TeeJaw Blog

Why Are Corporations Taking Write Downs This year For Costs That Obamacare Will Impose On Them In The Future?

Posted in Government and Politics by TeeJaw on Tuesday, March 30, 2010, 9: 51 AM

You have probably heard or read that AT&T, Caterpillar, John Deere, and other companies are taking write downs in their financial statements for the future cost increases that Obamacare will impose on them. Henry Nostrilitis Waxman (D-Calif.) is on the case and will haul the executives of these companies before Congress next month to make them explain themselves. Why are they trying to hurt this wonderful new government health system that is going to give all Americans absolutely free health care, make us capable of running marathons and live to 120? He has summoned top executives from several companies that have reported the impact of Obamacare on their bottom line to appear before his House Energy and Commerce Committee to answer for their actions. Their actions consist of complying with SEC regulations which set forth mandatory disclosure requirements for public companies.

Here’s how to understand what these companies did in order to comply with Federal rules that define their very existence. Say the state you live in passes a law that will raise your property taxes in future years. If your property taxes are $2,000 this year but will be $2,500 next year you know that if your income remains the same you will have $500 less to spend on other things next year. Now say you own a small business and the same change in your taxes is to occur. Unless you can increase your sales your profits next year will be $500 less.

But whether it is your taxes on your personal residence or on your business this future increase does not affect your current year’s income. The reason it does not is because you likely account for your income and expense on the “cash basis,” i.e., you don’t count an item of income until you actually receive the cash, and you don’t count an item of expense until you actually pay it.

Now consider a large public company such as AT&T, Caterpillar, or John Deere. These companies must prepare financial statements on the “accrual basis” of accounting. This means items of expense are counted as they “accrue,” whether actually paid at that time or not. Same with income. It is counted when it accrues whether it has been received yet or not. Income “accrues” when it is earned, expenses accrue when they are incurred. The time of actual payment or receipt is irrelevant.

A public company must comply with the regulations of the Securities and Exchange Commission. The Sarbanes-Oxley legislation makes corporate directors of public companies personally liable for misstatements in a company’s financial statements that renders those statements inaccurate or misleading. Traditional GAAP accounting is modified in certain ways by SEC regulations for these “public reporting companies.” Current SEC regulations require public companies to account for known future liabilities in their current financial statements.

When Obamacare passed, a “change” nobody believes in occurred in most public companies’ future liability for the health care they provide to their employees. Since applicable SEC rules require these companies to calculate the “discounted present value” of those known future liabilities and “accrue” that amount as a charge against current income, these companies are required to file what is called a “Form 8-K” with the SEC showing the change that Obamacare wrought in their current financials. Failure to file these required reports with the SEC is a serious matter which can lead to civil fines or even criminal liability.

But Henry Nostrilitis Waxman is not pleased. How dare these companies comply with the law if it makes Obamacare look bad! He’s going to flare his nostrils at these miscreant executives in hearings before his committee, and get to the bottom of this chicanery.

He will probably get to the bottom of something, all right. These companies should get a Joseph Welch-type lawyer to confront Waxman with “At long last Congressman, have you no shame?”

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