Financial Accounting Standards Board (FASB) Statement no. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," established standards for employers' treatment of the non-cash retirement benefits they give their employees. The standard example of a benefit covered by Statement no. 106 is coverage of a retiree's health care costs.


FASB Statement no. 106, issued in December 1990, became effective in 1993. Until then, employers had been allowed to account for the expenses of nonpension retirement benefits on a pay-as-you-go basis. As a result, giving such benefits looked (on the companies' income statements) like a decision that didn't cost the companies anything until years or even decades after it was made.

The new rule required accrual accounting--for instance, the costs of those eventual benefits are charged against income starting at the time the applicable employees begin work.

Discount Rate

In some respects, the consequences of Statement no. 106 mirrored those of Statement no. 87, "Employers' Accounting for Pensions." In both cases, for example, the "discount rate" used to estimate costs as they accrue is based on the market rate of long-term interest.

On the other hand, Statement no. 106 required the accountants for the affected companies to estimate future increases in health care costs. This was a new challenge for issuing companies and their accountants, some of whom were not happy about it.


Some large firms stopped offering retiree health benefits to active workers after the implementation of FASB Statement no. 106. As Kenneth Sperling and Oren Shapira, both with Aon Hewitt's global health care consulting practice, have observed in a paper for "Benefits Quarterly" (2011), "In the face of these liabilities, many companies decided to stop sponsoring retiree health care benefits entirely." They regard the new rules as imposing liabilities because health care costs are much more volatile than interest rates, and historically such costs have grown at more than three times the rate of wages. In 1988, under the old pay-as-you-go rule, 66 percent of large firms offered such benefits. By 1998 that figure was down to 40 percent, the paper said.

CEO Compensation

Leslie Kren, an associate professor at the School of Business Administrration at the University of Wisconsin, Madison, and Bruce Leauby, professor of accounting at La Salle University, pointed out in a paper on "The Effect of FAS 106 on Chief Executive Compensation" (2002) that the reduction in benefits to employees as a result of this rule has not extended to the chief executive's suite. Indeed, by increasing pressure for benefit cuts, it has allowed CEOs to transfer wealth from retirees to shareholders, and they argue that the boards of directors have noticed this transfer and have rewarded CEOs for producing it.