Post-Employment Benefits

What are Post-Employment Benefits?

Post-employment benefits are benefits provided by an employer to former employees after their retirement. These benefits can include pensions, health care, and other types of support. The accounting treatment of these benefits requires careful attention and varies based on whether the benefits are part of a defined-contribution pension scheme or a defined-benefit pension scheme.

Examples of Post-Employment Benefits

Pensions: Regular payments made to retirees based either on contributions made by employees and employers or based on salaries and years of service (defined-benefit plans).
Health Care Benefits: Medical coverage provided to retirees, often extending into their years of retirement.
Life Insurance: Life insurance policies that remain active even after the employee has retired.

Frequently Asked Questions

Q1: How are post-employment benefits accounted for in the USA?
A1: In the USA, the Statement of Financial Accounting Standards (SFAS) 106 requires post-employment benefits to be accounted for on an accrual basis rather than a cash basis. This means recognizing expenses related to these benefits over the period during which employees provide service, rather than when cash payments are made.

Q2: What is the main distinction between defined-contribution and defined-benefit pension schemes?
A2: In a defined-contribution pension scheme, contributions are made by the employer, employee, or both, but the future benefits are not guaranteed. In a defined-benefit pension scheme, the future benefits are determined by a formula based on factors such as salary history and duration of employment, placing the investment risk on the employer.

Q3: What accounting standards apply to post-employment benefits in the UK?
A3: In the UK, the accounting treatment for post-employment benefits is laid out in Section 28 of the Financial Reporting Standard applicable in the UK and Republic of Ireland. Since 1 January 2005, listed companies in Europe have been required to comply with International Accounting Standard 19 (IAS 19), which deals specifically with employment benefits.

Q4: What are actuarial assumptions in the context of post-employment benefits?
A4: Actuarial assumptions are estimates concerning future conditions that impact the cost of providing post-employment benefits. These include assumptions about mortality rates, employee turnover, and the rate of salary increase.

Q5: Why is the accrual basis of accounting used for post-employment benefits?
A5: The accrual basis of accounting is used to provide a more accurate reflection of an employer’s liabilities. It ensures that the costs of post-employment benefits are recognized during the periods in which employees render their services, rather than when payments are made after retirement.

Accrued Benefits: Benefits earned by employees up to a certain date, creating an obligation for the employer to pay these benefits in the future.
Actuarial Assumptions: Assumptions made by actuaries to estimate the future financial cost of post-employment benefits.
Actuarial Gains and Losses: Changes in the actuarial assumptions or actual results differing from these assumptions, impacting the cost calculations.
Vested Benefit: The portion of a retirement benefit that an employee has earned a legal right to receive, contingent on the employee meeting specific service requirements.

Online References

Suggested Books for Further Studies

“Accounting for Pensions and Postretirement Benefits” by Joseph F. Castellano
“Wiley GAAP 2021: Interpretation and Application of Generally Accepted Accounting Principles” by Joanne M. Flood
“Employee Benefits Design and Compensation” by Bashker D. Biswas