The accounting treatment for postretirement benefits other than pensions requires that companies offering these benefits adopt accrual accounting (similar to the requirements for pension plans)—that is, pay-as-you-go accounting is not acceptable. Assume you are considering an investment in one of two companies that both offer postretirement benefits. The two companies are of equal size and have identical retiree medical plans. However, one company is more labor intensive, and has a greater ratio of retirees to workers along with an older, more strongly unionized work force than the other company.

Required:

a. Compare the relative impacts of accounting for postretirement benefits on the:

(1) Size of the postretirement benefit obligation recognized by each of the two firms.

(2) Size of the postretirement benefit cost reported by each of the two firms.

b. For each of the three forms of the efficient market hypothesis, explain the effect that adoption of this accounting has on the per share price of a firm. Comment on the applicability of these implications to actual markets.