for recognition, measurement and disclosure of the cost of retirement and other post-retirement benefits in the FRF for SMEs generally require cost recognition of the plans in the periods in which employees perform services.
Pension and other retirement benefits may include pension income, health care benefits, life insurance and other benefits provided to employees after their retirement. Post-employment benefits provided to employees during employment and after retirement include long- and short-term disability income, severance benefits, salary continuance, supplemental unemployment benefits, job training and counseling and health care and life insurance benefits. If deferred compensation contracts as a group are similar to a pension plan they should be accounted for similarly.
These principles apply to any arrangement that is a benefit plan regardless of its form or funding provisions. It is assumed that past practice will extend into the future and applies to benefits for which an entity pays all or part of the cost.
An obligation for payment of benefits under these plans meets the defined characteristics of a liability:
- An entity has a responsibility to pay the benefits at a specified future time.
- While the obligation may not be practical in some cases, the entity has little or no choice but to pay it.
- The rendering of service by the employee or the employee’s applying for certain benefits such as long-term disability obligates an entity.
Defined Contribution Plans:
Pension cost should be recognized as an expense for a period. Pension cost should normally be the accrual basis contribution to a plan for a period.
Footnote disclosures should include a general description of each plan and the cost recognized for a period.
Pension cost in these plans is also recognized as a period expense. Pension cost normally includes the contribution to the plan. In addition to the disclosure requirements for defined contribution plans, any obligation for a probable or reasonably possible withdrawal from a plan should be disclosed.
Individual Deferred Compensation Contracts:
Only accruals of benefits attributable to current employment should be recognized. Future benefits attributable to more than one year of service should be accrued at present value over the employee’s period of service.
Defined Benefit Plans:
Management of an entity can chose either (1) a current contribution payable method or (2) an accrued benefit obligation method to account for these plans. Under the first method, the current plan contribution is expensed. Disclosure include a plan description including participants, the method of determining benefits, information about the funded status of the plan, the contributions for the current and the future year (expected), the expected plan rate of return and the obligation discount rate.
Selecting an accrued benefit obligation permits an entity to use an immediate recognition approach or a deferral and amortization approach. For the immediate recognition approach, the obligation is determined by an actuarial valuation report prepare for funding purposes. The deferral and amortization approach requires recognition of the accrued benefit obligation or asset representing the sum of the current and prior years’ benefit costs, less the accumulated contributions to the plan. Prior service costs are deferred and amortized over future periods, normally along with actuarial gains and losses. Any market value of plan assets and the accrued benefit obligation are disclosed in the footnotes.
More details for the immediate recognition approach and the deferral and amortization approach are included in the framework documentation which can be purchased in the AICPA Store, www.aicpa.org.
by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs. He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms. Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations. He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.