Academic journal article Journal of Accountancy

How Business Is Dealing with FASB 106

Academic journal article Journal of Accountancy

How Business Is Dealing with FASB 106

Article excerpt

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. …

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