Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (208)	4/20/1998 10:59:00 AM
From: Reginald Middleton	Respond to of 1722

<Companies will be tempted to move future liabilities that were recorded in 92 and 93 under different and less favorable assumptions back into the income statement. The opposite of the way they were recorded as non-cash charges against earnings before. This will produce the appearance of earnings that do not exist.> This can be circumvented by consistently reconciling net income statements. The reconciliation will give you a much clearer picture of what is going on. The problem is actually guessing true FAs 106 liabilities. This is difficult, for it takes what used to be a short term liability and makes it a very long tailed risk. <They were one shot charges in 92 and 93. The trend has been for reduced health care benefits for employees. When the old liabilities come due they will require significant "cash" outlays. It is possible that they will be much more than is being charged and accrued at that time. So real Free Cash may be lower than is reported by VL at that time. This will be compounded if the medical rate of inflation keeps falling or stays very low.> Many large companies have entered into customized funding arrangements that attempt to match FAS 106 liabilities with off-balance sheet vehicles. That is why it is VERY important to study the footnotes. Corporate owned life insurance (COLI) trusts and specialized financial reinsurance contracts were the vehicles of choice. If the actuarial assumptions which went into the design of these contracts were overly pessimistic (which is quite possible due to the unprecendented drop in long terms rates adn the unusually high return on equities - both of which are integral to the return on vehicles that fund long tailed risks), a net cash surplus could actually accrue in some well funded companies in lieu of net negative cash balance. Simply offering my 2 cents in this interesting debate RCM