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Groups, Companies Seek Delay in New Accounting Rules

October 13, 1989

NEW YORK (AP) _ A major accounting group this week asked the Financial Accounting Standards Board to delay implementation of new accounting rules that would force U.S. companies to deduct billions of dollars from profits for medical and insurance benefits paid to retirees.

The 85,000-member National Association of Accountants was one of several groups and companies calling for the accounting board to allow more time to gather information and implement the new accounting procedures.

Michael Cinalli, a member of NAA’s accounting practices committee and manager of accounting policy for Du Pont Co., said the burden would be especially difficult for smaller companies.

″The baseline data is difficult to accumulate even for the larger companies,″ said Cinalli, who testified before FASB. ″For medium and smaller companies it is more difficult.″

Cinalli said smaller companies’ primary focus has been on payment and costs, not on where retirees live or how many dependents they have. The new rules will require companies to project future benefit costs based on the age of the retiree, the retiree’s spouse and dependents, where and under what medical plan beneficiaries receive services, as well as future medical technology.

″Under the FASB rules, demographics play a large role in projecting future costs,″ Cinalli said.

Dennis R. Beresford, chairman of the accounting standards board, told hearing participants, however, that the FASB, a government-sanctioned authority for setting accounting standards, does not plan to delay implementing the rules. He said a delay would be considered only if testimony at the hearings suggests it is warranted.

About 60 companies testified before FASB during three days of public hearings in New York this week. Hearings are scheduled in Washington for Nov. 2 and 3.

The proposed rules, scheduled to take effect in 1992 for larger companies and in 1993 for smaller concerns, could wipe out the earnings of many companies, forcing some to reduce or discontinue benefits, analysts say.

At issue is a change from a ″pay-as-you-go″ funding approach for retiree health care benefits to one based on funded, accrued benefits.

Most companies currently are not required to report these estimated expenses or reserve money for them. They only have to report retiree health insurance costs as they are incurred.

The new rule would require companies to show all retiree health insurance costs, as well as other non-pension benefits such as housing subsidies or tuition assistance - those incurred now and expected in the future - as a liability.

Under the proposal, companies would be required to deduct from their earnings enough money for a special reserve that would cover the estimated benefits, which are not tax deductible as are pension benefits.

Robert G. Weiss, chairman of the NAA’s accounting practices committee, said the NAA has commissioned a study to determine the enormity of the problem.

’It will depend on what the final standard is, so the research can’t get going until the standard is out, so we need the delay,″ Weiss said.

FASB, which plans to present its final draft on rule changes sometime next year, has received about 500 letters on the proposal, including many from companies seeking ways to lower their liability under the new rules.

Continental Can Co. Inc., in its letter, asked the FASB to extend the implementation dates by at least two years because of the ″monumental task″ involved in compiling historical and cost data.

Continental Can, along with other companies, also asked the board to extend the period for adjusting the financial statements for previously promised medical benefits to at least 25 years. The current proposal provides for a 15- year catch-up period.

″A 15-year amortization period is far too short for companies to expense and accrue a liability that has evolved in many cases over 30-40 years or longer,″ said John N. Maier, controller of Continental Can.

Harry Don, a Cleveland-based consultant for Wyatt Co., a research and consulting firm, said many companies are in the process of shifting the burden of rising medical and other non-pension retirement costs to workers even before the rules take effect.

Experts are divided over the rule changes.

Dave Elder, chairman of California’s Public Employee Retiremenet Committee, said in a letter to FASB that the changes are overdue.

″If a company had millions of dollars in outstanding loans, there would be no question that this fact should show up on its financial statements. The retiree health care obligation should be treated similarly,″ he wrote.

But Abraham Briloff, professor emeritus of accounting at Bernard M. Baruch College in New York, believes FASB should start from scratch with rules that are more in step with reality.

Briloff said FASB has ignored several aspects of corporate behavior, including the fact that retiree benefits frequently are wiped out under a takeover or when a company sells one of its units.

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