For those of you following the Medicare Part D Accounting issue closely, FASB has posted its February 18, 2004 Board minutes here and an Action Alert here summarizing what they have decided. You can access previous posts on the subject here.
Also, an accounting friend has provided the following insight regarding these developments:
In past two board meetings, FASB has pretty much settled where it’s headed on Medicare Part D accounting. Within next several weeks, a dreaft staff position paper will be published, with a 30-day comment period. If FASB stays on schedule, the key effective date will involve fiscal quarters beginning after June 15, 2004, with a delayed effective date of measurement dates after September 15, 2004, for non-public companies with small plans. Three main actions will be necessary: (1) Employers must determine if their retiree health programs provide prescription drug coverage that is actuarially equivalent to the Medicare Part D coverage, in which instance the employer would be eligible for the special subsidy from the federal government; (2) If the employer determines that their retiree health plan is actuarially equivalent, then the effect of the subsidy payments must be measured and the accounting treatment to be prescribed in the forthcoming staff position paper must be calculated; and (3) Appropriate footnote disclosures for financial statements must be prepared. Any plan amendments (e.g., to make a plan actuarially equivalent) may involve additional actions and calculations for the accounting effects.
For more of this commentary on the developments, continue reading . . .
If an employer determines that its retiree health plan’s prescription drug coverage is not at least actuarially equivalent to Part D and if no amendment is made to the plan to bring it to an actuarially equivalent level, then no action need be taken. If the employer cannot yet determine if its plan is actuarially equivalent (e.g., due to absence of regulatory guidance on that issue), then a disclosure should be made to that effect in financial statement footnotes.For employers with plans that are determined to be actuarially equivalent, the underlying accounting methodology to recognize the effect of the special subsidy involves reduction of costs under SFAS 106. The cost reductions attributable to future years of service are recognized as reductions in the service cost for each year that the subsidy is attributable. Any reduction in cost attributable to benefits earned to date is treated as a reduction in the accumulated postretirement benefit obligation (APBO). Reduction in APBO is not recognized immediately in the year of implementation, but rather is treated as an actuarial gain, to be recognized over future service periods under the rules of SFAS 106. If a plan amendment is made concurrent with accounting implementation (e.g., to make the plan actuarially equivalent), then the accounting treatment will essentially combine the gain from reduction of APBO for the subsidy with the increase in APBO from the amendment, amortizing any net gain according to the rules for gain/loss recognition and any net increase in APBO as an amendment.
Transition then depends largely upon whether or not the employer had elected immediate implementation versus delayed implementation under FAS 106-1 issued in January. If early implementation had been elected, and if the employer’s methodology differed from the methodology now being set forth by FASB, then an adjustment for the cumulative effect of the change must be recognized in the first quarter of implementation under the new guidance, with reference back to the point of the immediate recognition. If the employer had deferred implementation, yet can reasonably determine its retiree prescription drug coverage to be actuarially equivalent, then a similar cumulative adjustment applies, but only back to the beginning of the first quarter that starts after December 8, 2003.