Chapter 8_ Solutions

Chapter 8_ Solutions - Suggested Solutions to Assigned...

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Suggested Solutions to Assigned Problems in Chapter 8: 8,9,10 8. a . This would depend on the tax deductibility of the accruals for other postretirement benefits. If these are not deductible, there would be no effect of OPEB standards on cash flows following their adoption, to the extent the company continues to pay these benefits. If the accruals are tax deductible, this would increase after-tax cash flows, at least in the short run. After a few years, when the new accounting approaches “steady state,” accruals and cash payments for benefits may be approximately equal, in which case the after-tax cash flow effects would be minimal. b. The answer is not completely clear, since the OPEB standards do not increase amounts of benefits. One possible reason is that firms did not realize how much other postretirement benefits were costing them until the expenses generated by the new accrual accounting became apparent. Another possibility is that firms were quite aware of these costs and were using the major liabilities recorded under the OPEB standards as an excuse to cut benefits. Then, the benefit cuts can be blamed on the accountants rather than the firm itself. c. Share price would rise, given efficient securities markets, if it became apparent that firms' cash flows and future reported profitability would increase. This could result from a cut in benefits following implementation of the OPEB standards. Share price would also rise if the amount of the accrued OPEB obligation was less than the market had expected. 9. a. From an efficient securities market perspective, the EnCana manager need not be concerned. Given full disclosure, the efficient market will look through the increased earnings volatility and realize that there is no effect on cash flows. Furthermore, prior to Page  1  of  4
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This note was uploaded on 12/14/2010 for the course ACC 706 taught by Professor Shadifarshad during the Winter '09 term at Ryerson.

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Chapter 8_ Solutions - Suggested Solutions to Assigned...

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