The Financial Accounting Standards Board has issued FAS 106 which deals with accounting for post-retirement benefits other than pensions. These rules have had dramatic effect on the balance sheets of many employers, since they require the immediate accrual of post-retirement benefits as soon as they are earned by participants.
Change in Reporting Rules. The new rules essentially treat postretirement welfare and insurance benefits as a form of deferred compensation and require that the liability for unfunded current and future benefits be accrued as benefits are earned. The current practice of recognizing postretirement benefits on a pay-as-you-go basis is no longer permitted since it does not provide investors with the information needed to assess the financial consequences of an employer’s decision to provide these benefits.
In making the calculation of the costs of these benefits, the actuary must project what the future costs will be when each participant and beneficiary becomes eligible for benefits. The inclusion of the projected future costs produces a much larger accrued expense than the employer is now showing on the balance sheet.