Accumulated postretirement benefit obligation definition
/What is an Accumulated Postretirement Benefit Obligation?
An accumulated postretirement benefit obligation is the actuarial present value of benefits expected to be given to employees following their retirement from the employer, based on employee service performed through a specific date. This obligation is not related to employee pensions. The main type of benefit associated with this obligation is the cost of medical care.
Example of an Accumulated Postretirement Benefit Obligation
A company offers its retired employees postretirement health benefits. The company estimates the total future benefits it will need to pay and records an accumulated postretirement benefit obligation (APBO) on its financial statements. Its APBO calculation is as follows:
Total expected benefits. The company expects to pay $5 million in health benefits over time to its retired employees.
Present value calculation. Since these payments will be made in the future, the company discounts them to the present value using an appropriate discount rate. If the present value of these estimated benefits is $3.5 million, this becomes the APBO recorded on the balance sheet.
Accounting treatment. The APBO is reported as a liability under postretirement benefits on the company’s balance sheet. The company may also record an expense each year as it accrues additional benefit obligations.
In short, APBO ($3.5 million) represents the present value of expected future postretirement benefits earned by employees up to the current date. It is a liability, because the company has a future obligation to pay these benefits. In addition, the APBO can increase over time as more employees earn benefits or as discount rate changes impact the liability.