Question

The Bleu Company reports a liability for “postretirement benefits” of $14 million on its December 31, Year One, balance sheet. a. Explain how this obligation was created. b. In determining this liability of $14 million, company officials worked their way through two steps. Describe those two steps. c. Some companies might argue that this liability should not be reported on a balance sheet. What argument would they use for this position?

Answer 1

a) As Employer-Employee relation exists impliedly in the term ''Post-Retirement benefits'' the obligation is created. These benefits include all the health and all the benefits of welfare other than pensions. The accounting method for both the benefits are similar.

b) Here, the company is bound itself in two way calculated obligation

1. Defined contribution plan : According to this step, The limited amount that the company agrees to contribute to the fund is bound by the company's legal or so called the constructive obligation.

2. Defined benefit plan: According to this step, The agreed amount the company has to pay for the benefits to the current as well as the former employees.

c) As the company offers these type of provisions to the third party service providers so the company may not be interested in adding these benefits as provisions in their reported balance sheet where the third parties definitely must but the company can add them as foot note depending on the circumstances. So some companies might argue that this liability should not be reported on a balance sheet.