Results of OPEB field test show impact on corporate expenses.

• Author: Akresh, Murray
• Position: Includes related article on the Overview of Post-employment Benefits field test - Impact of the proposed Financial Accounting Standards Board standards on post-employment benefits

Results of OPEB field test show impact on corporate expenses A field test, sponsored by the Financial Executives Research Foundation, measured the financial impact on 25 companies of the proposed FASB standard on other postemployment benefits. What did the test have to say about corporate America's future balance sheet? If the FASB exposure draft on postretirement benefits other than pensions is adopted, the financial statements of companies sponsoring these benefit plans could be significantly affected, because expense under accrual accounting is greater than current pay-as-you-go costs. How much greater was the subject of a field test of 25 companies sponsored by the Financial Executives Research Foundation (FERF).

Corporate America is particularly concerned about this proposed new accounting requirement because these plans are generally unfunded and, therefore, earnings on plan assets are not available to offset the effect of higher expense. Moreover, the specific impact on a particular company's financial statements--either at the time of initial application or in later years--cannot be predicted without substantial analysis.

Understanding the impact of these proposed changes on an individual company requires detailed information about its plan(s) and an analysis of many factors, including the unique features of the benefits offered, the company's specific demographic characteristics, and the assumptions used in the actuarial measurements. Even so, some general observations can now be made about the impact based on the results of the field test.

Field test results The actuarial valuations conducted for the field test demonstrated that company demographics and the specific benefits offered by the company significantly affect the measurement of retiree health obligations and expense. In particular, the ratio of retirees to active employees is important in understanding the impact of accrual accounting.

First-year expense under the ED was compared to pay-as-you-go expense for the field test companies. (We're using the term "expense," rather than "net periodic postretirement benefit cost" as defined in the ED.) As with many other variables examined, expense under the ED as a multiple of benefit payments varied with the ratio of active employees to retirees. First-year expense was between three and five times the pay-as-you-go amounts for most field test companies (predominantly mature companies). However, some "highly mature" companies had...