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The choice of a technique for computing the accrual cost is not. Recording a liability and eliminating accounting alternatives are matters of principle. The length of the attribution period or the period for amortizing the transition obligation is not. But the logic breaks down when the computation is applied to the typical nonpension retirement benefit plan, particularly retiree health care plans. Such a plan promises benefits in the form of services to be purchased when needed at prevailing prices. The length of employee service has no effect on the benefits the employee will receive.

It only matters that they are there when they are there, because that is the right time and it is of mutual benefit. A field test of the proposals has produced some scary numbers. For a mature company, with many workers already retired, the change to accrual accounting would increase the cost from three to six times. For a young company, the increase would be more like 30 times. Actuaries, whose happy job it would be to make the projections, have frankly expressed doubts about their ability to do it with reasonable reliability.

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That method would spread the cost as a percentage of payroll. As with the FASB’s proposed method, it would allocate the cost arbitrarily. But it would do so openly, avoiding any appearance of measuring the financial results of an event. More important, the method would be simple, and it would avoid the misleading appearance of precision.

It would not only relieve future operations of prior cost, but would immediately convert both the balance sheet and the income statement to what they would have been had accrual accounting been followed in the past. And why, critics will ask, should the cost be spread over less than an employee’s full service life? Granted, at the date an employee is eligible for benefits, an obligations exists; the employee could quit tomorrow, and the company would owe the promised benefits. Allocating the cost on the assumption that they will quit not only fails to charge all years worked with a share of the cost, but also misstates the company’s economic obligation. Worse, the accumulation of a cost by separate components, each with its own catalogue of detailed computational rules, would suggest a precision in the result that would be misleading.

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The complexity would add neither relevance nor reliability, only time and expense. The FASB attempts to overcome this awkward fact by assuming that each year’s service earns a pro rata share of the total benefit. But that simply reduces the computation to an arbitrary exercise; it cannot be described as measuring the financial effects of an event.

There is no event; there are no financial effects to measure. Yet, even a small difference in the cost trend rate can make a big difference. Using a typical plan, one study found that a one-percentage- point change in the trend rate changed the cost by 10% to 40% depending on the portion of the covered group that is currently retired. Differences of that size reduce reliability to levels below acceptability.

So, despite Damon Runyon’s advice never to offer more than three to one on events involving human beings, the odds on retaining pay-as-you-go accounting have to be at least 100 to one against. On this issue, the FASB believes it is on the side of the angels. And few in business or the accounting profession seem inclined to argue the point.

The FASB would include changes in health care costs in the projection, but would exclude changes in plan terms and in government cost-sharing arrangements. Changes in health care costs trigger changes in plan terms and in government cost-sharing arrangements. And, as the history of Medicare illustrates, changes in government cost-sharing arrangements trigger changes in health care costs.

Thus, many will suggest an alternative computation, one that does not give up the advantages of accrual accounting, but at the same time, does not require unreliable projections or inconsistent treatment of related events. The alternative would simply exclude projections of the health care cost trend rate from the computation, or at least project only general price level inflation. Compounding the problem of unreliability is that of inconsistency.

Connect and share knowledge within a single location that is structured and easy to search. The odds of eliminating minimum liability reporting are not good. While two Board members favor eliminating it, the others believe the five-year-delayed effective date takes care of most practical problems. That does not mean the October and November public hearings on the proposals will be an exchange of pleasantries. To the contrary, the hearings are likely to be as fractious as any the FASB has held. The Board will get an earful of objections and suggestions for change.

Field tests indicate that accrual accounting will increase the costs of benefits from three to six times of present cost. In the area of of health benefits, the FASB requires the projection of payments over the employees’ expected careers. This process includes future health care costs and factors into the projected cost the anticipated costs of inflation, technological advances, and changes in the utilization and delivery of services.

Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today’s practice environments. Get unlimited, ad-free homework help with access to exclusive features and priority answers. It all appeared to be a heat of the moment exchange between Reed and her team, caught up in the joy of March Madness. But as sports goes, every team is looking for a competitive edge and any perceived slight to add to its bucket of motivation. The clip of Reed referencing Mulkey, and what she believed to be on the way, made it back to the LSU Locker room.

That being the case, computing each year’s service cost as the present value of the added benefits earned by the year’s service has no basis in fact. Service during the year does not earn added benefits. Even worse, current tax laws allow companies to deduct only the pay- as-you-go cost. While the larger accrual cost will some day be deductible, SFAS 96 on income tax accounting sharply limits the future deductions that a company can count in figuring its current tax expense.