Business reacts to FASB's proposal for nonpension retirement benefits.
The past year has brought increasing attention to the accounting and reporting of nonpension other than postemployment benefits, referred to as OPEB. The attention was triggered by the Financial Accounting Standards Board's controversial exposure draft, Employers' Accounting for Postretirement Benefits Other Than Pensions, released in February 1989.
The board has received 467 comment letters on the ED. Here are the major concerns expressed by industry and other interested parties (see Responses to the FASB's ED on OPEB, by issue
Is there a liability for OPEB?
In general, respondents agreed (albeit many reluctantly) the OPEB obligation is a liability that ought to be recognized.
Approximately 60% of the comment letters supported the FASB's view that the obligation to provide OPEB is a liability that should be disclosed on the balance sheet. An additional 9% concurred that a liability exists but argued it should be disclosed as a footnote. Less than 15% contended the OPEB obligation is not a liability and should not be reported anywhere in the financial statements.
Opponents of recognizing the liability on the balance sheet presented two major arguments: The obligation is not a liability because
1. The employer has discretion to cancel the obligation.
2. The amount of the obligation is unmeasurable.
However, even among those who agreed the obligation for OPEB is a liability, many expressed concern that forcing U.S. businesses to recognize a liability for OPEB would have several undesirable consequences. For example, some businesses (including several Fortune 100 companies) said they would either curtail or drop OPEB benefits if required to record a liability. Others said U.S. businesses would be placed at a competitive disadvantage with businesses in foreign countries that have little or no obligation to provide OPEB because foreign governments, rather than businesses, heavily subsidize healthcare.
Finally, many said the debate over who should bear the cost for OPEB (particularly, healthcare) is unresolved. Those commentators argue the FASB is resolving that debate inappropriately and creating public policy by mandating that companies bear the OPEB liability.
Nonetheless, approximately 70% of the comment letters agreed with the FASB that an obligation exists. Furthermore, many letters said the FASB proposal would have the salutary effect of making employers, employees and the public more aware of the true cost of providing healthcare.
Over what period do employers incur the liability?
The most criticized proposal concerned the FASB's attribution period.
The board proposes attributing OPEB liability to the period starting at the hire date and ending at the date an employee becomes eligible for retirement. Nearly 80% of all letters commented on this issue and only eight (less than 2%) agreed with the FASB's approach.
Nearly all comments advocated attributing the liability to the period starting at date of hire and ending at retirement. Many commented that companies offer postretirement benefits to an employee as a form of deferred compensation for that employee's entire service from date of hire to date of retirement, not just for the service up to the eligibility date. Hence, the OPEB expense should be allocated over the entire service period.
It appears likely, however, the FASB will maintain its position on this issue since its approach is consistent with current generally accepted accounting principles on pension accounting. (Pension expense is attributed from the hire date to the vesting date. The FASB considers the eligibility date for OPEB to be similar to the vesting date for pensions.)
What rate should be used to project future healthcare costs?
The FASB proposes each company develop a unique healthcare trend rate based on the company's own history of healthcare costs. The FASB will not permit a company to factor into the rate the effects of any probable future actions to reduce healthcare costs by either the company (for example, reducing the level of benefits) or the government (for example, increasing Medicare coverage).
Over half the letters addressed this issue and less than 5% of them agreed with the FASB. Many said the escalating nature of healthcare costs ensures companies or the government will take steps to reduce them. Thus, a FASB approach that ignores those probable future actions in estimating probable future costs is considered unrealistic.
Others, particularly smaller companies, argued that determining a unique healthcare trend rate could prove to be an expensive and, given present databases on healthcare costs, possibly an impossible task. Nearly 51% of those commenting on this issue called for using the general inflation rate or some other standard rate to increase the comparability of information across companies.
Discount rate for measuring the obligation
The ED requires companies to use either the rate on an instrument that could be purchased to settle the OPEB obligation (the "settlement" rate) or the current rate of return on high-quality fixed-income investments. Less than 6% of the comment letters agreed with this approach.
In general, those commenting raised two objections:
1. No settlement instrument specifically designed to cover the costs of OPEB exists in the financial market today.
2. The funds used to pay the OPEB obligation are generated internally, not by investments.
Critics of the FASB approach offered a variety of alternative rates. The most commonly proposed alternative was the company's cost of capital.
Disclosing the vested postretirement benefit obligation
The FASB proposes annual note disclosure of the vested postretirement benefit obligation (VPBO). Briefly, this is the amount of the obligation to vested employees, assuming all employees eligible for OPEB retired at the balance sheet date.
Slightly more than 47% of all letters commented on this issue; of those, less than 5% agreed with the FASB.
Two commonly expressed objections were:
1. "Vested" is a misleading term because, as opposed to pension benefits, OPEB do not vest legally; thus, disclosure of a vested obligation would be misleading.
2. The assumption underlying the VPBO is all employees eligible for OPEB retire at the balance sheet date. This assumption is both unrealistic and contrary to the going-concern assumption.
Disclosing effects of a 1% change in healthcare rate
The ED proposes note disclosure of the effect on the liability for OPEB of a 1% change in the healthcare trend rate, in order to illustrate the significant potential impact of such a change. Nearly 60% of the letters discussed this issue. Approximately 4% of those commenting agreed with the FASB's approach.
The primary objection to this proposal begins with the observation that the healthcare trend rate is one of many assumptions used in preparing financial statements (for example, estimating depreciation requires assumptions of useful life and salvage value). The FASB does not require sensitivity analysis (analysis of the impact of changes) for these other assumptions. Also, the requirement to disclose the effect of a 1% change may cast doubt on the reliability of the healthcare trend rate assumption and, by implication, the reliability of other assumptions as well.
Amortization of the transition obligation
The transition obligation is the unfunded accumulated obligation at the beginning of the year the final OPEB statement is implemented. Unlike their pension plans, very few companies fund their OPEBs. Consequently, the transition obligation for most companies will equal their total accumulated OPEB obligations.
The ED calls for amortizing the transition obligation over the average remaining service period of covered employees. The employer has the option of electing to amortize over 15 years if the average remaining service period is less than 15 years. The ED also forbids immediate recognition of the entire transition obligation.
Less than 2% of those commenting on this issue agreed with the FASB. Over a quarter of the letters received proposed amortizing the transition obligation over a period greater than 30 years and less than 50 years.
The principal concern of respondents appears to be spreading the impact of recognizing the enormous liability for OPEB (estimated by the General Accounting Office in 1989 to be at least $227 billion) over as many years as possible. Additionally, 93% argued companies should have the options of treating the new accounting for OPEB either as a change in accounting principle (with a one-time charge to income) or as a prior-period adjustment (with a one-time charge to retained earnings).
The ED stipulates that the effective date for the OPEB standard be one year after issuance. Approximately 40% of all letters commented on this. Nearly 90% of those advocated a delay of two to three years after issuance. Critics of the effective date argue companies do not now have the data-gathering capabilities demanded by this standard, particularly for determining the healthcare trend rate. [Tabular Data Omitted]
Stan Martens, CPA, PhD, and Kevin Stevens, CPA, are assistant professors of accountancy with the School of Accountancy at DePaul University, Chicago.
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|Publication:||Journal of Accountancy|
|Date:||Jun 1, 1990|
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