Earlier this year, you were elected to the Board of Directors of Champion International, Inc. Champion has
Question:
Earlier this year, you were elected to the Board of Directors of Champion International, Inc. Champion has offered its employees postretirement health care benefits for 35 years. The practice of extending health care benefits to retirees began modestly. Most employees retired after age 65, when most benefits were covered by Medicare. Costs also were lower because life expectancies were shorter and medical care was less expensive. Because costs were so low, little attention was paid to accounting for these benefits. The company simply recorded an expense when benefits were provided to retirees. SFAS 106 changed all that. Now, the obligation for these benefits must be anticipated and reported in the annual report. Worse yet, the magnitude of the obligation has grown enormously, almost unnoticed. Health care costs have soared in recent years. Medical technology and other factors have extended life expectancies. Of course, the value to employees of this benefit has grown parallel to the growth of the burden to the company.
Without being required to anticipate future costs, many within Champion's management were caught by surprise at the enormity of the company's obligation. Equally disconcerting was the fact that such a huge liability now must be exposed to public view. Now you find that several Board members are urging the dismantling of the postretirement plan altogether.
Modern Advanced Accounting In Canada
ISBN: 9781259066481
7th Edition
Authors: Hilton Murray, Herauf Darrell