What were the major effects of SFAS No. 106 on reporting for post-retirement benefits other than pensions?

Question

What will be an ideal response?

Answer 1

ANSWER:
SFAS No. 106 brought accrual accounting to OPEB. It made it clear that, like pension costs, post-retirement benefits are liabilities, and it requires the projected benefit approach be used to measure the accrued expense. The discount rate used to show the OPEB obligation at present value should be based on rates of return for high-quality fixed-income investments that are currently available on the market and whose cash flows are generally similar in amount and timing to OPEB payments. This is in contrast to the AAA’s recommendation of a discount rate consistent with the firm’s borrowing rate for unsecured debt with a similar payment structure. SFAS No. 106 also requires the discount rate to include an inflationary component geared to the expected general rate of inflation.

Another important requirement of SFAS No. 106 is that OPEB costs should be spread over the period of time to the full eligibility date rather than over each employee’s total work period. It also requires that prior service costs be recognized over the remaining years of service to full eligibility date of active plan participants. These costs can be amortized over future periods on either a straight-line basis or on the basis of the remaining years of service of active plan participants to their full eligibility. Where employees are already retired or are beyond their full eligibility dates, prior service costs are amortized on the basis of the remaining life expectancy of these participants. However, prior service is taken into account in measuring the OPEB obligation when the plan is amended.

In addition, gains and losses arising from differences from assumed experience or changes in plan assumptions are recognized using the corridor approach. With this method, gains and losses are not recognized immediately but are amortized to the extent that the net amount exceeds 10 percent of the greater of the accumulated postretirement benefit.