Before the FASB's OPEB ruling: the first steps to take.

• Author: Herdman, Robert K.
• Position: Financial Accounting Standards Board - Other Postemployment Benefits

Before the FASB's OPEB ruling: the first steps to take

As the FASB releases its exposure draft on other postemployment benefits, companies are finding that the Board is serious about recognizing OPEB obligations on a firm's financial statements. But is a "best guess" of the obligation figure good enough? Two accounting practitioners offer their six steps for responding to the FASB proposal. In the face of increasing controversy, the FASB's project on accounting for postemployment benefits other than pensions continues to forge ahead. An important step in this process is the issuance of the FASB's exposure draft (expected in December of 1988 as this article went to press). If adopted as proposed, the new accounting rules for other postemployment benefits will have a dramatic effect on future financial statements and possibly on the amount of retirement benefits companies promise to employees.

The different estimates of costs associated with providing postemployment benefits are staggering. In 1986, the House Select Committee on Aging reported that providing medical benefits to the existing work force would cost $2 trillion. A Department of Labor study estimated the liability for benefits promised to existing workers over the age of 40 at $98 billion. Given the total net worth of the Fortune 500 companies of almost $700 billion, it is easy to understand why many corporate executives believe the issue is a financial time bomb.

Statement 87 as a model

The FASB's project on other postemployment benefits (referred to as OPEBs) is an offshoot of its earlier project dealing with pension plans. The fundamental approach taken by the FASB to resolve the issues relating to OPEB has been to use the accounting model embodied in FASB Statement 87, Employers' Accounting for Pensions. The FASB has concluded that, to the extent that similarities exist between the benefits provided under defined benefit pension plans and the benefits provided to retiring employees under various other plans, the accounting treatment in terms of both recognition and measurement should be the same.

As with pensions, the FASB has decided that, not-withstanding legal liability questions, the corporate promise to provide other postemployment benefits constitutes a liability for accounting purposes. The benefits are viewed as a form of deferred compensation that should be recognized as the employee renders service.

The FASB's approach requires estimates of the total costs of providing benefits to employees after they retire. The cost would be recognized in the financial statements as an expense over the employee's service period. For expense recognition purposes, the employee service period would extend only to the date...