Volume 19, No. 12

 

The Curious Case Of Postretirement Benefits Accounting:  In the hit movie “The Curious Case of Benjamin Button,” the hero starts out life with the appearance and physical condition of a very aged man. As he becomes older, he becomes younger in appearance, meeting his sweetheart at a tender age for her and reuniting with her for a blissful period when they’re both in their prime. Of course, nothing that good could last forever; they continue their inverse aging paths, missing each other as they live out their days.

Investors have been treated to a similar movie playing out over the last two decades, a movie about weirdly aging postretirement benefits obligations. These accounting creations first appeared on corporate balance sheets in 1992 among much fear and trepidation about the subsequent costs to be recognized through accrual accounting for postretirement benefits. In the time since, however, instead of becoming more detrimental to earnings, postretirement benefits costs have actually become less detrimental to earnings than ever - going from aged beasts to smooth-skinned youths. The last few years might even be a “sweetheart period,” where many firms have experienced declining postretirement benefits costs - and some firms are actually seeing negative costs.

That sweetheart period, just as in the movie, may be coming to a close. Firms will be remeasuring their postretirement benefits obligations at year end, and it would be surprising if the Patient Protection and Affordable Care Act of 2010 didn’t start affecting those obligations. Those effects can’t be anticipated - but before they show up, investors should wonder why the existing accounting doesn’t do enough to illustrate the economics of corporate postretirement benefits plans, which cover mostly medical benefits.

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