Volume 13, No. 14

 

Manna From Medicare: Third Quarter Juice?  The accounting for other postretirement benefits is rife with estimates; in their discussions of critical accounting policies, firms frequently cite other postretirement benefits obligations as an accounting estimate concern. And well they should: a firm not only must project the term over which it will pay health care benefits, it must also guess the trend in health care costs. Those estimates are the source of endless debates about too high or too lowfigures, but most would agree that the end result - the calculated obligation - is a significant number at many companies, bearing negative future cash implications. If you recall your accounting history from the early 1990's, remember that accounting for other postretirement benefits earned almost as much revulsion from public firms as the present proposal for recognizing stock option. In late 2003, a dream came (partially) true for corporate sponsors of these benefit plans: the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law, promising to subsidize them for certain prescription drug plans. Companies affected by the Act find themselves in the enviable position of having to reduce their recorded benefit plan obligations - and part of the package is a nice ongoing earnings fillip. The accounting for the change is effective in this current reporting quarter. Investors need to understand that it can provide added juice to some firms' net earnings in the quarter, and interpret it separately from other cost activities.

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