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Termination indemnities, which are more prevalent outside the US, generally involve unfunded plans that pay benefits for virtually all terminations, including retirement and voluntary and involuntary terminations. These plans are, in substance, defined benefit plans.
In these plans, the actuarial present value of benefits to which the employee is entitled if the employee terminates immediately may exceed the actuarial present value of benefits to which the employee is entitled at the expected date of separation based on service to date (due to the effects of discounting such future payments). If the vested benefit obligation (VBO) is determined assuming employee termination at the measurement date, that VBO could exceed the accumulated benefit obligation if that obligation is measured based on the employee's expected date of termination and related assumptions (such as salary increases) through that date. The accounting issue is whether the VBO is the actuarial present value of the vested benefits to which the employee is entitled if the employee separates immediately (Approach 1) or the actuarial present value of the vested benefits to which the employee is currently entitled, but based on the employee's expected date of separation or retirement (Approach 2).
Based on the guidance in ASC 715-30-35-41, either approach is acceptable as an accounting policy election, but the method used should be consistently followed and disclosed. Under either approach, the defined benefit plan provisions of ASC 715-30 should be followed. So, for example, the treatment of prior service costs arising from plan amendments and the treatment of gains and losses should be consistent with the requirements of ASC 715-30.
See PEB 8 for guidance on severance and other postemployment benefits not provided through a pension plan.
ASC 715 does not apply to government-established “social security” systems, under which the government pays pensions to retirees and obtains funds through payroll taxes or other levies on employers and employees. ASC 715 does not apply to such systems as employers have no responsibility to make the pension payments and there is no direct relationship between the taxes paid and recorded by the employer and the pensions paid by the government.
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