J-GAAP: Post-Employment Benefits

In Japan, the BADC issued Accounting Standard for Post-Employment Benefits in 1998. The Standard requires that accrual accounting must be applied to post-employment benefits, including one-time retirement payment (unique to Japanese practice) and monthly pension payments. Previously, entities recognized provisions for one-time benefit payments, but pension liabilities were not recognized because contributions to pension plans were charged to expense when paid.

Basic concept of the new Standard applying to accounting for post-employment benefits is not materially different from IAS 19 (revised 2002), Employee Benefits. It requires that pension obligations must be measured as projected benefit obligations, which means that any long-term inflationary trends in benefits must be reflected in the measurement. Post-employment benefit liability is measured as the excess of projected benefit obligations over pension assets, which are measured at fair value.

For allocation of projected post-employment benefit obligations over past service period and future service period, Japanese GAAP provides a choice among the straight-line method, the salary payment method, and the benefit multiplier method. IAS 19 requires that an entity must choose a method used for benefit calculation formula. Both require risk-free interest rate in discounting the accrued portion of the projected benefit obligation. Because Japanese GAAP allows use of an average of interest rates for past several years, in which abnormal interest rates were often excluded, the discount rates today are generally higher than the closing market interest rates.

Past-service cost must be allocated over the weighted average of remaining service years of employees under Japanese GAAP. IAS 19 requires the vested past-service cost must be recognized immediately, but allows entities to allocate the remaining unvested portion of past-service cost over the weighted average of remaining service years.

Adjustments of accounting changes by first-year application of new standard must be allocated over 15 years in Japan, but 5 years under IAS 19.

IAS 19 adopts the “corridor” approach to adjusting actuarial differences, while Japanese GAAP adopts the “materiality” approach. Under the “materiality” approach, an entity can leave any difference unrecognized if the difference falls within the 10 percent materiality threshold of changes in pension assets or benefit obligations. If the difference exceeds the 10 percent materiality threshold, it must be allocated over the remaining service years.

In Japan, the excess of pension asset over benefit obligation (plus any unrecognized differences), if any, are recognized as prepaid pension costs unless the excess stems solely from increases in past-service obligation or actuarial difference.