How the Fortune 500 are dealing with FAS 106.

Preliminary results of a survey of recent disclosures by 400 of the Fortune 500 indicate how well companies are prepared for accrual accounting of retiree medical benefits and the steps they are taking towards implementation of FAS 106. According to the Wyatt Company, the organization doing the survey, two implementation strategies are already emerging: combining extraordinary gains with early recognition to smooth the impact on earnings, and redefining the benefit promise before adopting the new accounting standard.

Here are survey highlights:

COMPANIES THAT ADOPTED FAS 106 EARLY:

IBM, GE, Wheeling-Pittsburgh, Imperial Holly, Abbott Labs, and Warner Lambert are the only companies studied that have adopted FAS 106 early.

* IBM had been funding its retiree liabilities when employees retired. After Congress enacted TEFRA, IBM switched to balance-sheet accruals rather than funding on a less tax-advantaged basis. IBM recognized a transition obligation of $2.7 billion immediately.

* GE had already funded and accrued $1.5 billion for the liability of retirees and spouses over age 65. GE elected immediate recognition of a $1.8 billion transition obligation.

* Wheeling-Pittsburgh has elected 20-year amortization of the transition obligation ($54 million). The transition obligation is net of a reserve established from adopting accrual accounting in 1987, when the company set up a reserve of $210 million.

* Imperial Holly does not provide retiree medical benefits but has certain deferred compensation contracts.

* Abbott Labs adopted FAS 106 in 1991, taking advantage of the investment gain of $128 million from the sale of a division to smooth out the impact on earnings.

* Warner Lambert adopted FAS 106 retrospectively to the first quarter of 1991, recognizing a $146 million charge to earnings.

COMPANIES INDICATING THEY WILL ADOPT EARLY:

Only two companies-Abbott Labs and Lockheed-said in their 1990 annual reports they will adopt FAS 106 early. In fact, Abbott Labs has already done so. Some companies are complying with the accounting rules of FAS 106, but have not formally adopted the standard.

COMPANIES PLANNING TO ADOPT FAS 106 IN 1993:

Of the 400 companies studied, 51 indicated they intend to implement FAS 106 in 1993 (the year required under FAS 106).

While most of these companies have not yet decided whether to take the one-time hit or spread it over 20 years, some (including Georgia-Pacific and Johnson & johnson) have already announced their intention to recognize the Accumulated Post-retirement Benefit Obligation (APBO) immediately.

Eight percent have disclosed the measured obligation:

* Twenty of the 400 companies studied reported a single estimate of their Accumulated Postretirement Benefit Obligation (APBO).

* Eleven companies gave a range of their APBO.

* The sum of the pretax APBO for these 31 companies ranges from $55 billion to $78 billion. Almost as many companies expect a "significant" impact as expect an "insignificant" impact:

* Seventy-five companies commented they do not anticipate a significant impact on their earnings.

* Seventy-three companies expect a significant impact on earnings. Balance sheet reserves will help reduce the transition liability:

* Coming set up an $84 million reserve when it switched to accrual accounting in 1988.

Dayton Hudson established a book reserve of $48 million when it adopted FAS 96, for a gain of $6 million.

* General Mills set up a pre-tax charge in 1989 when it had an extraordinary gain.

LTV took a one-time charge of $2,263 million in 1988 when it switched to accrual accounting. LTV remeasured the APBO in 1990 at $2,728 million.

* Martin Marietta holds a $55 million reserve for the APBO of retirees of divested businesses.

* Several companies (including NACCO Industries, Newell, PhillipsVan Heusen, and Smithfield Foods) hold reserves in connection with certain acquisitions.

VALUATION ASSUMPTIONS:

As with all actuarial calculations, assumptions are needed to project and discount future benefit amounts. For FAS 106 calculations, the two key assumptions are the discount rate and the health care cost trend rate. Only eight companies disclosed the assumptions they used in their 1990 annual reports. Three companies used flat health care cost trend rates, while five companies used rates that started high and declined. The range of discount rates used was quite narrow (from 8 percent to 9 1/2 percent), while the range of health care cost trend rates was much wider, declining from a range of 8 1/2 percent to 16 percent in 1991 to a long-term rate ranging from 5.5 percent to 9.0 percent. Seven percent already accrue or fund the liabilities:

Twenty-nine of the companies studied disclosed that they already accrue or fund retiree medical and life insurance liabilities. American Airlines (or, more precisely, its employees) funds through a VEBA. Armstrong, Boise Cascade, Gillette, and Ralston Purina have established an ESOP, while Merck has chosen a 401 (h). Procter and Gamble combined these funding vehicles into an HSOP. Deluxe and MMM fund part of the benefits, and Bethlehem Steel funds its retiree life insurance benefits. 1990 disclosures limited by lack of data, lack of time, and planned benefit changes:

* American Greetings is typical of the Famne 500 companies that have not assembled the data needed to measure their obligation. The 1990 report indicates that the company "...has not yet compiled the necessary information nor made the detailed calculations necessary to reasonably estimate the impact."

* Atlantic Richfield reported in its 1990 annual report that it "has not yet had sufficient time to evaluate the provisions of FAS 106."

* Borden indicated it could not determine the impact of FAS 106 because "a substantive plan at the required adoption date could be different from the current plan."

COLI AND TOLI: WHAT ARE THE

DIFFERENCES?

CORPORATE-OWNED LIFE INSURANCE (COLI)

* Frequently used for financing employee benefits

* Corporation is owner and beneficiary of insurance on lives of employees

* Usually highly leveraged; significant portion of cash value up to $50,000 per insured employee) borrowed from the policy

* Policy death benefits received tax-free

* Will not provide direct offset to FAS 106 liability

TRUST-OWNED LIFE INSURANCE (TOLI)

* Usually used in a VEBA trust

* Trust is owner and beneficiary of insurance on lives of trust beneficiaries

* Not leveraged; trustee directs investment of assets underlying policy cash values toward various asset classes e.g., equities, bonds, etc.)

* Investment earnings accrue as part of life insurance "inside cash build-up" and not currently taxed

* Policy death benefits received tax-free by trust; used to pay applicable trust-funded benefits

* If VEBA is properly established, TOLI cash value should offset FAS 106 liability.