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Patient Protection and Affordable Care Act Could Affect Current-Quarter Financial Reporting

Published on: 24 Mar 2010

Yesterday, President Obama signed into law the Patient Protection and Affordable Care Act (the “Act”) that was passed by the House of Representatives on Sunday and by the Senate on December 24, 2009. The Act is a comprehensive health care reform bill that includes revenue-raising provisions for nearly $400 billion over 10 years through tax increases on high-income individuals, excise taxes on high-cost group health plans, and new fees on selected health-care-related industries.

The House of Representatives also passed a separate reconciliation measure that modifies the Act. Plans are underway to move the reconciliation measure through the Senate in the coming days under an expedited procedure. Although House leaders expect the Senate to pass the measure promptly, changes and delay are still possible.

One of the revenue-raising provisions of the Act could affect the current quarter’s financial reporting. Before the provision’s effective date, an employer that offered retiree prescription drug coverage that was at least as valuable as Medicare Part D coverage was entitled to a federal subsidy (the Medicare Part D subsidy). Employers were able to deduct the entire cost of providing the coverage, even though a portion was offset by the subsidy. For taxable years beginning after December 31, 2010 (the provision’s effective date), the Act repeals the current rule permitting deduction of the portion of the expense that is offset by the subsidy. (As discussed further below, we understand that the effective date of this provision may change with passage of the reconciliation measure.) Consequently, the sponsor’s expected future tax deduction will be reduced by an amount equal to the subsidy, and the corresponding deferred tax asset that had been recognized must be adjusted (reduced). The expense resulting from this adjustment must be recognized as tax expense in continuing operations in the period the change in tax law is enacted. However, if there is a valuation allowance recorded against the deferred tax asset, the remeasurement of the deferred tax asset will not result in tax expense because the deferred tax asset has been previously reserved. In addition, the deferred tax asset is not adjusted downward (i.e., no tax expense is recognized) for amounts that are expected to be settled before the effective date. In the absence of standard setting or regulatory action deferring the recognition of the tax expense, employers would be required to account for this tax law change this quarter.

The reconciliation measure currently includes a provision that would delay the repeal of the deduction for expenses allocable to the Medicare Part D subsidy by two years. If the measure is passed by the Senate and is signed by President Obama (i.e., it is enacted) this quarter, the change in the effective date will affect the amount of the adjustment of the deferred tax asset and could reduce the amount of tax expense recognized in continuing operations. If the reconciliation measure is enacted in a subsequent quarter and no standard setting or regulatory action deferring the accounting for the original effective date occurs, affected entities would have adjustments in two reporting periods. The first adjustment would occur in the period that includes the enactment of the original Bill (March 23, 2010) and the second would occur when the reconciliation measure is enacted if the effective date is changed (as expected).

Watch for Deloitte’s upcoming Financial Reporting Alert for more information. For insight into some of the Act’s other tax provisions, see Deloitte’s Prescription for Change ‘Filled’ — Tax Provisions in the Patient Protection and Affordable Care Act.

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