How are future liabilities on the annual report estimated?

• A. The probable total future cost of compensation for the injury or disease
• B. The final cost of current year's medical bills
• C. Past expenses only
• D. Estimates of future profits

Answer: (A)

When a self‑insurance plan prepares its annual report, future liabilities are estimated by projecting the probable total future cost of compensation for injuries or diseases. This means setting aside reserves based on actuarial expectations for all payments that will be made to settle existing and anticipated claims, including medical costs, indemnity benefits, and claim handling expenses, over the life of the claims. The goal is to match expenses with the period in which the related events occurred, following accrual accounting, so the liability reflects the ultimate cost of the claims rather than just what has been paid in the current year.

This is why the correct choice is about the total expected future cost of compensation, not the current year's medical bills, past expenses, or profits. The other options don’t fit because they either focus only on immediate costs, ignore future obligations, or are unrelated to liabilities.