Human Capital & Careers

FASB to Weigh Effect of Medicare Act

Some companies have already announced reductions in their liability for retiree health-care costs.
Stephen TaubMarch 16, 2004

The Financial Accounting Standards Board on Friday proposed guidelines for how companies should account for subsidies under the Medicare Act of 2003. The guidelines would enable investors to compare benefit-cost savings among companies more easily.

Passed in December, the Medicare Act allows employers that provide prescription drug benefits for retirees to receive a federal subsidy beginning in 2006. According to FASB, the act has raised questions regarding whether companies should recognize the effects on the plan’s accumulated postretirement benefit obligation (APBO) and the employer’s postretirement benefit costs, and if so, when and how to account for those effects.

Under the board’s proposal, companies must record the amount they expect to receive as a result of the act as a reduction of future postretirement benefits costs, thus reducing the health-care liabilities for retirees. The effect on the APBO, it added, should be accounted for as an “actuarial experience gain.”

As a result, in quarterly and annual reports most companies will probably amortize the effects of the change in their income statements over the average working life of their employees rather than recognizing the full benefit immediately as an increase in earnings, explained The Wall Street Journal.

FASB is seeking comment on its proposal through April 12. A final rule is expected by late April or May, said the paper.

With FASB’s permission, many companies have put off accounting for the effects of the new bill in their 2003 annual reports. However, a number of companies have chosen to make the calculation now.

In a recent regulatory filing, General Motors announced that its liability for retiree health-care costs was reduced by $4 billion thanks to the Medicare bill. Even so, the company’s total liability surged to $63.4 billion, due mainly to changes in interest-rate and to short-term health-care inflation trends.

BellSouth Corp. recently reduced its accumulated benefit obligation by $572 million and announced that it is re-measuring the benefit costs, due to the act.