Alcoa reported a $2.73 billion liability at the end of 2008 for accrued postretirement benefits. In a

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Question:

Alcoa reported a $2.73 billion liability at the end of 2008 for accrued postretirement benefits. In a note to the Alcoa financial statements, the company explains part of this liability amount as follows:

"Alcoa maintains health care and life insurance benefit plans covering eligible U.S. retired employees and certain retirees from foreign locations. Generally, the medical plans pay a percentage of medical expenses, reduced by deductibles and other coverages. These plans are generally unfunded, except for certain benefits funded through a trust. Life benefits are generally provided by insurance contracts. Alcoa retains the right, subject to existing agreements, to change or eliminate these benefits."

Postretirement benefits cover a broad array of promises that companies make to their employees to boost morale and keep them from seeking other jobs. Alcoa is providing two of the most common: health care insurance and life insurance. Based on stipulations that may be required for eligibility, Alcoa helps employees by paying a portion of their insurance cost even after they have retired. This benefit is apparently earned by working for the company. After a person retires, Alcoa continues to provide these payments as a reward for years of employee service.

a. Is this a financial liability or an operating liability?

b. Should this liability be on the right hand side of the balance sheet or the left-hand side of the balance sheet according to GAAP? On which side of the balance sheet would you put it from an internal, managerial decision-making point of view? Explain.

c. In the alternate formulation of the Dupont model, how would this accounting item be factored into Total Assets?

d. If you answered in part that this is an operating liability, why is it important to recognize that this is an operating liability? If you answered that this is a financial liability, what would the implication of wrongly classifying it as an operating liability?