What Is the Accelerated Attribution Method?
Understand the accelerated attribution method, an accounting approach for recognizing post-retirement benefit costs over an employee's service to full eligibility.
The recognition of costs for post-retirement benefits, such as healthcare, is an accounting process designed to align these expenses with the periods in which an employee actively earns them. This approach requires companies to account for the total projected cost of these future benefits over an employee’s service years. This accounting treatment is guided by specific standards to ensure consistency and comparability in financial reporting.
Foundational Concepts of Benefit Attribution
Benefit attribution is the process of assigning the cost of post-retirement benefits to specific periods of an employee’s service. The “full eligibility date” is the point at which an employee has met all service-related requirements to receive the full benefits they are expected to earn, even if they continue to work. This date is determined by the terms of the benefit plan, which might specify a combination of age and years of service.
The “expected retirement date” is when an employee is anticipated to stop working and begin receiving benefits. This date is based on actuarial assumptions and can occur years after the full eligibility date. The period between an employee’s date of hire and their full eligibility date forms the attribution period—the window over which the benefit costs are recognized as an expense.
Calculating Benefit Expense
The calculation of annual benefit expense, known as net periodic benefit cost, is composed of several elements, including service cost, interest cost, and return on plan assets. To illustrate, consider an employee who is 35 years old and is promised a lump-sum healthcare benefit at retirement. The plan specifies that the employee will be fully eligible for this benefit after 20 years of service, at age 55.
The employee is expected to retire at age 65, and the total expected benefit cost is estimated to be $100,000. Under accounting standards, the entire $100,000 cost must be recognized over the 20-year period ending on the full eligibility date. This results in an annual service cost of $5,000 ($100,000 / 20 years) for the first 20 years of service.
After the employee reaches the full eligibility date at age 55, no further service cost related to this benefit is recognized for the remaining 10 years of employment, even though the employee continues to work. This approach concentrates the expense into the years leading up to the date the employee secures their right to the benefits.
Financial Statement Presentation and Disclosures
The required attribution method has direct consequences for a company’s financial statements. On the income statement, the net periodic benefit cost is recognized during an employee’s service years up to their full eligibility date. In the years after an employee becomes fully eligible but before they retire, the service cost component of the expense is no longer recorded, which can affect net income in those later periods.
On the balance sheet, this method leads to the accumulation of the company’s liability for future benefit payments over the attribution period. This liability, known as the projected benefit obligation (PBO), grows as the total benefit cost is recognized each year.
Accounting Standards Codification (ASC) 715 mandates detailed disclosures in the footnotes to the financial statements. Companies must provide information about the assumptions and methods used to measure their benefit obligations. The disclosures must provide:
- A reconciliation of the beginning and ending balances of the benefit obligation, showing the effects of service cost, interest cost, plan amendments, and benefit payments.
- The key actuarial assumptions used in the calculations, such as the discount rate and expected return on plan assets.