Responses to OPEB proposal.

RESPONSES TO OPEB PROPOSAL

The Financial Accounting Standards Board is receiving suggestions for changes in its exposure draft Employers' Accounting for Postretirement Benefits Other Than Pensions.

Public hearings on the proposed standard were held in October and more are scheduled this month. The American Institute of CPAs, many accounting firms and business advocates have put forward various suggestions for revising the proposal.

The AICPA accounting standards executive committee (AcSEC) unanimously agrees with the draft's position that employers who promise to provide postretirement benefits have created an obligation that meets the definition of liabilities contained in FASB Concept Statement no. 6, Elements of Financial Statements. According to AcSEC, these benefits should be reported in the statement of financial position if the costs can be measured with sufficient reliability. However, the committee also believes the proposal can be simplified and offered a number of recommendations (see AICPA RECOMMENDATIONS).

The Financial Executives Institute (FEI), which earlier this year published the results of a comprehensive field test of the FASB proposal, strongly opposes several of the standard's provisions.

In a letter to the FASB, FEI President P. Norman Roy stated his organization's agreement with the FASB proposal that postretirement benefit costs should be recognized using accrual accounting and that the promise of postretirement benefits results in an obligation for the company to sacrifice future assets to satisfy these costs.

He made clear, however, that the FEI does not agree with the FASB's liability approach since the right to receive postretirement benefits is normally contingent on actual retirement and employers often reserve the right to modify these benefits. And the FEI also claims that postretirement benefits do not meet the definition of a liability contained in FASB Concept Statement no. 6.

The FEI is calling for the following revisions in the FASB's proposal:

* The term "obligation" rather than "liability" should be used.

* Postretirement benefits should be attributed to the full service period, from date of hire to date of expected retirement, based on company experience with the work force as a whole.

* Companies should be allowed to recognize the transition obligation immediately or, alternatively, they should be allowed to elect an amortization period of at least 20 years.

* The general inflation rate should be used as the measure of long-term medical care cost trends.

A number of accounting firms are also urging revision of the proposal. For example, while Price Waterhouse found merit in shifting from pay-as-you-go cash-basis accounting to the accrual approach, it recommended that the FASB

* Relax the requirement for forecasting healthcare inflation, allowing companies the option of using consumer price index projections as the basis for accruing costs of future medical benefits.

* Refrain from demanding too much precision and conformity with the accounting rules.

* Permit more flexibility in treating the initial transition obligation by allowing immediate recognition instead of amortization during the transition period.

* Widen the corridor beyond which actuarial gains and losses must be amortized to at least 20%.

* Extend the attribution period.

* Drop the proposed requirements that a minimum liability be recorded five years after the initial adoption of the statement and that the vested benefit obligation have special disclosure requirements.

Deloitte Haskins & Sells agreed other postretirement benefits should be accrued to the extent they are reasonably estimable but stressed alternative approaches to measurement be developed that are more reasonably estimated at a lower cost to preparers.

AICPA RECOMMENDATIONS

Among the changes that the AICPA accounting standards executive committee would like made in the Financial Accounting Standards Board's proposed postretirement benefits standard are the following:

* Use a measure of healthcare cost inflation that excludes changes in healthcare usage or delivery patterns and technological advances rather than the healthcare cost trend rate proposed.

* Attribute benefit costs over the entire expected service period, from hire date through expected retirement date, regardless of whether the employer-employee agreement defines benefits in terms of specific periods of service to be rendered.

* Do not require recognition of the minimum liability. However, if it is required, it should apply only to retirees.