Reconcile Harbor Light's retiree medical obligation and cost

Problem

Two pages arrive from Harbor Light's actuary. One reports expected benefits for the current participant population; the other reports the amount attributed to service through year-end. The draft close calls both pages a liability, posts the $400,000 contribution as cost, and turns a healthcare-trend scenario into a forecast. Decide what each page can support before entering a number.

Preserve EPBO and APBO roles

The actuary's EPBO estimates expected future benefits for the supplied current participant population under plan terms, eligibility, cost sharing, utilization, trend, mortality, and discount assumptions. Attribution assigns the appropriate portion to employee service periods. APBO is the attributed portion through the measurement date; it is the obligation used in this funded-status example.

The signed report supplies a $7.50 million opening APBO. This workbook does not derive that amount from EPBO, participant records, or healthcare claims. That work belongs to the qualified actuarial process and must be tied to the same terms, population, date, and assumptions used by accounting.

Roll APBO and assets on separate rails

Benefits reduce both rails. The $400,000 contribution affects trust assets and employer cash; it does not define benefit cost. Ending funded status is $2.27 million minus $8.50 million, an underfunded $(6.23) million recognized liability under the supplied facts.

Build cost, OCI, and the entry

Service cost                              $500,000
+ interest cost                            450,000
− expected return                         (100,000)
+ net-loss amortization                     50,000
= net periodic postretirement benefit cost $900,000

Actual return exceeds expected return by $20,000. Current OCI is therefore the $300,000 obligation loss less the $20,000 asset gain and $50,000 loss reclassification, or a $230,000 loss. Opening AOCI loss of $800,000 becomes $1.03 million. The reclassification enters cost and leaves AOCI once.

Opening funded status was $(5.50) million, so the recognized liability rises $730,000. The employer entry joins—but does not manufacture—the schedules:

Dr postretirement benefit cost              $900,000
Dr OCI—postretirement benefit loss            230,000
    Cr cash—employer contribution                       $400,000
    Cr postretirement benefit liability                 730,000

Read trend sensitivity conditionally

The actuary supplies a $9.20 million APBO under a higher healthcare-cost trend and $8.00 million under a lower trend. Relative to the $8.50 million base, the conditional changes are +$700,000 and −$500,000. The defensible reading is narrow: within the supplied model, holding the plan design and other assumptions constant, changing the trend input changes APBO by those amounts. Claims forecasting, assumption selection, likelihood, and contribution planning need different evidence.

Retiree medical accounting shares the obligation, assets, funded-status, periodic-cost, and OCI/AOCI architecture with pension accounting. It does not share pension benefit formulas, compensation projection, participant cost sharing, healthcare utilization, Medicare-related effects, or attribution by default. Those differences belong in the plan-specific evidence map and note.