[Anonymous]

Hello,

I’m not sure how the question below comes up with an average of 20 years? Please help.

Thank you,

Angie

As of December 31 of the current year, the accumulated postretirement benefit obligation and plan assets of a defined benefit postretirement plan sponsored by Crouse, Inc., were:

Accumulated postretirement benefit obligation $500,000

Plan assets at fair value 425,000

Transition obligation $ 75,000

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Crouse elected to apply GAAP provisions for employers’ accounting for postretirement benefits other than pensions, in its financial statements for the current year ended December 31 and recognize the transition amount on a delayed basis as a component of net periodic postretirement benefit cost. The average remaining service period of active plan participants expected to receive benefits was estimated to be 10 years at the date of transition. Some participants’ estimated service periods are 25 years. To minimize an accrual for postretirement benefit cost, what amount of transition obligation should Crouse amortize?

A.

$3,000

B.

$3,750

C.

$5,000

Incorrect D.

$7,500

You answered D. The correct answer is B.

Under the circumstances given, the transition obligation can be amortized over a 20-year period. Since the average remaining service life of active participants is under 20 years, the longer 20-year period is available, and thus the annual amortization is $3,750 ($75,000 ÷ 20 years). (FASB ASC 715-60-35-39)

[Anonymous]

Your answer is in their explanation, it's just a rule you need to remember. Existing transition obligation is amortized over the greater of average service life or 20 years.

Transition obligation relates to adopting a rule that was passed sometime around the early 1990's. At the time, companies could either expense it all upfront or amortize it based on the rule above. Since it's been more than 20 years, I don't think any companies would still have an existing transition obligation, so I can't imagine it's tested with too much frequency.

[Anonymous]

Ohhh…I got it. Thank you so much!

[Author]

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