Financial statements and the FASB retiree health proposal.

• Author: Meehan, James C.
• Position: Financial Accounting Standards Board - Includes related article on accrual accounting impact

Financial statements and the FASB retiree health proposal

If the FASB's proposal on accounting for retiree health benefits is made a standard, companies will need to reevaluate their plans. How will financial statements fare after a transition to accrual accounting? Two experts, who now are analyzing the results of a field test on the subject, discuss the impact of the proposal. Concern has been mounting among employers about the costs of their retiree health care benefit plans. Costs have increased significantly in recent years and companies have a substantial financial obligation on their hands. The Financial Accounting Standards Board (FASB) recently published a summary of its proposed Statement of Financial Accounting Standards calling for companies to begin to accrue the costs of these benefits in 1992. Since many companies could face significant reductions in net income and increases in liabilities, the FASB's issuance of proposed new accounting requirements is expected to focus managements' attention on their retiree health care plans, not only from a financial reporting viewpoint, but also from a broader business and economic view. [Note that this article was prepared before the issuance of the FASB exposure draft on accounting for retiree benefits.--editor]

Because only a few companies follow accrual accounting or have established trust funds to pay for these benefits, these obligations are not currently included in the company's balance sheet. Although some companies have "rough" estimates of their future liabilities, few employers that account for postretirement benefits on a "pay-as-you-go" basis have detailed analyses of their current costs, future expenses, and potential liabilities for their retiree health benefit plans. Some companies may even find it difficult to measure their retiree obligations because they do not separate current expenditures for retirees from those for active employees.

The FASB project and the field test

The FASB would require most companies to switch to accrual accounting for retiree health care and other postretirement benefits by 1992 and would require a "minimum" liability to be recorded on the balance sheet by 1997. Because the FASB believes that an employee earns these benefits in exchange for service rendered to the company--as another form of deferred compensation--the accrual for future benefits should take place during an employee's working career, not at the time of retirement or after retirement. Thus, pay-as-you-go (cash basis) and terminal accrual (accrue at retirement) approaches would no longer be acceptable.

The FASB encourages interested parties to study, evaluate, and comment on its proposal. Once issued, the Board's exposure draft is expected to have a six-month comment period, followed by public hearings. By taking an active role in the standard-setting process and making their views known, companies may have an impact on the outcome of this FASB project. A final statement is expected to be issued by the FASB in mid 1990.

Recognizing the need to help the FASB and other interested parties assess the potential impact of the proposed new accounting...