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Comparison of Assumptions about Trends in US Health Care Costs- Employee Compensations

EXAMPLE 4

Comparison of Assumptions about Trends in US Health Care Costs

So lower health care cost–> lower pension obligations.

Why is it less conservative (more aggressive) approach for a firm? Is it Reporting lower liability= more aggressive accounting practice?

 

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Take 2 competitors in the same industry as an example. Company A is forecasting health care costs to grow at 5% while Company B is forecasting health care costs to grow at only 3%. Company A is more conservative since they are forecasting a larger obligation while Company B is less conservative since their forecasted obligation is lower due to the lower growth assumption.

“More aggressive” usually means a company is recognizing more revenue or less costs than it usually should, in order to boost profitability in the financial reports. So yes. recognizing a lower liability and the respective lower costs, means that they are indeed taking a more aggressive approach.

An accounting method is aggressive if it reports higher net income in the current period, and possibly lower net income in future periods.

Examples of aggressive accounting methods are:

  • Straight-line depreciation (vs. accelerated depreciation)
  • FIFO inventory costing in periods of rising inventory costs (vs. LIFO inventory costing)

An accounting method is conservative if it reports lower net income in the current period, and possibly higher net income in future periods.

Examples of aggressive conservative accounting methods are:

  • Accelerated depreciation (e.g., double-declining balance vs. straight-line depreciation)
  • LIFO inventory costing in periods of rising inventory costs (vs. FIFO inventory costing)

An assumption that lowers pension costs leads to higher net income in the current period: aggressive.

Simplify the complicated side; don't complify the simplicated side.

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Thank you all for the response.

S2000magician wrote:

An accounting method is aggressive if it reports higher net income in the current period, and possibly lower net income in future periods.

Examples of aggressive accounting methods are:

  • Straight-line depreciation (vs. accelerated depreciation)
  • FIFO inventory costing in periods of rising inventory costs (vs. LIFO inventory costing)

An accounting method is conservative if it reports lower net income in the current period, and possibly higher net income in future periods.

S2000magician wrote:
Examples of aggressive accounting methods are:

i think you meant “conservative” here. Got it.

S2000magician wrote:
  • Accelerated depreciation (e.g., double-declining balance vs. straight-line depreciation)
  • LIFO inventory costing in periods of rising inventory costs (vs. FIFO inventory costing)

An assumption that lowers pension costs leads to higher net income in the current period: aggressive.

Thank you for summing it up all.

swadhin wrote:
S2000magician wrote:
An accounting method is aggressive if it reports higher net income in the current period, and possibly lower net income in future periods.

Examples of aggressive accounting methods are:

  • Straight-line depreciation (vs. accelerated depreciation)
  • FIFO inventory costing in periods of rising inventory costs (vs. LIFO inventory costing)

An accounting method is conservative if it reports lower net income in the current period, and possibly higher net income in future periods.

S2000magician wrote:
Examples of aggressive accounting methods are:

i think you meant “conservative” here. Got it.

Good catch; I copied and pasted, then forgot to change the word.  I’ve corrected it.

swadhin wrote:
Thank you for summing it up all.

You’re quite welcome.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

I have another question about the same example. Solution 3. Why are we substracting from the equity the amount of increase in pension obligation? Thanks.