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.
Now, it's entirely possible that these companies are taking as
large a charge as possible, because that's what companies like to
do--if they have to recognize a negative event, they try to make it as
big as possible. Firms like to recognize as many upside surprises as
possible, while minimizing the number of unexpected adverse charges.
It is better to take one "big bath" then dribble out seven "Oops, we
underestimated the size of the problem" notices. And, of course,
companies have some discretion over when they "recognize" that the
charge they took was too big, which allows them to use a "conservative"
(very large) charge to smooth out future earnings somewhat.
But these charges aren't going to have much impact on the stock
price, or anything else; they're non-cash charges, the costs will be
spread over a number of years, and they're not a huge surprise to
investors. I doubt it's even going to have much impact on the
popularity of the health care plan.
As accounting sins go, this is the corporate equivalent of moving
your printer ink purchases up by two days in order to deduct them in
the current tax year. It certainly does not warrant congressional
investigation. What AT&T, Caterpillar, et al did was appropriate.
It's earnings season, and they offered guidance about , um, their
Obviously, Waxman is incensed because this seems to put the lie to
the promise that if you like your current plan, nothing will change.
But this was never true. Medicare Advantage beneficiaries are
basically going to see their generous benefits slashed, retiree drug
benefits suddenly cost more and may now be discontinued, and
ultimately, more than a few employers will almost certainly find it
cheaper to shut down their plans. If Congress didn't want those things
to happen, it should have passed a different law.
If Congress thinks that it made the right tradeoffs--or at least,
justiiable choices--then our Congressmen should step up and accept
responsibility for what they've done. At the very least, I think we
can ask that they refrain from trying to force companies to join them
in denying reality by threatening congressional investigation of any
company who dares to notify investors that this thing is going to cost
Megan McArdle is the business and economics editor for The Atlantic. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and the Economist.