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January 17, 2002
Creative Accounting in Retirement Benefits
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porations use a variety of sometimes creative methods to account for the liabilities associated with postretirement health and welfare benefits plans, Charles D. Spencer & Associates found in a recent survey.

The survey revealed that some companies used other accounting rules to help mitigate the impact of Financial Accounting Statement (FAS)106-Employers' Accounting for Postretirement Benefits Other Than Pensions-on their balance sheets. Other rules such as FAS 109, "Accounting for Income Taxes," which results in a one-time increase in net income that is applied to offset the one-time charge under FAS 106.

Another rule is FAS 71, "Accounting for the Effects of Certain Types of Regulation," which allows for the recovery of FAS 106 costs through rate increases.

The Spencer Benefit Report found that the adoption of FAS 106 resulted in many companies amending their retiree plans to include dollar caps, defined benefit approaches, increased cost-sharing, and/or reduced or completely terminated benefits packages.

Spencer analyzed the 2000 annual financial statements of 60 publicly held corporations. Utilizing discount rates and medical cost trend rates, the accumulated post retirement benefit obligation (APBO) in accordance with FAS 106 was calculated.

The study found that the median discount rates for 2000 averaged 7.63%, compared to 7.51% in 1999, ranging from a low of 3% to a high of 8.25%. However, given that few post retirement health care funds are actually funded, the year-to-year changes in the discount rates has little meaning and has no effect on actual costs. Medical rates hit 8.57%, their highest since 1996, reflecting a general trend towards higher medical costs.

Adopted in 1990 and effective in 1993, FAS 106 requires companies to record their accrued liability for post retirement health benefits and other non pension benefits, utilizing forecasts about health-care cost trends, inflation, retirement age, mortality rates, employee turnover, and other variables. When first introduced, FAS 106 gave companies a choice: 1. record their unfunded, previously unrecognized APBO as a single, one-time non recurring charge; or 2. record it through smaller charges taken over the course of 20 years.

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