The Wave of Corporate Writedowns

In the past several days, several major corporations have announced substantial writedowns in response to the new health care law.  These include Deere & Co. ($150 million), Caterpillar ($100 million), AK Steel Holding ($31 million), and 3M ($85-90 million).  Yesterday, AT&T joined the list, announcing it would take a $1 billion charge against future earnings.  A CreditSuisse analyst cited in both stories estimated the total first-quarter hit to S&P 500 firms will be $4.5 billion.

The writedowns are in response to the loss of a tax-free subsidy for providing prescription drug coverage to retirees.  Several years ago, Congress decided it was better to induce corporations to provide prescription drug coverage for retirees than to have the costs paid by Medicare, so it enacted a tax-free subsidy, while still allowing companies to take a tax deduction for the coverage .  Under the health care reforms Congress just enacted, however, the deduction will be eliminated in 2013.

Why are the companies announcing these changes?  And why now if the tax change does not take effect until 2013?  Because failure to do so could get the companies in trouble with the SEC.  Under standard accounting rules, companies are supposed to take the charge in the quarter in which the tax law change is enacted, not when it takes effect.  Because the first quarter ends Wednesday, more writedown announcements may be forthcoming.

The WSJ editorializes on the writedowns here.

UPDATE: Rep. Henry Waxman is demanding executives from AT&T and other companies announcing writedowns in SEC filings appear before Congress to explain themselves.