Accounting Rules Cause Red Ink At Ge
Nettlesome new accounting rules involving retiree health benefits are starting to hit home. GE stepped up to take its shot early, announcing a $1.8 billion charge against first-quarter earnings. No cash is involved, but the hit turned a $999 million first-quarter gain into an $801 million loss. GE insisted it will still turn a profit for the year.
GE is one of the first companies to comply with the new rules. They force companies to estimate and reserve for future retiree medical expenses, instead of accounting for the expenses as they are paid. Companies have the choice of taking a onetime charge, as GE did, or spreading the costs out over 20 years. Steelmakers and auto makers, in particular are likely to struggle with the choice, given their large number of retirees.
Some companies are responding by phasing out programs that promise to pay retiree benefits. International Paper, for instance, has stopped paying benefits to employees hired after 1987. Now that companies know what their promises are costing them, medical benefits for their retirees may be running out.
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