Financial standards - the unfair albatross.

• Author: Schnepper, Jeff A.
• Position: New accounting rule for post-retirement benefits - Column

THE FINANCIAL Accounting Standards Board (FASB) has the authority and responsibility to issue or create required standards for financial accounting and reporting. In December, 1990, it issued FASB 106, "Employer's Accounting for Post-Retirement Benefits Other Than Pensions."

Before then, most employers used cash basis (or pay as you go) accounting for "other" post-employment benefits. Typically, these were health care plans and life insurance premiums. Historically, these amounts were minor and, while it was conceptually wrong to account for such payments on a cash basis (because financial accounting attempts to match expenses and revenues to the period in which they are incurred or earned), it was not worth the cost in time and money to report them on an accrual basis. The only major requirement was that these cash basis amounts be disclosed in the annual report's footnotes.

FASB 106, however, requires companies to account for such post-retirement benefits currently--as they are "earned," rather than when they are paid. It thus allows investors today to see where a company's future cash flows will be directed.

Companies now have the option of two approaches--immediate or deferred recognition. Immediate recognition gets the pain over all at once. It shocks the balance sheet with a liability that represents the accumulated post-retirement benefits obligation. It also reduces equity because it is counted against current earnings. Moreover, it produces higher continuing expenses than cash reporting and therefore cuts net earnings.

Under delayed recognition, the accumulated liability does not get recorded at all. Rather, it is amortized against earnings over as much as 20 years. Rather than producing an initial balance sheet shock, delayed recognition gradually works its way onto the balance sheet. That amortization means the recurring expense hit under this method is even higher.

In simplest terms, FASB 106 requires employers who are providing health and welfare benefits to their retired employees (outside a tax-qualified pension plan) to create a new financial accounting liability account. The net liability represented by this account is determined by the present value of the health and welfare benefits to be provided to the retiree group less the current value of the assets of the enterprise set aside to fund them.

While the long-term effect remains subject to conjecture, the short-term impact is apparent. Adoption of FASB 106 has resulted...