By Philip I. Rosenbaum
AP Business Writer
NEW YORK (AP) – Financial Accounting Standard 106. The name might mean nothing to you, but if you’re a retiree or will be someday, this new accounting rule can pack a powerful punch.
Aimed at making investors more aware of company obligations to provide health benefits for future retirees, the rule has prompted many big corporations to trim or even kill retiree plans once considered untouchable.
To comply with the rule, companies must subtract from their profits the estimated future costs of providing health benefits to retirees. Previously, companies only had to account for the costs as they were incurred.
In effect, the rule will cut into companies’ reported earnings, hurting their overall financial picture.
“We’re seeing a lot of companies looking for ways to unload the liability of the rule,” said Mike Clowes, editor of Pensions and Investments, a twice-monthly publication.
Many firms are trying to lessen the impact by reducing their insurance coverage for workers. Some are asking workers to pay higher premiums and deductibles or offering less coverage for new workers. Others are eliminating benefits for retirees altogether.
In early November, computer maker Unisys Corp. said it will phase out health insurance for retirees by 1996, saving $ 100 million a year.
McDonnell Douglas Corp., a leading defense contractor, said recently it would phase out health benefits for salaried retirees after four years. That move was expected to halve the costs created by the new rule.
IBM, which took a one-time bookkeeping charge of $ 2.3 billion against earnings in the first quarter of 1991 to account for the rule’s impact, is making retirees pay a greater share of the benefit costs.
Navistar International Corp., a large truckmaker, recently negotiated a deal with the United Auto Workers that would slash medical benefits for 40,000 retirees in exchange for a large stake in the company.
Retired workers from some companies, including McDonnell Douglas and Unisys, have sued former employers on grounds the change violates original contract promises.
Cathy Ventrell-Monsees, a manager of worker equity at the American Association of Retired Persons, said companies are unfairly using the rule as a reason to cut benefits to retired workers.
“Theoretically it should have no relationship to the benefits the companies provide because they’ve had the benefits obligation all along,” she said. “We look at it as if they’re using FAS 106 as an excuse or a scapegoat.”
Dale Yamamoto of Hewitt Associates, a benefits consulting firm in Lincolnshire, Ill., said the rule is accelerating a new era of austerity among companies trying to get more control over health insurance, one of their most rapidly escalating costs.
“The companies making cuts eventually would have done so anyway. The rule is just speeding it up in some cases,” Yamamoto said.
A recent survey by the consulting firm Foster Higgins Inc. found 65 percent of employers offering retiree health care benefits either have changed their programs within the past two years, or intend to make changes by the end of 1993.
The most common reforms were raising premiums, increasing cost-sharing provisions, or moving to managed care programs, a more affordable alternative in which workers choose doctors from a pre-approved list.
Hewitt found in a survey that the bottom-line cost created by the rule range from $ 1 million for small businesses to more than $ 8 billion for the larger and older companies with the most retirees. General Motors Corp., the biggest U.S. company, has retiree obligations exceeding $ 20 billion.
The Financial Accounting Standards Board, the government-sanctioned body that creates rules for corporate accounting, wrote rule 106 to rectify the history of underestimating retiree obligations. Shareholders in many companies simply don’t know these obligations exist.
Like IBM and hundreds of other big companies that can afford it, the most logical choice has been to account for the costs in one lump sum, which is reflected in a bookkeeping transaction known as a charge against earnings.
Upjohn Co., for example, said this week it will take a $ 224 million charge in the fourth quarter to cover costs associated with the new rule. Amoco Corp. said it will take an estimated $ 850 million fourth-quarter charge.
Earlier in December, Ford Motor Co. said it would take charges of nearly $ 7.7 billion against 1992 earnings, mostly to account for the new rule.
In November, Reynolds Metal Co. said its 1992 results will be reduced by $ 827 million, largely because of the accounting rule.
An alternative under the new rule is to spread out accounting for the retiree costs over 20 years, but it’s not clear how many will do that. Hewitt said in a survey of 72 companies most expect to account for the full obligation in one step.
“They want to get it all out of the way in year one and not taint the future years thereafter,” said Vince Amorosa, an accountant with KPMG Peat Marwick in Washington.
Many companies have been scrambling to comply before Friday, when most corporate fiscal calendars begin. However, the majority of companies will not adopt the rule until 1993, postponing the impact on their financial statements as long as possible, the Hewitt survey found.
PHILIP ROSENBAUM 