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How to handle FASB 112.

In November 1992, the Financial Accounting Standards Board issued Statement no. 112, Employers' Accounting for Postemployment Benefits, which requires that accrual accounting be used to value the cost of benefits provided to former or inactive employees who have not yet retired. The benefits covered by the statement include salary continuation, disability, severance and health care.

Under Statement no. 112, each benefit offered by the employer must be accrued either

* Over the employee's service period (for benefits that vest or vary based on an employee's years of service).

* As an expense at the date of the event triggering the benefits (for example, the date of disability).

The statement requires employers to record a cumulative catch-up charge to income measured as of the beginning of the fiscal year in which it is adopted. The effective date of the standard is for fiscal years beginning after Dec. 15, 1993--for example, by the first quarter of fiscal 1994.


Postemployment benefits include all types of benefits provided former or inactive employees (including their beneficiaries and covered dependents) who are not retirees, regardless of whether they are expected to return to active employment. Basically, Statement no. 112 covers the' benefits that are not accounted for under Statement no. 87, Employers' Accounting for Pensions, or Statement no. 106, Employers' accounting for Postretirement Benefits Other Than Pensions. (See exhibit 1, for events triggering postemployment benefits under Statement no. 112.) EXHIBIT 1 Postemployment events subject to Statement no. 112

Disability Wage continuation

Health care coverage

Life insurance continuation Termination Severance pay

Salary continuation

Supplemental unemployment


Life insurance continuation

Health care coverage

Job training and counseling Death of an Survivor income active employee Survivor health care coverage

Survivor life insurance

Death benefit payment

To apply Statement no..112, employers must assess their postemployment benefits and determine whether each benefit--or portion of a benefit--is being accrued under Statements nos. 87, 88, Employers' accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, or 106. For example, some employers consider permanently disabled employees to be retired at the date of disability and therefore include certain benefits in their pension plans (which are accounted for under Statement no. 87) and health benefits in their postretirement medical plans (which are accounted for under Statement no. 106).

Under Statement no. 112, employers' postemployment benefit obligations must be recognized on the financial statements either as one-time charges at the time they are incurred (generally on termination of employment) or during the affected employee's working lifetime. Determining which accounting treatment must be used depends on whether the particular postemployment benefit meets the criteria of either Statement no. 43, Accounting for Compensated Absences, or Statement no. 5, Accounting for Contingencies.

Employers must consider Statement no. 43, which requires accrual over the employee's service period. The criteria in Statement no. 43 are applied to certain postemployment benefits when employees' rights to those benefits depend on past service, such rights accumulate or vest, payment is probable and the benefit amount can be reasonably estimated. Postemployment benefits that do not meet the criteria of Statement no. 43 are accrued when it is probable a liability has been incurred and the benefit amount can be reasonably estimated as defined under Statement no. 5.

Statement no. 112 provides little in the way of specific guidance and examples to help employers decide whether to apply the criteria in Statements nos. 43 or 5 to a particular benefit program. However, if a benefit accumulates according to employee service--and if the payment of the benefit is probable and can be reasonably estimated--statement no. 43 applies: The cost must be recognized as the benefit is earned. When this is the case, projected costs are accrued during active service as they are for postretirement benefits under Statement no. 106.

The criteria of probable and reasonably estimable in Statement no. 43 may be difficult to apply to postemployment benefits that vary according to years of service. Employers should consider their policies and future plans (for example, plans for work force reductions) as well as past practices and other facts and circumstances to assess the likelihood that benefits must be paid.

If not all of the Statement no. 43 criteria are met, Statement no. 5 applies and the obligation is recognized when payment is probable and reasonably estimable (for example, on death, disability or management's decision to lay off or terminate an employee or group of employees). For example, if all employees receive the same medical coverage on disability--regardless of their length of service--medical benefits for disabled employees are accrued at the date of disablement and not over the employee's service period.


Statement no. 112 was intended to be a general standard and provides little specific guidance on measuring postemployment obligations and expenses. However, it permits--but does not require--discounting.

Statement no. 112 suggests employers look to Statements nos. 87 and 106 for guidance on measurement issues if similar issues apply to postemployment benefit plans, although recognition of the transition obligation may not be delayed. In particular, the other delayed recognition approaches set forth in Statements nos. 87 and 106, covering the accounting treatment for plan amendments and actuarial gains and losses, are permitted under Statement no. 112.

Employers--and their actuaries and auditors--must deal with a number of key measurement issues that are not addressed by Statements nos. 87 or 106 or that are treated in different ways by them. For example, attributing costs to specific years of service for postemployment benefits meeting the criteria of Statement no. 43 is likely to be complex, since postemployment benefits are fundamentally different from pension or other postretirement benefits. In addition, applying Statement no. 112 when funded and insured plans are involved or when an employer elects not to discount an obligation may be particularly difficult.


Since Statement no. 112's impact will vary widely from employer to employer, employers should begin an assessment immediately. (Exhibit 2, outlines a general action plan.) In general, employers need to understand the current benefits offered, how they are accounted for and the changes in accounting treatment required under Statement no. 112. At that point management may need to obtain actuarial estimates to determine the specific financial statement impact as well as estimates for the impact of any benefit program changes and funding decisions. EXHIBIT 2 FASB 112 action plan 1. Understand the new accounting rules. 2. Survey postemployment benefits (both domestic and foreign) and current accounting practices. 3. Measure potential obligations, catch-up adjustments and ongoing expenses. 4. Consider early adoption in 1993 in conjunction with FASB Statement no. 106. 5. Consider plan design changes and their impact. 6. Evaluate current financing and review funding methods.

While Statement no. 112 is not effective until 1994, employers may find it beneficial to adopt it at the same time Statement no. 106 is adopted. Doing so may be particularly beneficial for employers whose Statement no. 112 catch-up adjustments are relatively smaller than those under Statement no. 106 (assuming the transition obligation under Statement no. 106 is immediately recognized) and for employers that do not want to show separate catch-up adjustments on their 1994 income statements for Statement no. 112.

Employers considering this strategy should measure their postemployment obligations as soon as possible with a view toward recording the cumulative catch-up adjustments for both Statements nos. 106 and 112 at the same time (generally in the first quarter of 1993).

Management also should evaluate related plan design and prefunding strategies. For plan design, employers might consider changing from a service-related to a nonservice-related benefit, which could allow them to change the accounting treatment through the plan design.

In addition, employers should review the funding of postemployment benefits. Funding vehicles such as 501(c)(9) trusts may be advantageous from a tax standpoint and may reduce the net obligations that must be reported in financial statements. Also, employers should assess their insurance arrangements because fully insured programs may be accounted for differently from self-insured or experience-rated insurance contracts.

While the statement's impact on postemployment benefits may not affect employers' financial statements as significantly as Statement no. 106, the effect may be material in some cases. In particular, the requited catch-up adjustment to income may be significant. Accordingly, it is important to understand the accounting options and the related plan design nd funding considerations.


* FASB Statement no. 112 requires accrual accountig for benefits provided former or inactive employees after employment but before retirement--including salary continuation, disability, severance and health care.

* THE STATEMENT requires employers to record, by the first quarter of fiscal 1994, a cumulative catch-up charge to income measured as of the beginning of the fiscal year in which it is adopted.

* EMPLOYERS SHOULD follow this action plan:

1. Understand the new accounting rules of FASB Statement no. 112.

2. Survey postemployment benefits (both domestic and foreign) and current accounting practices.

3. Measure all the potential oblication, catch-up adjustments and ongoing expenses.

4. Consider early adoption in 1993 in conjunction with adoption of Statement no. 106.

5. Consider plan design changes and their impact.

6. Evaluate current financing and review funding methods.

MURRAY S. AKRESH, CPA, is a director of Coopers Lybrand's human resources advisory technical services unit in New York City. HAROLD DANKNER, CPA, is the national director of Coopers Lybrand's' human resources advisory technical services unit. JUDITH E. LATTA, FSA, EA, is a partner in Coopers & Lybrand's human resources advisory group. She is a number of the pension committee of the Actuarial Standards Board and of the pension section council of the Society of Actuaries and president of the New York Chapter of WEB, Inc., a network of benefits professionals.
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Title Annotation:Financial Accounting Standards Board Statement no. 112
Author:Latta, Judith E.
Publication:Journal of Accountancy
Date:Dec 1, 1993
Previous Article:Uniformity is attainable through the Uniform Accountancy Act.
Next Article:Firm focus: establishing guidelines and limits.

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