Income Statement and Postretirement Benefits Essay

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4.9 GM to Take Charge of
$20.8-Billion
6343889 Xiaocen LIU

INTRODUCTION
• General Motor Corp. took a $20.8 billion charge against 1992 earnings
• This makes GM with the largest annual loss of US corporation
• Non-cash recharge and still sufficient to pay stock dividends
(only accounting information that affects expectations of future cash flows is priced)
• The actual loss is within the expected range $16 billion to $24 billion
• GM would also take $744-million restructuring charge for its National Car Rental Systems business What’s more?
1. GM disclosed it the new accounting policy in Feb 2, 1993.
This timely disclosure will make the public and shareholders have less concern about the inside information
2. In GM’s 1993 Annual Report, the company revealed the sentences in the note that “The ongoing effect in subsequent periods is not expected to be material. The effect at Electronic Data Systems Corporation is not material and there is no effect on GM Class E common stock earnings.”

SFAF 106 ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Summary
• Focus principally on postretirement health care benefits
• Significantly change the prevalent current practice of accounting for postretirement benefits on a pay-as-you-go
(cash) basis by requiring accrual, during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents • In exchange for the current services provided by the employee, the employer promises to provide, in addition to current wages and other benefits, health and other welfare benefits after the employee retires
• The benefits are a type of deferred compensation. The employer's obligation for that compensation is incurred as employees render the services necessary to earn their postretirement benefits

SFAF 106 ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
• objective of that accounting is to minimize the cost and mitigate the disruption to the extent possible without unduly benefits compromising the ability of financial statements to provide useful information.
• Accrual accounting goes beyond cash transactions and attempts to recognize the financial effects of noncash transactions and events as they occur. Recognition and measurement of the accrued obligation to provide postretirement benefits will provide users of financial statements with the opportunity to assess the financial consequences of employers' compensation decisions.
The Board's objectives in issuing this Statement are to improve employers' financial reporting for postretirement benefits in the following manner:
a. To enhance the relevance and representational faithfulness of the employer's reported results of operations by recognizing net periodic postretirement benefit cost as employees render the services necessary to earn their postretirement benefits
b. To enhance the relevance and representational faithfulness of the employer's statement of financial position by including a measure of the obligation to provide postretirement benefits based on a mutual understanding between the employer and its employees of the terms of the underlying plan
c. To enhance the ability of users of the employer's financial statements to understand the extent and effects of the employer's undertaking to provide postretirement benefits to its employees by disclosing relevant information about the obligation and cost of the postretirement benefit plan and how those amounts are measured
d. To improve the understandability and comparability of amounts reported by requiring employers with similar plans to use the same method to measure their accumulated postretirement benefit obligations and the related costs of the

QUESTION 1

1. Will the new accounting policy SFAF 106 affect the company’s financial reporting?

(Textbook 4.3.1) Accounting policies adopted by firms won’t affect as long as these policies have no
differential
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