The sky isn't falling...

The recent accounting changes by some major corporations got everyone in a tizzy about RomneyCare... What did Douglas Adams always say? Oh yeah... don't panic...

 

CFO.Com: Don't Panic: Health-Care Hit Is Minimal 

AT&T, Caterpillar, and Deere are among the companies that are reporting large first-quarter accounting charges because of the repeal of a tax deduction by the new health-care law. But the charges will have little effect on company valuations or cash flow, analysts say.

The Patient Protection and Affordable Care Act strips companies of a 28% tax deduction related to retiree drug benefits. The deduction is actually the tax-free treatment of a government subsidy that companies receive for providing retiree drug benefits equivalent to Medicare Part D, says tax expert Robert Willens, who heads a consultancy in New York. Since the deduction can't be claimed until the benefits are paid out, companies make the adjustment by writing down the deferred tax asset balances related to the subsidy, notes Willens.

Under the new law, the subsidy is no longer tax-free and must be included in a company's taxable-income calculation. The law eliminates the "double dipping" possibilities that were part of the tax code since 2003, says Willens. Under the original Medicare prescription-drug law, companies received deductions for making payments into retiree drug plans, as well as getting tax-free treatment for the subsidies they received for paying into the plans.

Last week AT&T announced it plans to take a $1 billion noncash charge related to the new law in the first quarter. Also announcing first-quarter charges were Caterpillar ($100 million), Deere ($150 million), and AK Steel ($31 million). Steelcase and DTE Energy also said they would be subject to similar accounting charges, although they have not yet specified the amounts.

A study of S&P 500 companies by Credit Suisse shows that the new law will cause companies to reduce their deferred tax assets by an aggregate $4.5 billion, with 45 of the companies possibly seeing a charge that is more than 10% of their consensus first-quarter earnings estimates. However, investors should not "overreact" to the potential earnings hit, cautions Credit Suisse's David Zion, because the charge will have very little effect on company valuations.

Posted via email from Jim Nichols