FASB Confirms Existing Rules on Medicare Accounting

The Financial Accounting Standards Board (FASB) on Wednesday cleared up some of the confusion surrounding accounting for the effects of the new Medicare law.

The Medicare Act, signed into law in December, has sparked not only political arguments but also an accounting debate over how companies should book the amount of federal subsidy they expect to receive in their financial statements.

FASB’s Wednesday vote confirmed that existing rules governing post-retirement benefit costs should be used. According to the Wall Street Journal, that means companies should book the estimated amount of federal subsidy as a reduction of future benefit costs — instead of as a stream of income from continuing operations.

The Medicare Act allows companies that provide prescription drug benefits for retirees to receive a federal subsidy starting in 2006. Medicare will reimburse employers for 28 percent of the amount they spend on each retiree's drugs between $250 and $5,000. The bill also creates a new drug benefit for seniors without prescription coverage.

"Given the magnitude of the obligations for employers, it's likely to be preferable for the federal subsidy to be directly offset against the obligations," said Barbara Bald, a principal at PricewaterhouseCoopers LLP's human resource services.

Since so many questions surrounded the new law, FASB decided last month to let companies try to recognize the effects on their own, before the guidelines were set. BellSouth made that attempt, and the company estimated that the Medicare Act would reduce its 2004 retiree medical obligations by $290 million, the Journal reported. Accordingly, BellSouth’s estimated 2004 earnings per share would be 10 cents higher than it had expected in November.

One question that went unanswered Wednesday is whether the reduced costs should be recognized immediately as a one-time gain to profits or amortized over time. FASB is set to answer that question at a meeting next week.

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