Page 228 - Accounting Best Practices

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11–15 Obtain Advance Rating Assessments
able proportion of their salaries in the 401(k) plan, this can force highly compen-
sated employees to limit their plan contributions to less than the maximum
amounts. Nonetheless, if there is a perception that immediate eligibility for the
plan will improve the employee turnover rate, then this should be considered the
overriding issue.
Cost: Installation time:

11–14 CONSOLIDATE INSURANCE POLICIES

Insurance policies are frequently added to a company’s insurance portfolio in a
piecemeal manner. Someone on the management team decides that some addi-
tional coverage is needed to mitigate a perceived risk, and so an additional pol-
icy is added—sometimes beginning at a different time of the year from the other
policies already in existence, and perhaps with different insurance companies.
This can be an expensive approach, for each insurer must factor in potential loss
costs plus operating expenses and profit—on each policy it issues.
A better alternative is to aggregate the policies with a single insurer. By doing
so, insurers can see that their administrative cost will be the same, despite the
much higher volume of insurance, and so they can reduce their insurance prices.
Also, there is little risk that claims will arise on every single policy held, so the
overall risk to the insurer declines—which in turn can reduce prices yet again.
This option is best used by large companies with large-dollar insurance poli-
cies, since insurers will want their business badly enough to be willing to reduce
prices based on the factors just noted.

Cost: Installation time:

11–15 OBTAIN ADVANCE RATING ASSESSMENTS

A company with publicly held debt can never be sure about the change in its rat-
ing by a major rating service after it has taken some significant action, such as an
acquisition or a major capital investment. If the rating agency decides after the
fact that the company’s action has downgraded the credit level on its debt, then
the reduced ranking may trigger a number of adverse financial items—such as a
drop in the market price of the debt in order to increase its effective interest rate,
or difficulty in obtaining additional debt at a reasonable price.
This problem can be overcome by using Standard & Poor’s Rating Evalua-
tion Service. This service allows a company to obtain a confidential review of its
credit rating by a Standard & Poor’s analyst who will issue a prospective credit
rating based on the proposed action. This is a particularly valuable service when a
company has a range of action items to choose from and is willing to change its