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The only acceptable attribution approach in ASC 715 is the benefit approach. Under this approach, discounting of the cost of benefits earned in a period is performed after an equal amount of the projected benefits are attributed to each period. For example, assume the plan specifies that $500 of future benefit is earned for each year of service and it is expected that the employee's expected service life is 20 years; at retirement, the employee will be entitled to a lump-sum cash payment of $10,000. Using the benefit approach, each year is charged with a service cost equal to the then-present value of $500 due at the end of year 20. Unlike stock compensation accounting under ASC 718, vesting provisions associated with pension benefits do not affect the period of attribution of expense. See PEB 2.5.3 for discussion of the attribution period for OPEB plans.
Accordingly, a benefit approach assigns a service cost to the early period of an employee's active service that is less than that assigned during later years. Put simply, the present value of a dollar of benefit promised to a 60-year-old is greater than that of a dollar of benefit promised to a 25-year-old, if both are payable at age 65. While the total benefit promised is the same, the benefit approach results in lower charges for service cost in early periods offset by higher charges for service cost in later periods compared with a straight-line approach (cost approach) based on the aggregate present value of the retirement benefits. The benefit approach invariably results in a lower accumulated and projected benefit obligation at any point in time prior to retirement compared with the cost approach, with interest cost recognized over the service period to accrete the previously accrued benefits to the amount payable in retirement.
ASC 715 requires the use of a single actuarial method based on the plan's benefit formula to the extent the plan states or implies attribution. For plans that define benefits similarly for all years of service (e.g., $500 for each year of service), the actuarial method to be used is "benefit/years of service" (unit credit actuarial cost method). When benefits are "salary" related, that is, defined based on final pay or career average pay (e.g., 1% of final pay for each year of service), a projected unit credit method is used. All career-average-pay plans and final-pay plans are accounted for similarly. See PEB 2.5.2.2 for discussion of attribution of benefits to service periods when it is not apparent from the benefit formula.

2.5.1 Projected unit credit method

The projected unit credit method is an actuarial valuation method that views each period of service as giving rise to an additional “unit” of benefit entitlement and measures each unit separately to build up the final obligation. This method will consider expected future pay increases in the calculation of liability and normal cost. The normal cost is the estimated present value of projected benefits current plan members will earn in the year following the valuation date. It represents today’s value of one year of earned benefits.
Example PEB 2-1 demonstrates a basic calculation using the projected unit credit method.
EXAMPLE PEB 2-1
Projected unit credit method
PEB Corporation provides a pension plan that pays participants an annual benefit in retirement of 1% of final salary for each year of service earned under the plan. Assume a plan participant is currently age 55, has worked for 20 years for PEB Corporation, and has a current salary of $50,000. The actuary assumes the participant will retire at 65, after working 30 years for PEB Corporation, with an estimated future salary of $75,000.
How is the PBO calculated using the projected unit credit method?
Analysis
Using the projected unit credit method, the projected benefit obligation is based on the participant’s expected future salary, but only takes into account the service earned to date. In other words, the projected benefit obligation would be the actuarial present value of a stream of annual payments of 1% times the projected salary at 65 multiplied by the years of service to date (20 at age 55) for the person’s expected lifetime (assume 80 years), commencing upon expected retirement at age 65 as follows:
Expected future salary
$75,000
Benefit rate
x 1%
Years of service rendered to date
x 20 yrs
Accumulated annual benefit
$15,000
Life expectancy
x 15 yrs
Gross projected benefit
$225,000
The projected benefit obligation would then be the actuarial present value of a $15,000 annuity payable for 15 years beginning in 10 years.

2.5.2 Backloaded plans

In some cases, a plan's benefit formula may not reflect the substance of the arrangement. For example, a plan that defines different rates of benefit accrual for different years of service (i.e., a "step-rate plan") may backload benefits; that is, it may provide for deferred earning of benefits. ASC 715-30-35-36 through ASC 715-30-35-38 requires that the projected benefit obligation be accounted for according to the terms of the plan unless there is significant backloading of benefits, in which case the projected benefit obligation should be attributed on a straight-line basis over the expected service period.
Consider the following terms of five plans, including three "step-rate" plans, all of which provide a benefit of $10,000 to participants with 20 or more years of service.
  • Plan A
  • Plan B
  • Plan C
  • Plan D
  • Plan E
$10,000 earned in year 2
$500 per year, earned annually in years 1-20
$500 per year for each year of service, earned in year 20
$1 per year, earned annually in years 1-19, $9,981 earned in year 20
$400 per year, earned annually in years 1-10, $600 per year, earned annually in years 11-20
Backloaded plans (Plans C and D) and frontloaded plans (Plan A) are accounted for differently. Backloading results in straight-line attribution over the expected service period; frontloading follows the terms of the plan. Thus, the present value of the entire benefit due under Plan A would be attributed over two years.
Plan D is an extreme example of backloading benefits to year 20, although the substance of the plan is that over a 20-year service period a benefit of $10,000 will accumulate. The benefits earned under Plans B, C, and D would be accounted for similarly, although the total cost may differ because of turnover assumptions; each year in the 20-year period would be charged with the actuarial present value of a $500 benefit payable at retirement.
Judgment is required in determining whether benefits are backloaded. When step-rate benefits reflect the increased value of an employee's continued service (Plan E), the benefit formula should be followed. Under Plan E, years 1-10 would be charged with the actuarial present value of a $400 benefit payable at retirement and years 11-20 with the present value of a $600 benefit.
If an employee's service period is expected to extend beyond 20 years in this example, but no additional benefits are earned, the subsequent years' charges would be for interest only, to accrete the previous compensation charges to the then present value of the plan benefit. It would not be appropriate to amortize the service cost over the longer expected service period because the terms of the plan specify otherwise.

2.5.2.1 Attribution of OPEB plans

ASC 715-60-35-61 through ASC 715-60-35-70 generally prescribes that an equal amount of the EPBO be attributed to each year of service in the attribution period for OPEB plans, regardless of the existence of a benefit formula that specifies the benefits earned for individual periods of service. There is an exception in the rare situation when the benefit formula attributes a disproportionate share of the EPBO to early years of service. In that situation, the benefit formula is followed. This methodology is different from that required under pension accounting by ASC 715-30, under which benefits are attributed ratably only in the absence of a plan formula (see ASC 715-60-55-13 for further guidance). The FASB concluded that ratable allocation would be less complex, especially in situations when the benefit formula grants differing levels of benefits depending on years of service and when it is supplemented by other eligibility criteria. Ratable allocation avoids the need for interpreting plan terms to determine specific benefits provided in exchange for each year of service.

2.5.2.2 Attribution - plans with no specified earning of benefits

In accordance with ASC 715-30-35-38, if a pension plan's benefit formula does not specify how benefits are earned relative to years of service, the benefits are deemed to accumulate in either of the following manners:
  • Benefits of a type includable in vested benefits (for example, a supplemental early retirement benefit that is a vested benefit after a stated number of years) are included in the benefit obligation in proportion to the ratio of the number of completed years of service to the number that will have been completed when the benefit is first fully vested.
  • Benefits of a type not includable in vested benefits (for example, a death or disability benefit under the pension plan that is payable only if death or disability occurs during active service) are included in the benefit obligation in proportion to the ratio of completed years of service to total projected years of service.

2.5.3 OPEB plans - full eligibility date

For OPEB plans, the end of the attribution period is the full eligibility date. At that date, an employee's APBO and EPBO are equal. The full eligibility date is the date on which an employee has rendered all the service necessary to receive all the benefits expected to be received by that employee (including any beneficiaries and dependents expected to receive benefits). This date could precede the employee's expected retirement date, depending on the terms of the plan.
While the full eligibility date is used for attribution, the expected retirement date is used for measurement (expected timing of when benefit payments will commence) of the expected benefits.
In determining the full eligibility date, plan terms that provide incremental benefits expected to be received by an employee for additional years of service extend the attribution period, unless those incremental benefits are trivial. Salary progression and benefit indexation formulas are examples of plan provisions providing incremental benefits. To illustrate, assume an employee is eligible for postretirement life insurance benefits after rendering 10 years of service and attaining age 55, but the amount of insurance benefits earned under the plan are indexed until retirement (e.g., based on final salary at retirement). Even though an employee has met the age and service requirements, the full eligibility date has not yet been reached because the employee earns additional non-trivial benefits each year for salary increases until retirement (see ASC 715-60-55-11 through ASC 715-60-55-13).
Question PEB 2-1 addresses measurement and attribution at the full eligibility date.
Question PEB 2-1
An employee is fully eligible for a benefit payable under an OPEB plan at age 55, but his expected retirement date is at age 65. What is the appropriate age to use to calculate the EPBO and what is the appropriate attribution period?
PwC response
The EPBO should be calculated as the actuarial present value of benefits to be provided beginning at age 65. However, because the employee will be fully eligible for the OPEB benefits at age 55, that is the age that would be used in the calculation of the EPBO (i.e., the actuarial present value as of age 55 of the benefits payable beginning at age 65) and the period to which benefits (service cost) would be attributed. While there would be no additional service cost for an employee beyond age 55, there will be interest cost and potential gains and losses. In other words, all of the service cost component would be recognized by the time the employee is age 55. From age 55 to 65, interest cost would be recognized to accrete the liability to its full balance at the time the employee reaches age 65.

Question PEB 2-2 addresses a question regarding determination of the full eligibility date when there is incremental benefit provided for additional years of service.
Question PEB 2-2
A plan provides single coverage to employees who work for 10 years and attain age 55 while in service and dependent coverage for employees who work 20 years and attain age 65 while in service. For an employee expected to meet the necessary age and service requirements and also expected to have dependents during retirement (even though none may exist today), what is the full eligibility date?
PwC response
The full eligibility date is the date that employee has rendered 20 years of service and attained age 65.

Example PEB 2-2 addresses the determination of the full eligibility date when there is a graded benefit formula.
EXAMPLE PEB 2-2
Determination of the full eligibility date when there is a graded benefit formula
Consider an OPEB plan with the following benefits:
  • 25% of eligible healthcare costs if an employee provides at least 10 years of service
  • 50% of eligible healthcare costs if an employee provides at least 20 years of service
  • 80% of eligible healthcare costs if an employee provides at least 30 years of service

Employee A was hired at age 32 and is expected to retire at age 60 (with 28 years of service).
Employee B was also hired at age 32 but is expected to retire at age 65 (with 33 years of service).
What is the full eligibility date and attribution period for each employee?
Analysis
Employee A would be fully eligible for the expected level of benefits (50% of eligible costs) at age 52; that is, when 20 years of service have been rendered. Thus, the attribution period is 20 years, even though the expected service period is 28 years.
Employee B would be fully eligible for the expected level of benefits (80% of eligible costs) at age 62 when 30 years of service have been rendered. The attribution period would be 30 years, even though the expected service period is 33 years.
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