The Impact of FASB Statement No. 106

Statement of Financial Accounting Standards No. 106 requires that companies accrue the expenses for nonpension postretirement benefits. The focus of this thesis is to examine the impact of SFAS No. 106 on companies and their employees. Particular attention is paid to the increase in expenses for postretirement benefits and the increase in total liabilities resulting from the recognition of the obligation for postretirement benefits. My study is the first to use actual data from financial statements to assess the impact of this new ruling. Eighty three companies were included in my sample. All of these companies were early adopters of FASB Statement No. 106 (implementation is only required for fiscal years starting after December 15, 1992). T-tests were used to determine whether the increase in expenses and liabilities resulting from adoption were significant. T-tests were also used to determine the impact of several factors on the increase in expenses and total liabilities. These factors included the maturity level of the firm, the transition approach used, the actuarial assumptions used, and the funding practices used. Chi-square tests, correlation analysis and regression models were also used to find significant relationships between the variables. The impact of FASB Statement No. 106 was significant. Significant increases were found in postretirement expenses and total liabilities. The mean increase in postretirement expenses was 200% for the sample companies, while total liabilities rose 7.6%. The impact was found to be particularly harsh on immature companies, nonfunding companies and those companies that recognized the entire transition obligation immediately. Many companies have reacted to this huge increase in expenses and liabilities by cutting benefits for their employees. The ultimate victims of this accounting change may be the employees.