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In November 1992, the Financial Accounting Standards Board (FASB) issued Statement 1 12, "Employers' Accounting for Postemployment Benefits." This Statement represents the final stage of the FASB' s project on accounting for retirement and other post-employment benefits. The FASB had specifically excluded post-employment benefits from the scope of earlier Statements that dealt with retirement benefits, primarily because of their unique characteristics.
Statement 112 requires employers to recognize the obligation to provide postemployment benefits in accordance with Statement 43 ("Accounting for Compensated Absences") if certain specified conditions exist. If these conditions are not met, the employer must account for postemployment benefits when it is probable that a liability has been incurred and the amount can be reasonably estimated in accordance with FAS Statement 5, "Accounting for Contingencies."
Postemployment benefits have generally been accounted for on a terminal accrual or cash basis method until no Individual employers may have used different methods of accounting for different types of benefits.
The purpose of this article is to provide a brief summary of the requirements of Statement 112 and to describe its potential impact on your company. Also included are recommended approaches that can he used to value the liabilities associated with postemployment benefits.
REQUIREMENTS OF STATEMENT 112
The new accounting standard defines postemployment benefits as all types of benefits provided to former or inactive employees (including covered dependents) after employment but before retirement, regardless of whether the employee is expected to return to active employment or is expected to be eligible to retire. All types of postemployment benefits provided to former or inactive employees are to be accounted for under the provisions of Statement 112, irrespective of the method or timing of the benefit payment.
Postemployment benefits may be paid as a result of layoff, death, disability or other like events. Examples of the types of benefits covered by the new standard include continuation of salary, health care and life insurance benefits, worker's compensation, severance benefits, short and long-term disability coverage, job training and counseling, and the continuation of benefits during a leave of absence. The FASB concluded that postemployment benefits are part of the compensation provided to employees in exchange for services rendered. This conclusion becomes critical when measuring the liability and expense associated with postemployment...