On August 31, 1999, an article in The Globe and Mail, "2000: New year, new accounting, new costs,” anticipated the introduction of Section 3461 of the CICA Handbook, requiring accrual accounting for OPEBs. This standard is similar to SFAS 106 and IAS 19 described in the text. The article noted that firms have the option of recording the accumulated OPEB liability as a direct charge to retained earnings, or to defer the amount of the liability over the next several years and amortize it. The article quotes Mr. Ken Vallillee, a partner of a large accounting firm, as saying, “Most companies will opt for the one-time charge if they can." The article also points out that Section 3461 replaces the previous method of accounting for OPEBs, charging cash payments for OPEBs to expense as they are made.

Required

a. Explain the extent to which the new standard will increase the decision usefulness of financial statements for investors. Consider both issues of relevance and reliability in your answer.

b. Do you agree with Mr. Vallillee that most firms will opt for the one-time charge?

Explain why or why not.

c. What effects will the reporting of the OPEB liability have on the market value of affected firms’ shares? Will the effect depend on how the firm chooses to record the liability?

In your answer, consider situations where share price might fall, remain unchanged, or rise. Assume in your answer that securities markets are efficient.