FASB 106's deferred tax implications: FASB Statement no. 109 adds another wrinkle to accounting for postretirement benefits. (Financial Accounting Standards Board)

Financial Accounting Standards Board Statement no. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, changed financial reporting for such benefits from a cash basis to an accrual basis. Companies must accrue the cost of postretirement benefits as they are earned by employees. (Previously, such liabilities were not recognized in the financial statements.) FASB Statement no. 109, Accounting for Income Taxes, requires companies to determine whether a valuation allowance is needed to reduce deferred tax assets to an amount more likely than not to be realized. How do these statements relate to each other? Recording an accrued liability under Statement no. 106 creates a deferred tax asset under Statement no. 109.

For some companies, existing, but previously unreported, postretirement benefit obligations are significant. In 1992, for example, General Motors Corp. and Ford Motor Co. recorded accrued liabilities of approximately $33 billion and $12 billion, respectively. Statement no. 109 requires companies to use an offsetting valuation allowance in placing deferred tax assets on their balance sheets. In deciding the appropriate magnitude of the allowance, CPAs must exercise considerable professional judgment. This article addresses factors that must be evaluated in making this decision.

SERVING TWO MASTERS

The treatment of postretirement benefits is just one example of how financial reporting and Internal Revenue Code tax reporting requirements differ.

Financial statement reporting requirements. The change from pay-as-you-go to accrual-basis accounting for …