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ASC 712 prescribes the accounting for the estimated cost of other postemployment benefits provided by an employer to former or inactive employees after employment but before retirement. These benefits include salary continuation, supplemental unemployment benefits, severance benefits, disability related benefits (including workers’ compensation), job training and counseling, and continuation of benefits, such as health care benefits and life insurance coverage. These benefits are generally viewed as part of the compensation provided to employees in exchange for service.
Of these benefits, those that vest or accumulate are accounted for using the same model applied when accounting for compensated absences pursuant to ASC 710-10-25-1 through ASC 710-10-25-3 (see PEB 6.4). Other benefits that do not meet these conditions are accounted for using a loss contingency model under ASC 450-20-25-2.
Under a loss contingency model, a liability to pay benefits that is reported in the balance sheet should result from a condition, situation, or set of circumstances that existed at the balance sheet date. A liability should be recorded when it is probable that a liability had been incurred at that date and the amount is reasonably estimable. For example, the existence of a postemployment benefit plan evidences an employer’s promise to provide termination benefits to involuntarily terminated employees. Employers with such a plan have generally communicated it to employees so that they understand the benefits they would be entitled to receive if they are involuntarily terminated. Thus, the employer with such a plan has a mutual understanding with its employees regarding the benefit arrangement and has therefore obligated itself to pay the benefits in the event of their involuntary termination. Accordingly, when it is probable that the employer will involuntarily terminate the employment of employees, and the amount of the termination benefits is reasonably estimable, the “existing condition, situation, or set of circumstances” requirement is met, and a liability for the cost of the benefits would be recognized. The accrued amount should incorporate an estimate of employees that will voluntarily cease employment prior to being involuntarily terminated and not ultimately receive the severance benefits.
An employer's nonretirement postemployment benefit obligation is the sum of:
  • the reasonably estimable value of nonvesting/nonaccumulating postemployment benefits that are probable of payment to the current group of former or inactive employees (e.g., those on disability leave); and
  • a proportionate amount (based on the portion of the required service period rendered) of the probable and reasonably estimable value of vesting or accumulating postemployment benefits expected to be paid to current employees.
Uncertainty regarding the timing of benefit payments does not preclude the recognition of the obligation.
Question PEB 8-3
A subsidiary is in the process of streamlining its organization in anticipation of being spun-off by its parent. This spin-off will lead to the termination of 100 subsidiary employees. The subsidiary is offering its employees the opportunity to receive one-time incremental termination benefits, in addition to the termination benefits available under the parent’s pre-existing severance plan, if they are willing to leave the company. The employees were notified of this opportunity on March 1 and have until March 31 to notify the subsidiary if they will voluntarily leave. The subsidiary will then determine which voluntary terminations to accept. If less than 100 employees voluntarily agree to terminate then the subsidiary will involuntarily terminate sufficient employees to ensure that they eliminate at least 100 employees in total. All decisions will be made on or before April 30 and communicated to the employees on April 30.

Should the voluntary termination benefits be accounted for as a special termination benefit, a contractual termination benefit, and/or as a one-time termination benefit?
PwC response
The voluntary termination benefits being offered to the employees should be accounted for in two pieces. The portion that is provided under the parent’s pre-existing severance plan is a postemployment benefit (ASC 712) and the incremental portion is a one-time termination benefit (ASC 420; see PEB 8.5). The benefits should not be accounted for as special termination benefits because the subsidiary can either accept or deny the employee's acceptance of this termination program. Under ASC 712-10-25-1, "special termination benefits to employees shall be recognized as a liability and a loss when the employees accept the offer and the amount can be reasonably estimated." However, this guidance applies when a plan would be binding once the employee accepts the offer. Since the subsidiary can either accept or deny the employee's acceptance of this termination program, this plan is not considered a special termination benefit as the subsidiary will make the final decision to terminate an employee.
For termination benefits provided under the parent’s pre-existing severance plan, a liability should be recognized when it is probable and reasonably estimable (ASC 712-10-25-2). The subsidiary should consider when the decision was made to streamline the operations and eliminate 100 employees as that is the date when it would be probable and reasonably estimable that 100 employees will be entitled to the contractual termination benefits.
For the one-time benefits that are incremental to the parent’s pre-existing severance plan, a liability should be recognized when the criteria under ASC 420-10-25-4 are met. Consequently, for the portion subject to ASC 420, the subsidiary would record the liability when they determine which employees’ offers of termination they will accept (i.e., sometime in April), as that is the point at which management would have committed to the plan of termination (assuming that the other three criteria of ASC 420-10-25-4 have been met) and communicated the benefit arrangement.
Question PEB 8-4
On December 15, 20X1, a company makes a general announcement that cost-cutting measures are underway and an involuntary work force reduction will occur in the near future. As of December 15, 20X1, the company has identified affected employees, but has not notified them and does not plan to do so until January 20X2. Upon termination, no future services will be required of the employees.

The company has a written plan that specifies that an involuntarily terminated employee receives two weeks of base salary for every year of continuous employment. In connection with this work force reduction, management has decided to provide severed employees with an extra week of base salary for every year of continuous employment. This additional benefit will be communicated in January 20X2 when identified employees are notified. Management does not intend to offer this additional week in future severance events.

What model for termination benefits should be used? When should the liability and related expense be recorded?
PwC response
The company would account for the benefits associated with the three weeks of base salary for each year of service in two pieces. Two of the three weeks would be accounted for under the other postemployment benefit plan (under ASC 712) because the company has a written plan that entitles severed employees to two weeks of base salary for every year of continuous employment. The related liability and expense for those termination benefits would be recorded on December 15, 20X1 for the identified employees, as there is a mutual understanding of benefits that employees will be entitled to receive at that time, and the benefits are both probable and estimable at that time.
The company would account for the benefits associated with the additional one week of base salary for each year of service as one-time employee termination benefits (under ASC 420) because that benefit is an additional one-time benefit and is not covered by an existing written or substantive plan. The related liability and expense for those termination benefits would be recorded in January 20X2 upon communication of these benefits to the impacted employees ("communication date") when the benefit arrangement is mutually understood by the employees. The amount of the benefit would be recognized immediately, as no future services are required to receive the additional benefit. See PEB 8.5 for further discussion.

8.4.1 Termination benefits that vest or accumulate

When the four conditions in ASC 710-10-25-1 are met, the expense and liability for benefits are accrued as the employees provide the services to earn the benefits. The four conditions are:
  • The benefits relate to past service
  • The benefits vest or accumulate
  • Payment is probable
  • Payment can be reasonably estimated
Benefits meeting these conditions should be recognized in the period or periods in which employees render the necessary services to earn the right to the benefit. An employer must continue to assess whether payment is probable and reasonably estimable at each reporting date, and recognize the liability that exists (i.e., based on the portion of the required service period rendered) when those conditions are initially met.
Vested rights are defined as those for which the employer has an obligation to make payment even if an employee voluntarily terminates; thus, they are not contingent on the employee rendering future services. Benefits that accumulate are those for which earned but unused rights are carried forward to one or more subsequent periods, even though there may be a limit to the amount that can be carried forward. Benefits that accumulate generally have been defined as any postemployment benefit that increases with additional employee service.
Question PEB 8-5
If an employer meets the first two conditions in ASC 710-10-25-1 (i.e., that postemployment benefits are attributable to services already rendered and that they either vest or accumulate) but does not meet one or both of the other conditions in that paragraph (i.e., payment of the benefits is not probable or the amount cannot be reasonably estimated), should the employer follow a loss contingency model (ASC 450-20-25) from that point on?
PwC response
No. Since the employer has a plan under which postemployment benefits meet the first two conditions of ASC 710-10-25-1, it must continue to assess whether it meets the probable and reasonably estimable conditions at each reporting date and recognize the liability that exists when those conditions are initially met (and recognize subsequent increases in that liability for additional benefits earned as a result of additional employee service). Uncertainty regarding the timing of benefit payments does not justify not recognizing the obligation.

8.4.1.1 Determining when termination benefits accumulate

Benefits that accumulate are any postemployment benefits that increase with additional years of employee service. If an employee with ten years of service receives a larger benefit than an employee with nine years of service (because of the length of service), the benefit accumulates.
Benefits based strictly on compensation levels do not accumulate. For example, if an employee with five years of service earning $25,000 would receive the same benefit (e.g., defined as a percentage of final pay) as an employee with three years of service who also earns $25,000, there is no accumulating benefit. Likewise, if the employee with five years of service receives a salary increase in year six, which would increase the amount of benefit but is not directly attributable to working an additional year (i.e., it is not formulaic based on years of service), the larger benefit would not be considered an accumulating benefit.
Assuming all of the other conditions of ASC 710-10-25-1 are met (particularly that the payment is probable and reasonably estimable), the cost of accumulating benefits should be recognized as they are earned by employees through the rendering of service. The period of attribution starts on the date the rights to benefits begin to accumulate and ends on the date the employees are fully eligible to receive the benefits.
Question PEB 8-6
For a postemployment benefit to accumulate, is it necessary that the increase occur more than once (i.e., in a series of increments as more years of service are rendered)?
PwC response
No. The key criterion for an accumulating benefit is that the benefit amount must increase due to length of service. That increase could occur only once. For example, the benefit could increase after five years of service without any further increases for additional years of service.
Question PEB 8-7
An employer provides disability benefits to its employees subject to an eligibility requirement of five years of service. For five to ten years of service, the employee receives 30% of salary; for 10 to 15 years of service, the employee receives 50% of salary; and for over 15 years of service, the employee receives 75% of salary. Do the disability benefits accumulate?
PwC response
Yes. The disability benefits accumulate. Accordingly, the cost of the benefits would be accrued during the relevant service periods of employees based upon anticipated disabilities and the estimated amount of benefits, assuming the amounts are probable and reasonably estimable.
Question PEB 8-8
An employer has a written involuntary termination benefit plan that is distributed to all of its employees at their date of hire. The plan provides that, upon an involuntary termination of employment for other than cause, each terminated employee will receive one week of severance pay for every year of service (i.e., the benefits accumulate). If an employee voluntarily terminates employment, the employee will receive no termination benefit under this arrangement (i.e., benefits are not vested prior to the involuntary termination date).
Would the written plan constitute a postemployment benefit plan?
PwC response
Yes. The employer and its employees have a mutual understanding of the benefits the employees will receive if they are involuntarily terminated. To be mutually understood, employees must know that the benefit arrangement exists and the terms that determine what benefits the plan provides. Accordingly, when payment of benefits under this plan is probable and reasonably estimable, the cost of the benefits should be accrued based on the approach described in ASC 710-10-25-2 (as prescribed by ASC 712-10-25-4) because the benefits accumulate based on years of service.

8.4.2 Common types of postemployment plans

There are various types of postemployment arrangements, including the following:

8.4.2.1 Workers' compensation

Any benefits that result from an existing injury are recorded under the loss contingency model (ASC 450), requiring that an obligation be recognized for the estimated cost of claims filed and those incurred but not reported. In addition, if a benefit meets all of the ASC 710-10-25-1 conditions, an obligation is to be recognized even before any injuries occur if it is probable that accumulating workers’ compensation benefits will be paid to current employees covered by the plan. This is because, for that type of benefit, the event that creates a liability and affects the amount of accumulating benefits is the rendering of employee service. However, since workers' compensation benefits generally do not vary with additional years of employee service (i.e., they do not vest or accumulate), the ASC 710-10-25-1 approach is rarely used to account for the cost of such benefits.

8.4.2.2 Severance benefits

Many severance plans provide benefits that vest (i.e., they are payable regardless of who initiates the action that leads to termination of employment) or accumulate (i.e., the benefits increase in amount based on length of employment) and are, thus, attributable to past services. An employer should accrue a liability when all four of the ASC 710-10-25-1 conditions are met. A benefit that an employee is entitled to upon any termination of service (including voluntary termination), sometimes referred to as a termination indemnity, should generally be accrued over the vesting period. The liability at each reporting date should at least reflect the amount currently vested. Although the timing of the payment may not be known, it would generally be considered probable that the company will pay the benefits at some point in the future. This type of arrangement may be more common in certain foreign countries.
Some companies may have a history of paying severance benefits for involuntary terminations absent a written severance plan. In that case, the history of the severance payments should be analyzed to determine whether a substantive plan exists. A benefit arrangement that is mutually understood by an employer and its employees would constitute a substantive plan even if that arrangement is unwritten. A history of paying special termination benefits, as defined in ASC 712 (see PEB 8.2), would not constitute such a plan, however, because employers have no obligation to pay benefits until employees accept an offer to voluntarily terminate their employment.
For severance benefits that vest or accumulate, companies should accrue a liability when payment of the benefits is probable and reasonably estimable. Generally, three different situations may occur for companies with written or substantive severance plans:
  • Severance occurs from time to time, but is not probable and estimable. Companies should record a liability when payment of benefits becomes probable and estimable.
  • Some minimum level of probable severance benefits can be predicted and estimated with reasonable accuracy covering normal recurring involuntary terminations. If the severance benefits vest or accumulate, they should be accrued over the related service period under the ASC 710-10-25-2 approach. Unusual levels of severance (e.g., resulting from a restructuring or plant shutdown) would be accrued when probable and reasonably estimable, generally when management has made the decision to initiate the terminations.
  • Some very large companies may have so many work locations that the natural evolution of their businesses results in a reasonably predictable pattern of workforce reductions (e.g., through small reorganizations, plant shutdowns, and other actions). In those situations, overall severance costs, including those related to various termination “events,” could be considered probable of payment and reasonably estimable even though a decision has not been made to close any specific plant. As such, the value of severance benefits that vest or accumulate should be accrued over the relevant employee service periods.
If the termination benefits represent contractual termination benefits (see PEB 8.3), a liability for such benefits would be recognized when it is probable that the specified event that would trigger a requirement to pay benefits (e.g., plant closing) will occur.
One-time termination benefits provided to involuntarily terminated employees under the terms of a one-time benefit arrangement (an arrangement established by a plan of termination that applies for a specified termination event or for a specified future period) should be accounted for under ASC 420 if the benefits are not provided in the form of an enhancement to an ongoing benefit plan. See PEB 8.5 for additional discussion of one-time termination benefits.
Question PEB 8-9
On December 15, 20X1, a company makes a general announcement that cost-cutting measures are underway and an involuntary workforce reduction will occur soon. As of December 15, 20X1, the company has identified affected employees, but has not notified them and does not plan to do so until January 20X2. The company does not have a written pre-existing severance plan; however, it has a history of compensating severed employees four weeks of base salary for every year of continuous employment, and plans to do so in this case. Employees understand how their benefits would be calculated if they were to be involuntarily terminated.

What model for termination benefits should be used? When should the liability and related expense be recorded?
PwC response
The company would likely conclude that it has a substantive involuntary termination benefits plan because it has a consistent past practice of providing termination benefits that employees understand. The liability and related expense for the termination benefits would be accrued on December 15, 20X1 for the identified employees, as there is a mutual understanding of benefits that employees will be entitled to receive at that time and the amount is both probable and estimable. Note that the assessment of what constitutes a “consistent past practice” involves considerable judgment, as further described in PEB 8.5.
Question PEB 8-10
To record a liability for one-time termination benefits, ASC 420 requires an employer to, among other things, communicate to its employees the benefits they will be entitled to receive if they are terminated. Must this communication be made for a liability to be recorded for severance benefits pursuant to an ongoing benefit plan?
PwC response
No. ASC 712 addresses the accounting for benefits that are provided under the terms of an ongoing postemployment benefit plan. A plan represents the benefit arrangement that is mutually understood by an employer and its employees. Thus, if an employer has an ongoing benefit plan that provides involuntary termination benefits, employees are already aware of the benefits they will receive if they are terminated involuntarily so the communication of the benefit is not necessary for an obligating event to occur.
Example PEB 8-1 discusses the timing of recognition of a liability related to a reduction in force.
EXAMPLE PEB 8-1
Timing of recognition of liability for severance benefits for a reduction in force
An employer has a written involuntary termination benefit plan that is distributed to all of its employees at their date of hire. The plan provides that, upon an involuntary termination of employment for other than cause, each terminated employee will receive one week of severance pay for every year of service. If an employee voluntarily terminates employment, the employee will receive no termination benefit under this arrangement.
The employer has previously concluded that involuntary terminations were not probable and/or reasonably estimable.
During its fiscal fourth quarter, the company determines that it will initiate a reduction in force (RIF). Management can reliably estimate the expected number of involuntary terminations that will occur. The RIF is expected to occur approximately six months after the fiscal year end and specific affected employees will be notified at that time and terminated immediately.
What accounting would be required under these circumstances?
Analysis
Because the benefits accumulate—i.e., the amount of severance increases based on years of service—the plan is subject to the guidance in ASC 712. Although no benefits were previously accrued because management concluded payment was not probable or reasonably estimable, the decision to initiate a RIF in the fourth quarter and establish the number of terminations expected to occur makes payment probable and reasonably estimable under the plan. Because payment of the benefit is probable and the amount can be reasonably estimated, the company would recognize a liability during the fourth quarter for the cost of benefits earned by employees’ services rendered through the end of the fiscal fourth quarter. The amount should be based on expected future payments of benefits earned for service to date, taking into account the possibility that some individuals may voluntarily terminate their employment before being notified of the RIF and will not be entitled to the benefits. The liability would be increased in the first and second quarters of the next fiscal year as employees who will be terminated as part of the RIF render additional service that earns them a larger benefit (i.e., they reach another anniversary date to be eligible for another week of pay).
If the company did not have a written plan or a substantive plan based on a history of paying benefits for past terminations, but rather announced what the severance benefits for this RIF will be in the fourth quarter when it reached the decision to perform a RIF, the benefit arrangement would be accounted for as a one-time termination benefit. In that case, because individuals must be employed on the termination date in order to receive the benefit and the minimum retention period to receive the benefits is greater than 60 days, the cost of the benefits and corresponding liability would be accrued from the date that all of the conditions in ASC 420-10-25-4 are met (management commitment, employee groups identified, terms established in enough detail that employees can determine benefits if they are terminated, unlikely significant changes to plan will be made and communication to affected employees) through the termination date.
Question PEB 8-11
Company A terminated a key employee. The employee has historically been instrumental in Company A's revenue growth, developing and maintaining a significant number of the company's customer relationships. At the time of termination, Company A and the employee negotiated a $2 million severance payment, as well as a three-year non-compete agreement.

Should Company A expense the $2 million upon termination or capitalize some or all of the $2 million and attribute the amount over the three-year term of the non-compete?
PwC response
It depends. The determination of whether some or all of the $2 million should be expensed or attributed over a future period is dependent on whether the non-compete agreement is considered an asset (i.e., whether there is a probable future economic benefit that is controlled by the company) consistent with the guidance in ASC 350-30-25 regarding the recognition of an intangible asset. This evaluation would consider whether the non-compete agreement is substantive, and whether Company A has the intent and legal ability to enforce the non-compete agreement.
If the non-compete is determined to be substantive and Company A has the intent and ability to enforce it, the fair value of the non-compete, not to exceed the total payment, would be capitalized and amortized over the three-year term of the non-compete. The fair value of the non-compete may be an amount less than the $2 million total payment. Any amount paid in excess of the fair value of the non-compete would be expensed as a severance payment.

8.4.2.3 Long-term disability benefits

If long-term disability-related benefits do not vary with years of service (i.e., do not vest or accumulate), and are separate from a pension or postretirement plan, the employer is required to accrue the cost of the benefits (e.g., wage continuation, health care, life insurance) at the date of the disability. However, disability-related benefits that vary with years of service (i.e., accumulate) will need to be recognized during employees' service period under ASC 710-10-25 when payment of benefits is probable and reasonably estimable. Disability benefits offered to active employees as part of a pension plan are in the scope of ASC 715-30 and should be included in the measurement of the projected benefit obligation. See PEB 2 for additional discussion of these types of benefits in a pension plan.
In general, disability benefits are unlikely to be probable or reasonably estimable prior to the injury or illness of the employee occurring. Thus, accrual for disability benefits typically occurs on an incident-by-incident basis. To measure the liability for disability-related benefits at the date of disablement, an estimate of all wage continuation and health care benefits will have to be developed for each disabled employee (and covered dependents). Depending on the benefit arrangement and the interaction of various plans, this liability may be smaller if the employer is already accruing a significant portion of disability-related costs as a postretirement benefit under ASC 715-60.

8.4.2.4 Life insurance benefits

Employee death benefits (employer-provided life insurance that is self-insured) typically vary with an employee's salary rather than with years of service. Therefore, most such benefit arrangements do not vest or accumulate. As a result, an employer will typically record death benefits, future survivor income payments, and health care benefits for a surviving spouse upon the death of an employee if the benefit is only provided to employees who die while in active service. If the benefit is provided as part of a pension or postretirement plan, or is also provided to former or retired employees, it would be a postretirement benefit accounted for under ASC 715 (see PEB 2). In some cases, employers may purchase life insurance contracts to fund these benefits. See LI 5 for some of the more common types of life insurance contracts, such as, key-person life insurance and split-dollar life insurance, and the reporting entity’s accounting for its investment in these contracts.

8.4.2.5 COBRA benefits

The continuation of health care benefits under COBRA (Consolidated Omnibus Budget Reconciliation Act) is a postemployment benefit. Any difference between the actual cost of healthcare benefits and the COBRA contribution collected from the employee is the amount of the postemployment benefit and should be reflected in the measure of the benefit obligation. All employees are entitled by law to elect continuation of healthcare coverage under COBRA. However, the benefit typically does not vest or accumulate and, thus, should be accounted for using a loss contingency model. Because this benefit is provided for a limited period of time, and terminated employees often pay a large portion of the cost of continuing coverage, an employer's obligation for COBRA benefits may not be material. However, employers who voluntarily provide health care continuation on more favorable terms than COBRA may have a more significant obligation.

8.4.3 Subsequent events affecting postemployment benefits

If an event after the balance sheet date confirms that, at the balance sheet date, payment of a benefit covered by ASC 712 was probable, a reasonable estimate of the amount should be accrued at the balance sheet date. The estimate should take into account all information available as of the date the financial statements are issued or available to be issued to the extent the information reflects facts that existed at the balance sheet date. Conversely, if the post-balance sheet date event indicates that the payment of benefits became probable only after the balance sheet date, and all other evidence similarly supports that the payment of benefits was not probable at the balance sheet date, the post-balance sheet date event should not be reflected in an accrual at the balance sheet date.
It would be inappropriate to presume that, once the probability condition is met for any reason, any and all subsequent events that give rise to the payment of benefits should result in an adjustment to the accrual at the balance sheet date. Judgment is required to determine whether payment of benefits is probable at the balance sheet date and, accordingly, the specific facts and circumstances will need to be considered.
Question PEB 8-12
A calendar year-end company has a severance plan under which benefits do not accumulate or vest. The plan provides $5,000 to each employee who is involuntarily terminated without cause. At December 31, 20X1, the company determined that it was not probable that severance benefits under the plan would be paid. On January 13, 20X2, one of the company's facilities was destroyed by a tornado. On February 5, 20X2, the company’s board of directors decided not to rebuild the facility and management decided to terminate the employees that worked at the site. The company intends to file its 20X1 Form 10-K on February 15, 20X2.

Should the company recognize a liability for severance benefits in its 20X8 financial statements?
PwC response
No. The tornado and subsequent decision by management to terminate the employees are not events that provide new information about conditions that existed at the balance sheet date. Payment of severance benefits was not probable at the balance sheet date (December 31, 20X1). Accordingly, the liability for severance benefits would be accrued in the first quarter of 20X2. Depending on the materiality of the severance benefits or the destruction of the facility, disclosure of the event is likely warranted in the 20X1 financial statements.

8.4.4 Recognition of postemployment benefits provided under a plan

The existence of a plan means that employees understand the terms of postemployment benefits to which they are entitled. The compensation accounting framework presumes, therefore, that the employees have been providing service to the company with the understanding that they are earning those benefits. Thus, once payment of benefits under the plan are considered probable and reasonably estimable, they should be recognized in full for past services rendered. Even if future service is required in order to receive the benefit (e.g., an employee identified for involuntary termination must work through the scheduled termination date in order to receive the severance benefits provided for under the plan), any amounts attributable to past service should be recorded immediately.
The approach under ASC 712 for benefits provided pursuant to a pre-existing plan is different than the requirements of ASC 420 for one-time termination benefits (see PEB 8.5.3), which treat the one-time benefits as a stay bonus. Under ASC 420, because the employee did not previously know about the potential severance benefit and therefore could not have been providing services in the past in return for that benefit, the benefit is attributed entirely to future service provided by the employee from the communication date to the termination date.

8.4.5 Measurement of postemployment benefits provided under a plan

ASC 712 does not provide specific guidance on measuring the obligation for postemployment benefits. ASC 712-10-35-1 indicates that "to the extent that similar issues apply to postemployment benefit plans, employers may refer to ASC 715-30 and ASC 715-60 for guidance in measuring their other postemployment obligations in compliance with the requirements of this Subtopic." As ASC 712 does not require employers to follow the guidance in ASC 715, we believe other methodologies that reasonably estimate the obligation can be used.
To the extent that a reporting entity chooses to employ the measurement framework under ASC 715-30 (pensions) or ASC 715-60 (other postretirement benefits), it should apply all of the measurement and recognition provisions of ASC 715, including those that provide for delayed recognition in net income of remeasurement adjustments and plan amendments. It would be inappropriate to apply the guidance selectively. If a company does not apply the provisions of ASC 715 to benefits in the scope of ASC 712, then any changes in the estimated amount of the benefits payable is recorded immediately through compensation cost in the period of change.
ASC 712-10-35-1 permits, but does not require, the use of discounting in measuring postemployment benefit obligations. Outside the context of applying the ASC 715 measurement framework, the parameters for discounting a liability are less well defined. In general, discounting is likely only appropriate when measuring accumulating benefits.
For nonaccumulating benefits, the SEC staff has published interpretive guidance in SAB Topic 5, which prescribes the use of a settlement rate (i.e., a rate that would result in an amount that could be paid currently to settle the liability) and states that the rate should not exceed a risk-free rate (i.e., a rate that reflects no risk of default) on assets with maturities comparable to that of the liability. The use of a risk-free rate (versus a rate based on high-quality bonds under an ASC 715 approach) could have a significant effect on the measurement of the postemployment benefit obligation.
Question PEB 8-13
ASC 712-10-35-1 indicates that, to the extent employers face issues similar to those faced in applying ASC 715, they may refer to ASC 715-30 and ASC 715-60 for guidance in measuring their postemployment obligations. What are some examples of similar issues?
PwC response
Measuring the obligation for disability medical benefits would require an assumption about future health care costs, similar to the judgment required when measuring retiree medical costs. The need to make mortality and morbidity assumptions and other assumptions, such as those concerning turnover, dependents, and beneficiaries, could be considered similar issues. In addition, making discount rates assumptions and accounting for differences between expected and actual outcomes related to benefit payments may be considered similar issues.
Question PEB 8-14
An employer that provides accumulating disability benefits to its employees records an estimated liability pursuant to ASC 710. In subsequent periods, the estimated liability is re-evaluated and adjusted to reflect the actual experience of the employer. Can the employer defer recognition of these adjustments by applying the delayed recognition approach set forth in ASC 715?
PwC response
It depends. Treatment would depend on whether the employer is applying the ASC 715 framework in measuring its postemployment obligations. If it is, remeasurement adjustments would be subject to the employer’s accounting policy under ASC 715—either deferral initially in other comprehensive income or immediate recognition in net income. If the employer is not applying the provisions of ASC 715, any change in the liability would be recognized as a change in estimate through net income in the period of change in accordance with ASC 250.

8.4.5.1 Plan assets of a postemployment plan

To the extent an employer has set aside assets to fund a postemployment benefit obligation, they would generally be considered assets of the company independent of the benefit obligation, unless the employer is applying the ASC 715 framework. In that case, plan assets would be subject to the parameters in ASC 715 (see PEB 2.6), requiring that they be segregated and restricted (usually in a trust) solely for the purpose of paying postemployment benefits. If the assets are explicitly available to creditors in the event of the company’s bankruptcy, they would not qualify as plan assets. See also PEB 7.5.1 for a discussion of rabbi trusts.

8.4.5.2 Insurance arrangements used to fund postemployment benefits

There are no specific rules governing the accounting for postemployment benefits that are covered by insurance arrangements. However, regardless of the funding mechanism, employers will need to account for the postemployment benefit obligation pursuant to ASC 712. In particular, postemployment benefits (e.g., long-term disability benefits) that an employer self-insures or that are covered under an experience-rated insurance arrangement will generally be subject to ASC 712 as though they were not insured. In cases when an insurance company has assumed the entire risk of paying benefits, it may be appropriate to measure the benefit cost as the cost of the insurance (i.e., the amount of the annual insurance premiums). See LI 5 for a discussion of the accounting for certain life insurance arrangements provided outside of pension and OPEB plans.

8.4.5.3 Gains and losses from changes in estimates (postemployment plans)

ASC 712 is silent as to the treatment of gains and losses that result from changes in estimates. As a general matter, the effects of changes in estimates are recognized currently. However, employers may elect to defer the current recognition of gains and losses in net income if other aspects of the ASC 715 model are also applied. Deferral of gains and losses, however, is not appropriate for postemployment benefit obligations accrued under a loss contingency model (ASC 450).
Question PEB 8-15
Medical benefits are provided to long-term disabled employees under a long-term disability plan that is accounted for under ASC 712. When the employee retires, the medical benefits are provided under the employer’s postretirement medical plan, which is accounted for under ASC 715. Because the company assumes that employees will retire at age 65, its ASC 712 obligation includes benefits for employees through age 64, and its ASC 715 obligation includes benefits for retired employees age 65 and older. As a result of an employer-provided incentive to retire early, 55% of the long-term disabled employees elected to retire in the current year. Because many of these employees are under age 65, this event results in a decrease in the ASC 712 obligation and an increase in the ASC 715 obligation for the cost of benefits from the employee’s age at retirement (e.g., age 60) to age 65.

Should the decrease in the ASC 712 obligation be recognized as a gain and the increase in the ASC 715 obligation recognized as an actuarial loss?
PwC response
No. Although unanticipated early retirements can give rise to an actuarial loss under ASC 715 and, if the employer has not elected to apply the ASC 715 measurement framework to the ASC 712 benefits, a gain for the change in estimate under ASC 712, the two effects are linked to the same event and, in substance, have no impact on the employer’s overall obligation. The employees did not lose any benefits as a result of their decision to early retire. The employer’s obligation to pay their medical benefits remains unchanged; the employer will merely pay those benefits from a different plan. Because the economic substance of the employer’s obligation has not changed, any gain recognition under this fact pattern would be inconsistent with the underlying economics. Accordingly, the portion of the ASC 712 liability that decreased due to the early retirement of the disabled employees should be reclassified to the ASC 715 liability. This treatment is consistent with the example in ASC 715-60-55-11 when increased pension benefits are provided to retirees to partially offset the elimination of their postretirement medical benefits.

8.4.5.4 Amendments to postemployment benefit plans

Plan amendments (including initiation of a plan) affecting postemployment benefits may grant employees credit for past service. The accounting for this “prior service cost” (see PEB 3.2.6) will depend on which approach the employer uses in accounting for the postemployment benefits. If the employer follows the methodology in ASC 715 and the benefit is an accumulating benefit, the prior service cost should be initially deferred in other comprehensive income and recognized over the future service periods of the affected employees. If the employer does not follow the methodology in ASC 715, the vested prior service cost should be recognized in full in the current period. Similarly, if a loss contingency approach is followed because the benefit does not accumulate (and, therefore, there is no service period), the liability for vested prior service cost should be recognized in full in the period of the amendment.
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