OPEB Issues
Response to the following problem:
"Will it cost your company your company? Ready for one of the most difficult challenges ever to confront corporate America? One that is estimated to cost up to $400 billion. New FASB regulations will force companies to measure and post as a debit their health expense obligation to current and future retirees. . . . We'll help you minimize the financial impact of these regulations and still enable you to remain responsive to the benefit needs of employees." (Excerpts from an advertisement by CIGNA, a large insurance company.)
"Forget about retiring with all-expenses-paid health care from your employer. About 65% of U.S. companies have reduced benefits. Some have asked retirees to pay more of the costs, while others have eliminated the plans altogether. Blame soaring medical expenses and a new accounting rule that requires companies to post long-term retiree medical benefits as liabilities on their balance sheets." (Adapted from Business Week, August 24, 1992, p. 39.)
Required:
1. Critically evaluate the content of the advertisement.
2. Explain why companies may have reduced benefits when they adopted new GAAP.