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| Economy |
| Henry Waxman's war on accounting |
| 2010-03-30 |
| Megan McArdle, The Atlantic Accounting basics: when a company experiences what accountants call "a material adverse impact" on its expected future earnings, and those changes affect an item that is already on the balance sheet, the company is required to record the negative impact--"to take the charge against earnings"--as soon as it knows that the change is reasonably likely to occur. This makes good accounting sense. The asset on the balance sheet is now less valuable, so you should record a charge. Otherwise, you'd be misleading investors. The Democrats, however, seem to believe that Generally Accepted Accounting Principles are some sort of conspiracy against Obamacare, and all that is good and right in America. Here's the story: one of the provisions in the new health care law forces companies to treat the current subsidies for retiree health benefits as taxable income. This strikes me as dumb policy; . . . . But this is neither here nor there, because Congress already did it. And now a bunch of companies with generous retiree drug benefits have announced that they are taking large charges to reflect the cost of the change in the tax law. Henry Waxman thinks that's mean, and he's summoning the heads of those companies to Washington to explain themselves. It's not clear what they're supposed to explain. What they did is required by GAAP. And I've watched congressional hearings. There's no chance that four CEO's are going to explain the accounting code to the fine folks in Congress; explaining how to boil water would challenge the format. Now, it's entirely possible that these companies are taking as large a charge as possible, because that's what companies like to do--if they have to recognize a negative event, they try to make it as big as possible. Firms like to recognize as many upside surprises as possible, while minimizing the number of unexpected adverse charges. It is better to take one "big bath" then dribble out seven "Oops, we underestimated the size of the problem" notices. And, of course, companies have some discretion over when they "recognize" that the charge they took was too big, which allows them to use a "conservative" (very large) charge to smooth out future earnings somewhat. But these charges aren't going to have much impact on the stock price, or anything else; they're non-cash charges, the costs will be spread over a number of years, and they're not a huge surprise to investors. I doubt it's even going to have much impact on the popularity of the health care plan. As accounting sins go, this is the corporate equivalent of moving your printer ink purchases up by two days in order to deduct them in the current tax year. It certainly does not warrant congressional investigation. What AT&T, Caterpillar, et al did was appropriate. It's earnings season, and they offered guidance about , um, their earnings. The Instapundit and some of his readers comment: I think when they planned for ObamaCare's costs to come online post-election, they didn't know enough to realize that accounting rules (and SEC regulations) would require companies to act now. Just another example of the “knowledge problem' confronting economic planners and regulators . . . . |
| Posted by:Mike |
| #2 The guy looks and acts like a villain in an Ayn Rand novel. So let me get this straight: Waxman is trying to force these companies to break securities law? Isnt that a felony? By the way, pardon the language, but Waxman's pic belongs in the dictionary next to "rat faced fuck". |
| Posted by: OldSpook 2010-03-30 21:56 |
| #1 If the Democrats want Waxman (D-Nostrilia) as their public face, I say let em. The CEOs will not bow to this asshole when they face SEC charges for avoiding realistic accounting write-offs. The Dems are not held to any realistic standards by the LSM. Should be fun |
| Posted by: Frank G 2010-03-30 19:51 |