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Tuesday, March 30, 2010

"The GAAP Conspiracy Against ObamaCare"

The Atlantic, Henry Waxman's War on Accounting:

Accounting basics:  when a company experiences what accountants call "a material adverse impact" on its expected future earnings, and those changes affect an item that is already on the balance sheet, the company is required to record the negative impact--"to take the charge against earnings"--as soon as it knows that the change is reasonably likely to occur.

This makes good accounting sense.  The asset on the balance sheet is now less valuable, so you should record a charge.  Otherwise, you'd be misleading investors.

The Democrats, however, seem to believe that Generally Accepted Accounting Principles are some sort of conspiracy against Obamacare, and all that is good and right in America.  

Here's the story:  one of the provisions in the new health care law forces companies to treat the current subsidies for retiree health benefits as taxable income.  This strikes me as dumb policy; there's not much point in giving someone a subsidy, and then taxing it back, unless you just like doing extra paperwork.  And since the total cost of the subsidy, and any implied tax subsidy, is still less than we pay for an average Medicare Part D beneficiary, we may simply be encouraging companies to dump their retiree benefits and put everyone into Part D, costing us taxpayers extra money.

But this is neither here nor there, because Congress already did it.  And now a bunch of companies with generous retiree drug benefits have announced that they are taking large charges to reflect the cost of the change in the tax law.

Henry Waxman thinks that's mean, and he's summoning the heads of those companies to Washington to explain themselves.  It's not clear what they're supposed to explain.  What they did is required by GAAP.  And I've watched congressional hearings.  There's no chance that four CEO's are going to explain the accounting code to the fine folks in Congress; explaining how to boil water would challenge the format.

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Comments

Congressman Henry Waxman strikes again. It's bad enough Waxman maintains he does not understand what he voted on regarding this provision, not to mention GAAP, SEC reporting, SOX, which is a scary thought considering he is Comm Chair of Energy & Commerce but the indignation he shows to the CEOs of these companies as if they are lying when they made their regulatory filings. Is Congress actually trying to intimidate corporations with a Congressional Investigation for following the law? Waxman and others are either stupid, which maybe true anyway, or are simply attempting to strong arm anyone who dares speak the truth. Guys fess up to your blunder and please stop this witch-hunt.

Posted by: Clinton | Mar 31, 2010 2:17:15 PM

In a sense, Waxman does have a point. The charge to earnings is related to a mandatory write down of deferred tax assets and is required to be taken in the period the law changes under ASC 740 (the accounting standard governing accounting for income taxes). The charge to earnings doesn't involve any current cash outlays and is simply reversing the benefit to earnings received in prior years when the deferred tax assets were originally established on the books.

On the other hand, accounting standards don't permit companies to reflect future cost savings, if any, from this legislation on their books until the savings are actually realized. Thus, accounting rules accentuate the downside of this legislation and fail to reflect currently the potential upside.

In my opinion, neither side of the debate understands ASC 740 (a notoriously complex standard) well enough to really appreciate the nuances of this issue.

Posted by: Ron | Apr 1, 2010 12:38:26 PM