Democrats to accounting rules: Drop dead

It didn’t accept fiscal reality or health-care reality, so why would anyone expect ObamaCare to accept accounting reality?

Democrats led by Rep. Henry Waxman are furious that several publicly traded companies have already begun issuing writedowns related to the new law. They are accounting for reduced future profits because the new law makes changes to Medicare Part D that will make it more expensive for companies that offer generous prescription medicine benefits to their retirees. Waxman is so angry that he wants to the companies’ executives to testify before Congress about why they’re complying with accounting standards speaking ill of ObamaCare.

As the Atlantic’s Megan McArdle explains in an excellent piece, the companies don’t really have a choice when it comes to writedowns:

[W]hen 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.

And it is, as she also notes, earnings season: the time of year when companies offer “guidance about, um, their earnings.” One possible unintended consequence of the change, she writes, may be that more companies decide “to dump their retiree benefits and put everyone into Part D, costing us taxpayers extra money.”

All of this upsets Waxman, for reasons that McArdle explains:

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 them money.

One final note: If you think the writedowns due to ObamaCare are bad, just wait until the Senate passes cap and trade.

34 comments Add your comment

Jess

March 31st, 2010
2:01 pm

I think this goes hand in hand with you last article. Democrats do not want to know the truth about the health care bill, and they sure as hell don’t want people to know it. This will be just another attempt to villify private companies like they already have the insurance industry, the oil industry, and most of the financial industry.

Hillbilly Deluxe

March 31st, 2010
2:08 pm

I never have understood the concept of “writedowns accounting for reduced future profits”. Doesn’t seem to me that you know you’re going to lose money in the future until the future gets here. In essence you’re writing off a loss that hasn’t occured yet.

It reminds me of having a pension fund for your workers but not putting aside the money to pay them when they do retire. That seems wrong to me as well, especially if you claim you don’t have the money when it’s time to pay up.

Oh well, I’ve never understood the concepts of high finance and doubt if I ever will.

All that being said, Rep. Waxman just wants to have a hearing so he can have a dog and pony show and try to make himself look good.

Waxman Has No Clue

March 31st, 2010
2:24 pm

Perhaps if Waxman and the other Dems actually read the bill before they voted on it, they might understand what effects it would have on our economy. I’m just being generous, they don’t really care what’s in Obamacare as long as it first benefits their party. In November, we can vote out these self-serving progressives and replace them with representatives that really understand business and have the life experience of having held a real job.

RJ

March 31st, 2010
2:33 pm

Waxman,

I’m not disagreeing with you, but exactly who are the replacements that are going to do better? I hope you’re not referring to the self serving republicans. Your complaint doesn’t describe Democrats as much as it desribes politicians.

Maybe if EVERY incumbant is tossed out, Congress will get the point. I’m sick of having to choose between two corrupt parties controlled by extremism.

Ragnar Danneskjöld

March 31st, 2010
2:43 pm

Dear Hillbilly @ 2:08, you are speaking rationally, which has little to do with securities law. The “fraud” definition has two distinct definitions: “knowing misleading statements” and “knowing silence when a statement could affect the decisions of the investor.” The latter is the basis for the corporate restatements. Yes, it is stupid, but because of the Federal approval of that basis for litigation there is a big pile of money on the table every calendar quarter.

retiredds

March 31st, 2010
2:48 pm

Kyle, it is patently obvious over the last year that you don’t like Romney/ObamaCare. Of more interest to Georgians is what’s going on under the Gold Dome about transportation and ethics legislation. Do you have any opinions regarding those issues?

Jess

March 31st, 2010
2:59 pm

Actually many, many people will not be able to keep their current plans. I worked for a company which hired primarily engineers who were highly paid. We offered a range of health insurance plans but the most popular was a high deductible plan which was very inexpensive compared to more traditional plans. Most people in that particular workforce could easily afford the $2000 per covered individual deductibile, and did so to save money on premiums.

This will no longer be allowed under the new bill. This company has about 29,000 employees in the US, and a large percent will see a change. Many companies offer a range of plans like this.

retiredds

March 31st, 2010
3:00 pm

So, Kyle, what are we to do about this? Is it RomneyCare or ObamaCare or Romney/ObamaCare?

From the Christian Science Monitor:

Former Massachusetts Gov. Mitt Romney, a Republican, is trying to distance himself from the state healthcare reform overhaul that he signed in 2006. The Massachusetts bill included elements such as the individual mandate – that is, requiring people to buy insurance – which is also in the federal plan and is deeply unpopular among conservatives.

CJ

March 31st, 2010
3:37 pm

Let’s be clear about what we’re talking about here. Corporations receive government subsidies for providing prescription drug coverage to their employees. Fair enough.

But these same corporations are complaining about no longer being able to deduct those subsidies—expenses the corporation never incurred—from their taxes. That’s like somebody buying Kyle’s lunch for him, but then Kyle deducts the cost of that lunch on his own tax return.

If you don’t buy the lunch, you don’t get to deduct it. And if a corporation accepts money from the government to help cover some of its expenses, it can’t deduct that money.

Bush and the Republican had let corporations take these deductions; Obama and the Dems put a stop to it. Now corporations think they found an accounting loophole to get around the change, and they’re diving through it head first. Waxman is justifiably angry.

Of course, if these corporations win and get to avoid paying their share of taxes, then the rest of us have to make up the difference.

Kyle Wingfield

March 31st, 2010
4:03 pm

Nice try, CJ, but this is hardly some “loophole.” Companies have to account for their future liabilities. Their future liabilities just went up. It doesn’t really matter in terms of GAAP *why* the liabilities went up. Or do you think the SEC would let them get away with not restating these liabilities?

Perhaps if government had to follow the same accounting rules that it imposes on businesses, the likes of Henry Waxman would understand what was happening here.

David S

March 31st, 2010
4:07 pm

Once again the negative influence of government tax policy on the economy.

Let’s all be adults about this. When the big government republicans passed the economically destructive Medicare Drug plan under Bush, they were just looking to buy the votes of the elderly and the pharmaceutical companies while sacrificing the nation’s future (oh, and being obedient lap dogs to Bush’s every whim). The recent bill by the big government democrats is even more economically destructive and is also just a way to buy votes from the poor and the pharmaceutical companies. In a truly free market, all of us would just be purchasing what WE wanted and not what the government is forcing us to buy in order to help their friends.

What we are seeing is an example of what libertarians always remind people of – the law of unintended consequences. This kind of failed central planning is what doomed the Soviet Union. 534 (leaving Ron Paul out) ignorant boobs surely cannot effectively manage the economy better than the individual actions of 300 million individual decision makers. Each of us knows what we need and will work for that. Whatever accounting tricks the big companies are using now, they are likely the result of failed accounting regulations like the horrible Sarbanes-Oxley and certainly are not as dubious as the accounting tricks the democrats and republicans employ when they want to get these horrible bills passed.

Isn’t it time to get government out of our economy?

Ironical

March 31st, 2010
4:10 pm

Drill Baby, Drill!

retiredds

March 31st, 2010
4:11 pm

Kyle, it appears that Ford will not take the accounting charge. It looks like another mountain is being made of a molehill. When the dust settles it will be that some will and some won’t . It’s not an Armageddon issue. But then again Armageddon sound like a good sound bite.

retiredds

March 31st, 2010
4:16 pm

Now here’s a real issue for Georgians. I’m betting the Republican legislature will punt on this one again. Ahhh, the leadership we have under the Gold Dome is remarkable.

Common Cause Georgia, the nonpartisan group promoting open and honest government, issued a position paper Wednesday blasting ethics legislation proposed by House Speaker David Ralston (R-Blue Ridge).

“We had high hopes that a turnover in leadership at the Capitol would result in a new attitude about lobbying and use of campaign funds,” said Bill Bozarth, the group’s executive director. “The general climate is definitely better, but that hasn’t produced strong ethics legislation yet. We’ll be working hard to get Senate support for strengthening the bill when it gets over there.”

Bozarth argued that Ralston’s legislation, which has yet to pass out of the House Rules Committee or the House, would not require members of state boards and authorities to file financial disclosure report or exempt lobbyists from reporting money they spend on travel, meals, and hotels for legislators attending meetings.

Kyle Wingfield

March 31st, 2010
4:33 pm

retiredds: Didn’t Ford already remove its retiree health-care liabilities into a trust fund? If I’m right about that, I wouldn’t expect the company itself to be affected by the change.

If anyone is making this into an “Armageddon issue,” I’d say it’s Mr. Waxman. He’s the one making a federal case out of it. The companies are simply doing what they previously said they’d have to do if the bill passed.

Jess

March 31st, 2010
4:35 pm

Retiredds,

Ford is not taking it because it will not affect them, Their entire retiree medical benefits program was put inot a VEBA in 2007, thus they will not lose money. The fact is that many companies will not have a cost because they do not subsidize medicare coverage. Just as with so many things in this country, those companies who offered their employees generous plans will be punished.

Kyle Wingfield

March 31st, 2010
4:36 pm

As for ethics, I wrote about that a couple of weeks ago and my position hasn’t changed — the Legislature can and should do more.

The same (unchanged position) goes for transportation, since I know you also asked about that.

CJ

March 31st, 2010
4:50 pm

I stand corrected Kyle. These companies are, in fact, complying with accounting rules.

You linked to the McCardle’s article in the WSJ (Fox News in print). McCardle sourced an article in CFO.com. Here’s what they had to say about these writedowns:

…Indeed, the ‘eye-popping’ numbers being reported are not a good indication of the costs being incurred in the first quarter, notes study co-author Christopher Cornett. That’s because a quirk in the accounting rules requires companies to recognize the present value today of future cash costs going out as far as the drug benefits are offered…(Accounting rules mandate such current-period true-ups when tax-code changes require accounting adjustments to items that are already on the balance sheet, he explains. In most cases, an ongoing future cost would be recognized every quarter, year after year.)

Jefferson

March 31st, 2010
4:54 pm

On one hand you hate deficits, but then when the taxes are levied you don’t like that. It ain’t free and its the law. Taxes will have to pay for it.

ITP Conservative Libertarian

March 31st, 2010
4:56 pm

Your title could easily ready “Democrats to America: Drop Dead”

I’m only 39, but I never recall a congress and a President ignoring the voice of the American people with such obtuseness, and frankly basic business rules. As many others have said it has to be intentional. No one as smart as the President is alleged to be would make such poor economic choices – higher taxes, massive spending and debt in such a trying economy. I truly hope he and the democrat congress have done this to their own detriment come November.

Many 2008 Obama supporters I know regret their vote for him.

Algonquin J. Calhoun

March 31st, 2010
4:57 pm

Kyle, please tell me what the Republican plan for the overhaul of health-care was. I missed that. Something needed to be done and something was done. The Republicans contributed nothing and now they are complaining. Since you are writing about accounting, please give an update on how much has been spent on the immoral war on Iraq!

Kyle Wingfield

March 31st, 2010
4:58 pm

No problem, CJ. The White House is trying to paint the old law as a tax loophole that companies were taking advantage of…and while that may be technically correct, it actually amounted to a cheaper result for the government than having the companies drop their drug plans altogether and dump retirees into Medicare Part D.

Which is not to argue for the merits of Part D itself…

Kyle Wingfield

March 31st, 2010
4:59 pm

You left out one enormous part of the equation, Jefferson.

Jess

March 31st, 2010
5:02 pm

Algonquin….,

$687 billion.

Jess

March 31st, 2010
5:18 pm

Jefferson,

You seem to totally ignore spending as a means of reducing deficits. Spending is in fact the number one issue most conservatives have with this administration. They are on an unprecedented spending binge.

Linda

March 31st, 2010
5:31 pm

Congress creates tax laws & we follow them whether as individuals or as companies. Congress allows us to deduct the interest we pay on our home loans & donations to charity. Are they subsidized by other taxpayers who rent & aren’t charitable? Maybe. Maybe not. Deductions are created by govt. to entice us to act in ways it desires. Tax deductions aren’t loopholes & taxpayers who use them aren’t scumbags or criminals.
It’s popular to demonize companies, corporations & rich people. The fact is that most corporations are owned by stockholders (us). Most public (us) & private (us) pension funds are invested in corporations on Wall St. If we did not have American corporations, our homes would be free of appliances, furniture, heat, A/C, driveways & probably a lot of food & clothing.
These “loopholes,” tax deductions, subsidies, corporate welfare, tactics, whatever you want to call them, were created by govt., given to the corporations, legally, to entice corporations to fund drug benefits to retirees because the govt. thought the corps. could do it cheaper. Now they have been taken away by govt. The corps. are not trying to run away from their new obligations or are even complaining. They are required by law to report everything that will impact their future earnings to their existing or future stockholders or go to jail. A letter was sent to DC last July signed by several corp. CEOs warning DC what the impact would be.
The corporations will have several options:
* pass the cost on to their customers (us)
* eat the cost which means their stockholders (us) will suffer
* eat the cost & lay off workers (us) & have them receive unemployment benefits (from us), food stamps (us) & later mortgage assistance (from us) OR
* eat the cost & cancel the benefits to their retirees (us) who shift to Medicare (us) (& with us paying 100% rather than the existing deduction on 28%).
The letter sent by Waxman to a select few of the CEOs requires them to bring to the hearing on the hill what one would bring to an IRS audit. It’s a hanging. The new requirement seems pretty simple, even to me. The deduction was eliminated to make the cost of the hc bill appear less expensive & acceptable, one of those unintended consequences.

LA

March 31st, 2010
5:35 pm

Democrats ignore everything. Can’t wait to see them gone in November.

Jefferson

March 31st, 2010
5:42 pm

I don’t see spending being reduced by politicians at the national level since Reagan started big spending, they just look for ways to come up with more money to spend. How they spend the money seems to be the power to hold office. Look at the state, what the state cuts back on the counties make up, it runs downhill. Who is going to reduce spending? And why should I believe them when they didn’t before.

Jefferson

March 31st, 2010
5:43 pm

LA I bet you will wait.

Churchill's MOM

March 31st, 2010
5:43 pm

Wingboy.. What is your position on the accounting rule changes that allow Banks to hide their Loan Losses?

Jess

March 31st, 2010
5:47 pm

Jefferson,

They all are guilty of overspending, but this administration has elevated it to new and dangerous levels.

Jess

March 31st, 2010
5:47 pm

Linda,

Very well said.

atl12345

March 31st, 2010
7:41 pm

In 1965, Congress passed Medicaid and Medicare.

PREDICTION: In 1967,the House Ways and Means Committee estimated that Medicare would cost only about $12 billion by 1990 (a figure that included an allowance for inflation)
REALITY: In 1990, the cost of Medicare was $107 Billion. 2009 cost was over $500 Billion

PREDICTION: In 1965 Congress claimed that Medicaid would only cost $1 Billion per year(to be fair, indexing for inflation, this amount would be $6.8 Billion in 2009 dollars
REALITY: IN 2009, Medicaid cost around $250 Billion.

PREDICTION: In 1987, Congress estimated that Medicaid‟s disproportionate share hospital (DSH) payments—which states use to provide relief to hospitals that serve especially large numbers of Medicaid and uninsured patients—would cost less than $1 billion in 1992xi.
REALITY: The actual cost(only 5 years later) that year was a staggering $17 billion

PREDICTION: Owebamacare will only cost $1 Trillion dollars and will reduce the deficit
REALITY: we will have to wait and see, but it aint looking good

No More Progressives!

April 1st, 2010
6:51 am

Jefferson

March 31st, 2010
5:42 pm
I don’t see spending being reduced by politicians at the national level since Reagan started big spending, they just look for ways to come up with more money to spend. How they spend the money seems to be the power to hold office.

Have you looked around outside your house recently? Have you checked the red ink since Little Barry was elected? Do you remember the controversy over earmarks? Little Barry has quadrupled the deficit, and the Nations unfunded liabilities are now somewhere around $48 trillion dollars. No one in the Nations history has spent this much money in such a short time as Little Barry Soetoro.