Accounting for Life Insurance and Postretirement Health Care Benefits

Introduction

The reward of the local employees usually includes pensions and health insurance benefits packages. In most cases, a health insurance cover for the workers usually continues even after the workers have retired. However, the government responsibility for the finance of both healthcare benefits and pensions are similar for retirees. Retiree rewards have historically been treated separately from pensions in financial status and government budgets (Michael, 2013). Financial Accountings Standard Board (FASB) has lately released Statements of public Financial Accountings Standard No. 02. This essay will focus on employers Accountings for Defined Pension Benefits and Postretirement Plan; variations to the rules and guidance that add improvement to the public accounting and reports of benefits. Predictions and important way on how the future of accounting will be change, the benefits these significant changes are based on in the political climate, business and scenario in Postretirement Health Care and Life Insurance and the possible impacts of changes in reporting practices and public finance accounting.

  1. Based on your research, compare and contrast the early historical accounting for Postretirement Health Care and Life Insurance Benefits with the guidance / rules in place today.

Initial historical Accounting for Postretirement Healthcare and Life Insurance Benefit, firms offering pensions plans must expose their structures and plans in a formal document. For explained Postretirement Healthcare and Life Insurance Benefits plans, the firms must release; if there is any, in the previous years and pension’s expense is the same as Postretirement Healthcare and Life Insurance Benefit. For explained benefits plans, general releases of component of pension expenses, assumptions, pension asset activity and pension’s obligations, account and status of net funding must be exposed (Sugrue, 2013). Adding to that, net pension assets or liabilities must be well booked as assets or liabilities and the changes in assets and pension liabilities that might not be reserved into revenue must be ordered into other inclusive returns. For pension, the retirement’s benefit is secured in the sum by those terms in the contract and the term can only be unknown. The benefits of health care are difficult to estimate because of the term which is unknown but the benefits are depending on the cost of healthcare provided at the moment (Catlin, 2014).   

The Accounting for Pensions Firms unveils market values of the pension plans assets and the expected benefits obligation of plan but does not know them on their statement of affairs. The unknown move of assets and their obligations from the first adoption of the statement unrecognized previous services costs and the deferred gain and losses from actuarial experience and plan for the asset performance in the pension plan. Information is inhibited about by instability, which is caused by two main sources: Important changes when actuarial expectations are changed on net pension liability and when experiences in particular periods are different from the expectation that is included in the made assumptions. Instability from a change in the markets valuations of plans assets (Michael, 2013).

Accounting for Stock-Based Compensations allows employers to select between finance statement recognitions and footnotes release of new methods of accounting for costs of workers standard options.  This requires businesses to make use of accrual accounting and expenses of the costs of benefits that are earned by the workers (Sugrue, 2013). Contracted firms are supposed to have choices of adoption and alternatives regarding on how to conduct an accounting. The earlier unreported accumulated benefits costs earned by workers up to the adoptions time. Corporations were necessary to select between two acceptance alternatives. One-time charges, recognizing the whole sum of liabilities on the statement of affairs in the adoptions year, while with offsetting charges to the net income as a cumulative effect of changes in accounting principles.

Historically, the treatments of the yet to come costs of healthcare and other which are non-pensions benefits for pensioners has been very dissimilar from pensions. Instead of pre-paying off the benefits to a trust fund through depositing, many employers put their money in annual budgeting for the premiums costs of the pensioners’ benefits and healthcare cover insurance (Sugrue, 2013).   One of the major aim of the differences in the treatment of pensions costs and pensioner health cost is because of local and states government have never before been needed to calculate and bring a report on future costs of non-pensions of retirees benefits as assured to current and previous workforces.  

According to Bragg (2010), it is noted that only a few have completed so freely. In contrasting of states and locals governments, having been needed to report pensions cost for future pensioner ever since the initial 1990s. additionally, the duty of states and locals regimes to pay pensioner health costs is minor binding than their responsibility to emolument pensions benefits. Public workers pension’s benefits are often certain in a country’s constitution while health benefit is not. Lastly, the sum of pensions which will be payable to any pensioner is a known sum resolute by formula while the health costs after retirements are not to be predicted with confidence.

  • Based on your research, make at least two (2) recommended changes to the guidance / rules that you believe would improve the financial accounting and reporting of the benefits in question.  Provide support for your recommendation. 

While SFAS 134 has massively enhanced postretirement benefits accounting, there is so much room for further enhancement to be done. SFAS 134 did not amend any of SFAS 91, SFAS 99, and SFAS 111 rules of measurements. The records to and releases should be increased so as to include a comprehensive plan of cash outflow so that the running needs of the firm can be known. These suggestions serve to ensure that postretirement benefit is accounted fairly accounted for and reported accurately.

Secondly, if the discounts rates were set at a constant and the main performance that was used in computing for postretirement benefits expenses, a more trusted and faithful look at the finance conditions of the benefits plans will result finally. Also, when the performance plans impact on some income determination the employers would more likely get involved to see the plans is being monitored, otherwise there may be poor performance leading to poor earnings correspondingly (Bragg, 2010).

  • Predict the significant manner in which the future of accounting for these benefits could change, based on potential changes in the business and political climate that you foresee. Provide support for your prediction(s).

Present rules allow the employers to plan ahead. Each and every year, the employers must pay their shares of health insurance cost for existing workers. If the employers implement the current accounting rules, then they can appeal on those funds to enable them to meet those payments instead of appropriating income each financial year. In some fiscal years, health costs can go up to more than expected due to change in some pensioners who are eligible. The new rules also recommend for public reserves (Bragg, 2010). Reserves are helpful in case an economic go-slow reduces revenues, or the states will face unforeseen revenue expenditures in other bodies of the year budget because of a natural adversity. If the States maintain reserves in their accounting statements, they can suspend a year’s deposits while still able to pay its health cost of current workers who retired.

  • Create a scenario in which at least two (2) types of Postretirement Health Care and Life Insurance Benefits change. Predict the potential impact of these changes on financial accounting and reporting practices.

Although OPEB future cost (Other Post-Employment Benefit) is less than the future costs of pensions, OPEB’s instant impacts on employer’s financial reporting have the potentials to be greater due to its new requirements. The purposes for this is due to the employers having historically held these two employee benefits. For a very long time, many employers may require setting aside some cash in trust funds to enable them to make payments for future and current pensions. These funds presently include sufficient assets to cover over 75 percent of the expected average cost. (Michael, 2013).

  • Develop an argument that supports your proposed changes in Question 4. Next, create correspondence to your Chief Financial Officer in which you justify your position.

Observing the OPEB, it will force states and locals rules to put on a significant future number on unfunded liabilities (Bragg, 2010). Secondly, they are seemed to want to see the plans for dealing with the liabilities and trend that is important shortly.  Government bonds ratings agencies have realized that the cost of pension and health benefits for public workers are increasing on a daily basis, but they commonly have had no estimate of how larger is the future costs can be. If the liability is big and large, and the employers do not know plans to address it then, it will affect their financial accounting eventually and also cost on money borrowed as the interest rates go up (Michael, 2013).  For instance, it could be problematic if employers have larger and growing liabilities for pensioner’s health and have not yet identified ways to make the payments for it. Or even, if many states do start pre funding’s some of them or all of their employees’ health liabilities, bond rates might be on look as more helpful on these states as compared to pay as you go states shortly. The ways in which the states and local government are acting to handle this liabilities will eventually affect their actual budgets.

Consideration of consistency versus flexibility, given the reduction rates for all the plans to use for computing, OPED would only favor consistency; however, allowing firm managers to set the rates using related information would favor flexibility. It is important to embrace random consistency to eliminate the moral risk problems, it will also impact on the productivity of the company economic status from the representation of public accounts figures (Subramanyam, 2009). Under the present states of how financial reports are made and the much scrutiny, it gives professionally consistent certainty, which is preferable over inaccuracy possibility accounting plan.

References

Bragg, S. M.  (2010). Wiley GAAP: John Wiley & Sons, Inc.: Hoboken, New Jersey.

Catlin, B. (2014). The trouble with pension accounting.

Michael, S. (2013). Underfunding of private pension plans. Economic Letter No. 2003-16.

Subramanyam, R. (2009). Uniformity versus flexibility: Evidence from accounting for the pension obligations.

Sugrue, F.  (2013). The elements of actuarial changes under pension benefits are accounting. Journal of Financial and Strategic Decisions 8(1): 35-41 7.

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