FASB Issues Rule on Accounting for Medicare Subsidy

Companies are barred from booking a federal Medicare subsidy as a one-time boost to their earnings under a new rule issued Wednesday.

The Financial Accounting Standards Board’s (FASB) final guideline requires companies to record the amount of federal subsidy they expect to receive as an "actuarial gain," to be amortized into income over the average working life of their employees, the Wall Street Journal reported. That means companies are prevented from recognizing the full effect all at once.

The guideline will take effect for fiscal periods beginning after June 15 for publicly traded companies — the third quarter for companies on a calendar year.

Starting in 2006, employers who sponsor certain prescription-drug benefits for retirees will receive a federal subsidy, as outlined in the Medicare Act passed in December.

Companies must project how much money the subsidy will save them in benefit costs to determine the current liability and expense of their retiree health-care plans. Even though FASB allowed companies to put off accounting for the effects of the bill in their 2003 reports, some companies tried to figure their post-retirement benefit costs as of December.

The savings should be significant. Eighteen large companies estimated in their 2003 reports that the legislation would save them a total of more than $11.8 billion in benefit costs over time, according to a report by Bear Stearns.

General Motors Corp. may save the most. The auto maker said in its 2003 report that it expects the federal government to give the company more than $4 billion.

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