What are the possible economic consequences of OPEB recognition?
What will be an ideal response?
ANSWER:
In addition to costs of preparation, OPEB obligations on the balance sheet mean higher debt-to-equity ratios, which threaten debt covenants on bond issues. In addition, management compensation is affected by recognizing OPEB expenses.
It is possible that OPEB obligation recognition could lead to an extensive scaling back of this benefit. One study found 71 firms that cut OPEB benefits between 1989 and 1992. Many of these firms reduced health insurance coverage due to problems related to debt covenants.
Finally, OPEB recognition may put American firms at a competitive disadvantage relative to foreign firms in such areas as cost of capital and pricing of products. However, the focus should be on harmonizing accounting standards. Other nations should be using recognition and measurement techniques similar to those of SFAS No. 106.
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