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"Profiting from Health Care Cuts?" - very good article

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  • philly_four
    http://www.cfo.com/Article?article=2045 Excerpt: Profiting from Health-Care Cuts? Critics accuse companies of managing earnings through FAS 106 rules for
    Message 1 of 1 , Oct 1, 2002
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      http://www.cfo.com/Article?article=2045

      Excerpt:

      Profiting from Health-Care Cuts?

      Critics accuse companies of managing earnings through FAS 106
      rules for treatment of
      retiree medical benefits.

      Laurie Kaplan Singh, CFO Magazine
      February 01, 2001

      Increasing attention to the use of accounting
      gimmicks to boost profits has rekindled a
      nine-year-old controversy involving Financial
      Accounting Standards Board Statement No. 106. In
      recent months, critics have renewed charges that
      some companies are using FAS 106--the standard
      that since 1993 has governed accounting for
      postretirement health-care benefits--as part of a
      strategy to reduce retiree medical coverage, then
      reflect the lower reserve amounts in operating
      earnings. While there is evidence to support the
      suggestion in some cases, the issue is far more
      complex.

      The FAS 106 issue mirrors criticism of FAS 87, which funnels
      surplus pension assets
      through corporate income statements as a credit to pension
      expenses. Some companies,
      critics charge, then slash their pension benefits to help keep the
      surpluses pumped up.

      "The mechanics of FAS 87 and FAS 106 are almost identical," says
      J. Richard Hogue, an
      actuary specializing in FAS 106 valuations. That's because both
      standards were designed
      to ensure that companies record liabilities for retirement
      benefits in the years employees
      were working to earn those benefits, according to "the key
      principle of accrual
      accounting: to match revenues and expenses," notes Julia D'Souza,
      assistant professor
      of accounting at Cornell University's Johnson Graduate School of
      Management. D'Souza
      argues that FAS 106 "offers a relatively cost-free means for
      managers to achieve desired
      financial reporting objectives."

      Here's how the technique supposedly works: Under FAS 106,
      companies record their
      accrued liability for postretirement health benefits and other
      nonpension benefits, after
      making a series of assumptions about health-care cost trends,
      inflation, retirement age,
      mortality rates, employee turnover, and other variables. "The
      accounting rules require
      companies to disclose the principal underlying assumptions" so
      that investors "can
      assess the accuracy of the estimated liability," says Eli Amir, a
      U.S. and international
      accounting standards scholar who now heads Israel's accounting
      standards board. Still,
      the wide range of variables can allow a company to tweak its
      expectations any number
      of ways, and affect earnings favorably.
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