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How business is dealing with FASB 106.

Only a handful of employers have complied with Financial Accounting Standards Board Statement no. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The statement disallows cash basis and terminal accrual approaches and requires employers to accrue retirees' health and other postretirement benefits. (For a detailed explanation of Statement no. 106, see "The New FASB 106: How to Account for Postretirement Benefits," by James R. Wilbert and Kenneth E. Dakdduk, JofA, Aug.91, pages 36-41.) All publicly held companies and private organizations with more than 500 postretirement plan participants have until 1993 to act on Statement no. 106; private employers with 500 or fewer participants have until 1995.

In fact, most employers have not decided yet how to handle a key element of the statement: transition obligation, the technical term for the present value of the benefits obligation for current retirees and employees eligible for benefits at retirement. For some employers that transition obligation totals billions of dollars. General Motors Corp., for example, recently estimated its obligation at between $16 billion and $25 billion.

Before acting on Statement no. 106, however, employers must address some difficult questions that require financial, actuarial and accounting policy analysis. ln this article, Murray S. Akresh, a director in the Coopers & Lybrand actuarial, benefits and compensation group, outlines some of the major questions that employers face. WHEN TO TAKE THE CHARGE

The first question every employer must resolve is timing: Should it move quickly to adopt Statement no. 106 or wait until the last minute?

A recent study by benefits consultant A. Foster Higgins & Co. showed about 12% of the businesses with a 1993 deadline adopted the statement before the end of last year. Many were large companies wanting to get bad financial news behind them. For example, International Business Machines Corp. took a hit against $2.3 billion in earnings, and General Electric Co. wrote off $1.8 billion. Others were companies wanting to offset gains: Abbott Laboratories accelerated a $125 million writeoff for Statement no. 106 last year for accounting purposes to mitigate a large gain from a sale during the year.

Some companies, such as American Telephone & Telegraph Co., Ford Motor Co. and Chrysler Corp., also moved swiftly last year-not to adopt Statement no. 106 and take the writeoff but to disclose their anticipated transition obligations. They were complying with Securities and Exchange Commission Staff Accounting Bulletin no. 74, Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period, which requires public companies to reveal potential impacts of FASB pronouncements not yet in effect and to report them in SEC filings. "For that reason we should start seeing a lot more footnote disclosures of the dollar impact of 106," Akresh says.


A company must resolve whether the writeoff should be recognized immediately or amortized over the average remaining service period of plan participants, which for most employers will be about 20 years.

The lump-sum or spread-it-out decision can't be put off long. It's a one-time election, however, and an employer choosing amortization is stuck with that approach for the next 20 years. "To get the information needed to make such a long-term decision requires that an employer do some indepth planning-actuarial and financial," Akresh says.


Most of the assumptions required by Statement no. 106 are highly subjective, and they drive the decisions on how and how much a company should account for future retirees' health-care costs. In addition to relying on actuarial forecasts on the number of eligible retirees and their longevity, accountants must work with their actuaries to determine the cost of future health care and the discount rate used to determine the present value of the transition obligation.

To be sure, employers probably will report wide variations on some of these variables. For example, some California utilities are estimating that health-care costs, in the early years at least, will rise about 17% a year. Other employers have used much lower future rates, estimating that while rates in the initial years indeed may be in the double-digit range, later-year rates more likely will level out at 5% to 7%. STUDY OPTIONS

Employers have many options when deciding the depth of their analyses to meet Statement no. 106 requirements. They can perform or commission studies considering only bare essentials. "That, however, may be shortsighted," Akresh warns.

Companies opting for a comprehensive study gain information crucial to sound financial and cost-control decisions on benefits design. Such a study goes beyond the minimum necessary actuarial and financial analysis, providing 10-year projections and alternative assumptions, which include sensitivities (analyses that determine how sensitive the bottom-line numbers are to each change in assumptions). "The bottom line," Akresh says, "could be improvements in cash flow or earnings."

Naturally, a thorough study takes more time and money. But in the long run, such a study saves money because it provides the information underlying any changes to health-care plans that could result in economies. While a change in a plan sometimes could produce only a small change in near term cash flow, it could increase earnings.

Comprehensive studies provide an employer with many plan-design options. For example, the company could shift some future health-care costs to retirees. An increasingly popular idea, from the employers' point of view, is dollar-denominated benefits, sometimes called defined dollar benefits or company caps. Under such a plan, recently adopted by both AT&T and IBM, a company sets a cap on future payments for retirement health-care benefits; costs exceeding the cap shift to the retirees. Designing such a plan requires reasonably accurate actuarial data and financial forecasts. WHETHER TO FUND

The current tax law provides little tax incentive for most employers to fund future benefit costs. As a result, few companies take that step. However, some employers do stand to gain, and some are considering funding: for example, public utilities, which can add future health-care funding in their rate applications, and defense contractors, which can include such costs under government contracts.

Utilities are already moving on that front. In recent rate-increase applications to state regulatory agencies many utilities report they plan to fund benefits under Statement no. 106 and want to include those costs in their applications. WHEN TO BEGIN WORK The final major question facing employers is when to start work on meeting Statement no. 106's requirements.

Many companies apparently are waiting for the last minute. "That could be a mistake," says Larry G. Cook, Ge's insurance benefit consultant. GE was one of the employers involved in a field study conducted by Coopers in affiliation with the Financial Executives Institute and the Institute of Management Accountants (IMA), to fine tune Statement no. 106 during the draft stage and to understand possible impacts. So GE has been involved with Statement no. 106 for years-from the initial draft through the final statement.

In fact, GE had been accounting for a portion of retiree costs for some time, so it had lots of routines to capture data needed for its analysis. "But still," Cook concedes, "we were surprised to find how difficult it was to come up with some of the starting numbers. "

Ray Vander Weele concurs. He is a CPA and health-care administrator of the Christian Reformed Church Pension Fund and was project director for the IMA study. "Companies should begin work immediately. Many may be surprised by how much data they will have to collect. In accounting we say, The first step in cost control is cost finding,' and that certainly holds true for Statement no. 106. "
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Title Annotation:accounting for postretirement benefits
Author:Zarowin, Stanley
Publication:Journal of Accountancy
Date:Mar 1, 1992
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