Business Reacts to FASB's Proposal for Nonpension Retirement Benefits
BUSINESS REACTS TO FASB'S PROPOSAL FOR NONPENSION RETIREMENT BENEFITS The past year has brought increasing attention to the accounting and reporting of nonpension other than postemployment benefits, referred to as OPEB. The attention was triggered by the Financial Accounting Standards Board's controversial exposure draft, Employers' Accounting for Postretirement Benefits Other Than Pensions, released in February 1989. The board has received 467 comment letters on the ED. Here are the major concerns expressed by industry and other interested parties (see Responses to the FASB's ED on OPEB, by issue Is there a liability for OPEB? In general, respondents agreed (albeit many reluctantly) the OPEB obligation is a liability that ought to be recognized. Approximately 60% of the comment letters supported the FASB's view that the obligation to provide OPEB is a liability that should be disclosed on the balance sheet. An additional 9% concurred that a liability exists but argued it should be disclosed as a footnote. Less than 15% contended the OPEB obligation is not a liability and should not be reported anywhere in the financial statements. Opponents of recognizing the liability on the balance sheet presented two major arguments: The obligation is not a liability because 1. The employer has discretion to cancel the obligation. 2. The amount of the obligation is unmeasurable. However, even among those who agreed the obligation for OPEB is a liability, many expressed concern that forcing U.S. businesses to recognize a liability for OPEB would have several undesirable consequences. For example, some businesses (including several Fortune 100 companies) said they would either curtail or drop OPEB benefits if required to record a liability. Others said U.S. businesses would be placed at a competitive disadvantage with businesses in foreign countries that have little or no obligation to provide OPEB because foreign governments, rather than businesses, heavily subsidize healthcare. Finally, many said the debate over who should bear the cost for OPEB (particularly, healthcare) is unresolved. Those commentators argue the FASB is resolving that debate inappropriately and creating public policy by mandating that companies bear the OPEB liability. Nonetheless, approximately 70% of the comment letters agreed with the FASB that an obligation exists. Furthermore, many letters said the FASB proposal would have the salutary effect of making employers, employees and the public more aware of the true cost of providing healthcare. Over what period do employers incur the liability? The most criticized proposal concerned the FASB's attribution period. The board proposes attributing OPEB liability to the period starting at the hire date and ending at the date an employee becomes eligible for retirement. Nearly 80% of all letters commented on this issue and only eight (less than 2%) agreed with the FASB's approach. Nearly all comments advocated attributing the liability to the period starting at date of hire and ending at retirement. Many commented that companies offer postretirement benefits to an employee as a form of deferred compensation for that employee's entire service from date of hire to date of retirement, not just for the service up to the eligibility date. Hence, the OPEB expense should be allocated over the entire service period. It appears likely, however, the FASB will maintain its position on this issue since its approach is consistent with current generally accepted accounting principles on pension accounting. (Pension expense is attributed from the hire date to the vesting date. The FASB considers the eligibility date for OPEB to be similar to the vesting date for pensions.) What rate should be used to project future healthcare costs? The FASB proposes each company develop a unique healthcare trend rate based on the company's own history of healthcare costs. …