1. Case 4-8 Economic Consequences

The FASB has issued SFAS No. 106, Employers Accounting for Postretirement Benefits Other than Pensions (see FASB ASC 715), and SFAS No. 112, Employers Accounting for Postemployment Benefits (see FASB ASC 712). These pronouncements required companies to change from accounting for benefits, such as health care, that are paid to former employees during retirement on a pay-as-you-go basis to recognizing the expected cost of benefits during employment. As a result, companies must accrue and report expenses today, thereby reducing income and increasing liabilities. Some have argued that these pronouncements will cause employers to reduce or eliminate postretirement and postemployment benefits. It is not necessary for you to know the particulars of implementing either of these standards to address the issues described here.

Required:

a. Should financial reporting requirements affect managements decision-making process? Discuss. Should management reduce or eliminate postretirement or postemployment benefits simply because of the new pronouncement? Discuss.

b. Are there social costs associated with these pronouncements? Explain.

c. What would mainstream accounting proponents say about the potential and/or actual impact of these pronouncements?

2. Case 5-2 Earnings Quality

Economic income is considered to be a better predictor of future cash flows than accounting income is. A technique used by securities analysts to determine the degree of correlation between a firms accounting earnings and its true economic income is quality of earnings assessment.
Required:

  a.  Discuss measures that may be used to assess the quality of a firms reported earnings.