Official releases: GASB No. 47.

Space considerations prevent publishing here the appendices to GASB Statement no. 47. Since the appendices often are important to understanding GASB statements, readers are advised to obtain complete copies. For additional copies of GASB statements and/or information on applicable prices and discount rates, contact the GASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Telephone: [phone].

Statement No. 47 of the Governmental Accounting Standards Board--Accounting for Termination Benefits

SUMMARY

This Statement establishes accounting standards for termination benefits.

Recognition Requirements

In financial statements prepared on the accrual basis of accounting, employers should recognize a liability and expense for voluntary termination benefits (for example, early-retirement incentives) when the offer is accepted and the amount can be estimated. A liability and expense for involuntary termination benefits (for example, severance benefits) should be recognized when a plan of termination has been approved by those with the authority to commit the government to the plan, the plan has been communicated to the employees, and the amount can be estimated. For financial reporting purposes, a plan of involuntary termination is defined as a plan that (a) identifies, at a minimum, the number of employees to be terminated, the job classifications or functions that will be affected and their locations, and when the terminations are expected to occur and (b) establishes the terms of the termination benefits in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated. If a plan of involuntary termination requires that employees render future service in order to receive benefits, the employer should recognize a liability and expense for the portion of involuntary termination benefits that will be provided after completion of future service ratably over the employees' future service period, beginning when the plan otherwise meets the recognition criteria discussed above.

In financial statements prepared on the modified accrual basis of accounting, liabilities and expenditures for termination benefits should be recognized to the extent the liabilities are normally expected to be liquidated with expendable available financial resources.

Measurement Requirements

Healthcare-related termination benefits that are provided as the result of a large-scale, age-related program (for example, an early-retirement incentive program that affects a significant portion of employees) should be measured at their discounted present values based on projected total claims costs (or age-adjusted premiums approximating claims costs) for terminated employees, with consideration given to the expected future healthcare cost trend rate. Employers that provide healthcare-related termination benefits that are not part of a large-scale, age-related termination program are permitted, but not required, to measure the cost of termination benefits based on projected claims costs for terminated employees. That is, in this circumstance, the cost of termination benefits may be based on unadjusted premiums.

The cost of non-healthcare-related termination benefits for which the benefit terms establish an obligation to pay specific amounts on fixed or determinable dates should be measured at the discounted present value of expected future benefit payments (including an assumption regarding changes in future cost levels during the periods covered by the employer's commitment to provide the benefits). If, however, the benefit terms do not establish an obligation to pay specific amounts on fixed or determinable dates, the cost of non-healthcare-related benefits should be calculated as either (a) the discounted present value of expected future benefit payments or (b) the undiscounted total of estimated future benefit payments at current cost levels.

Termination Benefits That Affect an Employer's Defined Benefit Pension or OPEB Obligations

As an exception to the general recognition and measurement requirements discussed above, the effects of a termination benefit on an employer's obligations for defined benefit pension or other postemployment benefits should be accounted for and reported under the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, or Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as applicable.

Disclosure Requirements

This Statement requires employers to disclose a description of the termination benefit arrangement, the cost of the termination benefits (required in the period in which the employer becomes obligated if that information is not otherwise identifiable from information displayed on the face of the financial statements), and significant methods and assumptions used to determine termination benefit liabilities.

Effective Date

The requirements of this Statement are effective in two parts. For termination benefits provided through an existing defined benefit OPEB plan, the provisions of this Statement should be implemented simultaneously with the requirements of Statement 45. For all other termination benefits, this Statement is effective for financial statements for periods beginning after June 15, 2005. Earlier application is encouraged.

In the initial year of implementation, the requirements of this Statement should be applied to any previous commitments of termination benefits that remain unpaid at the effective date of the Statement. The cumulative effect of applying this Statement should be reported as a restatement of beginning net assets (or equity or fund balance, as appropriate). Financial statements for prior periods are not required to be restated.

How the Changes in This Statement Will Improve Financial Reporting

This Statement supersedes accounting guidance in National Council on Governmental Accounting (NCGA) Interpretation 8, Certain Pension Matters, as amended, which addresses one form of voluntary termination benefits--special termination benefits, or those offered for a "short period of time." It improves financial reporting by (a) adopting for all voluntary termination benefits recognition requirements similar to those in NCGA Interpretation 8, (b) establishing guidance applicable to involuntary termination benefits that requires governments, in financial statements prepared on the accrual basis of accounting, to account for the effects of termination benefits in the period in which the employer becomes obligated to provide benefits to terminated employees, and (c) elaborating on measurement issues associated with all forms of termination benefits. As a result of governments' being required to account for similar termination benefits in the same manner, application of this Statement will enhance the comparability of financial statements,

CONTENTS

Introduction/1-2

Standards of Governmental Accounting and Financial Reporting/3-21 Scope and Applicability of This Statement/3-7 Measurement and Recognition of Termination Benefits/8-17 Measurement/9-11 Healthcare-Related Termination Benefits/9 Non-Healthcare-Related Termination Benefits/10-11 Recognition of Termination Benefit Liabilities and Expense in Accrual Basis Financial Statements/12-15 Recognition of Termination Benefit Liabilities and Expenditures in Modified Accrual Basis Financial Statements/16 Effects of a Termination Benefit on an Employer's Defined Benefit Pension or Other Postemployment Benefit Obligations/17

Note Disclosures/18-21 Effective Date and Transition/22-23

Appendix A: Background/24-28

Appendix B: Basis for Conclusions/29-64

Appendix C: Codification Instructions/65-67

INTRODUCTION

1. Some governments provide benefits intended to hasten an employee's voluntary termination of services, sometimes referred to as early-retirement incentives, which may be offered for a short period of time or, in some cases, may be part of a longer-standing offer. Examples of benefits commonly provided as incentives for voluntary terminations include cash payments (one-time or a series), enhancements to defined benefit pension or other postemployment benefit (OPEB) formulas, and healthcare coverage when none otherwise would be provided. In addition, governments sometimes provide benefits to terminated employees as a result of involuntary terminations, such as layoffs. Examples of benefits provided for involuntary terminations include severance pay, continued access to health insurance through the employer's group insurance plan, career counseling, and out-placement services. Other benefits, such as healthcare continuation under the Consolidated Omnibus Budget Reconciliation Act (COBRA), are provided as a result of voluntary and involuntary terminations, in certain circumstances.

2. Prior to this Statement, guidance on governmental employer accounting and reporting for termination benefits was limited to one form of voluntary termination benefits--special termination benefits, which were defined as those offered "for a short period of time." The objective of this Statement is to provide guidance to governmental employers for measuring, recognizing, and reporting liabilities and expense/expenditures related to all termination benefits, including voluntary termination benefits, without limitation as to the period of time during which the benefits are offered, and involuntary termination benefits.

STANDARDS OF GOVERNMENTAL ACCOUNTING AND fiNANCIAL REPORTING

Scope and Applicability of This Statement

3. This Statement establishes standards of accounting and financial reporting for termination benefits. As used in this Statement, termination benefits are benefits provided by employers to employees as an inducement to hasten the termination of services or as a result of a voluntary early termination (voluntary termination benefits) or as a consequence of the involuntary early termination of services (involuntary termination benefits). Termination benefits include early-retirement incentives, severance benefits, and other termination-related benefits. The scope of this Statement does not include unemployment compensation, for which accounting requirements are established in National Council on Governmental Accounting (NCGA) Statement 4, Accounting and Financial Reporting Principles for Claims and Judgments and Compensated Absences.

4. Termination benefits, as discussed in paragraph 3, are different in nature from the salaries and benefits, including postemployment benefits, that an employer provides as compensation for employee services. Accordingly, post-employment benefits (pensions and OPEB), which are part of the compensation that employers offer in exchange for services received, are excluded from the scope of this Statement. Accounting requirements for pensions and OPEB are addressed in Statements No. 27, Accounting for Pensions by State and Local Governmental Employers, and No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, respectively.

5. In determining whether the nature of a benefit arrangement is to provide benefits in exchange for the early termination of services (a termination benefit) or to provide benefits in exchange for employee services (a pension benefit or OPEB), professional judgement should be applied considering all relevant factors--including, for example, the employer's intent, the way in which the employees generally view the benefits, whether the benefit is conditioned on termination of employment prior to the normal retirement age, and the length of time for which the benefits have been made available.

6. The requirements of this Statement apply to the financial statements of all state and local governmental employers that provide termination benefits.

7. This Statement supersedes paragraphs 6, 7, 8b, 12, 17, and 18 of NCGA Interpretation 8, Certain Pension Matters', and amends paragraph 5 of NCGA Interpretation 6, Notes to the Financial Statements Disclosure; paragraph 8 of GASB Statement No. 1, Authoritative Status of NCGA Pronouncements and AICPA Industry Audit Guide; paragraph 2 of GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues; paragraph 2 and footnote 2 of GASB Statement No. 12, Disclosure of Information on Postemployment Benefits Other Than Pension Benefits by State and Local Governmental Employers; paragraphs 12 and 44 of GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans; paragraphs 5 and 11 of GASB Statement No. 26, Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans; footnotes 2 and 3 and paragraphs 5, 6, and 39 of GASB Statement 27; paragraph 81 of GASB Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis-for State and Local Governments; paragraphs 9 and 46 of GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans; paragraphs 8 and 40 of GASB Statement 45; and paragraphs 5, 6, 9, 11, and 14 and footnote 7 of GASB Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements.

Measurement and Recognition of Termination Benefits

8. An employer should account for termination benefits in accordance with the measurement and recognition requirements of paragraphs 9 through 16 of this Statement, as applicable, and should include as part of the cost of termination benefits any fringe benefits related to the termination benefits and any directly resulting changes in the estimated costs of other employee benefits such as compensated absences, if reliably measurable. However, the effects of a termination benefit on an employer's defined benefit pension or OPEB obligations should be accounted for in accordance with paragraph 17 of this Statement.

Measurement

Healthcare-Related Termination Benefits 9. An employer should measure the cost of healthcare-related termination benefits, including healthcare continuation under COBRA, by calculating the discounted present value of expected future benefit payments, in accordance with the following requirements, as applicable:

a. Projection of Benefits.

(1) If the event giving rise to healthcare-related termination benefits is a large-scale, age-related program (for example, a voluntary program of incentives for senior employees that results in early termination of employment by a significant portion of employees), the employer should segregate the benefits provided to terminated employees and their beneficiaries from those provided to active employees for measurement purposes and should project the employer's expected future benefit payments based on the projected total claims costs, or age-adjusted premiums approximating claims costs, for terminated employees. (1) (The employer's expected termination benefit payment for each future period for which healthcare-related termination benefits are to be provided is the difference between (a) the projected claims costs, or age-adjusted premiums approximating claims costs, for terminated employees and (b) the payment(s), if any, to be made by the terminated employees.)

(2) If the event giving rise to healthcare-related termination benefits is not a large-scale, age-related program (for example, the termination benefits arise as the result of a reduction in force that affects employees with an age profile similar to that of the entire workforce), the employer should segregate the benefits provided to terminated employees and their beneficiaries from those provided to active employees for measurement purposes and should project the employer's expected future benefit payments for terminated employees. (2) For this purpose, the use of projected claims costs, or age-adjusted premiums approximating claims costs, is not required. In this circumstance, unadjusted premiums may be used as the basis for the projection of expected future benefit payments. (If unadjusted premiums are used, the employer's expected termination benefit payment for each future period for which healthcare-related termination benefits are to be provided is the difference between (a) the projected termination benefit cost, based on unadjusted premiums, for terminated employees and (b) the payment(s), if any, to be made by the terminated employees.)

b. Healthcare Cost Trend Rate. The projection of expected future benefit payments should include an assumption regarding the healthcare cost trend rate (3) for the periods covered by the employer's commitment to provide the benefits.

c. Discount Rate. The discount rate should be determined by giving consideration to the estimated yield, over the period of time the benefits are to be provided, on the investments that are expected to be used to finance the payment of benefits, (4) with consideration given to the nature and mix of current and expected investments.

Non-Healthcare-Related Termination Benefits

10. An employer should measure the cost of termination benefits that are not healthcare related as follows:

a. If the benefit terms establish an obligation to pay specific amounts on fixed or determinable dates, the cost of non-healthcare-related termination benefits should be calculated as the discounted present value of expected future benefit payments, including an assumption regarding changes in future cost levels during the periods covered by the employer's commitment to provide the benefits.

b. If the benefit terms do not establish an obligation to pay specific amounts on fixed or determinable dates, the cost of non-healthcare-related benefits should be calculated as either (1) the discounted present value of expected future benefit payments, including an assumption regarding changes in future cost levels during the periods covered by the employer's commitment to provide the benefits, or (2) the undiscounted total of estimated future benefit payments at current cost levels.

11. If expected future payments for termination benefits are discounted, the discount rate should be determined by giving consideration to the estimated yield, over the period of time the benefits are to be provided, on the investments that are expected to be used to finance the payment of benefits, (5) with consideration given to the nature and mix of current and expected investments.

Recognition of Termination Benefit Liabilities and Expense in Accrual Basis Financial Statements

12. An employer should recognize a liability and expense for voluntary termination benefits, in financial statements prepared on the accrual basis of accounting, when the employees accept the offer and the amounts can be estimated. Measurement of the liability should be updated, and any incremental liability and expense (positive or negative) should be recognized, as of the end of each subsequent reporting period.

13. An employer should recognize a liability and expense for involuntary termination benefits, in financial statements prepared on the accrual basis of accounting, when a plan of termination has been approved by those with the authority to commit the employer to the plan, the plan has been communicated to the employees, and the amounts can be estimated. Measurement of the liability should be updated, and any incremental liability and expense (positive or negative) should be recognized, as of the end of each subsequent reporting period.

14. For purposes of this Statement, a plan of involuntary termination is a plan that:

a. Identifies, at a minimum, the number of employees to be terminated, the job classifications or functions that will be affected and their locations, and when the terminations are expected to occur

b. Establishes the terms of the termination benefits in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated.

15. Notwithstanding the requirements of paragraph 13, if a plan of involuntary termination requires the employee to render future service in order to receive termination benefits, a liability and expense for the portion of involuntary termination benefits that will be provided only after completion of future service should be recognized ratably over the future service period. (6) Measurement of the liability should be updated as of the end of each subsequent reporting period, and any incremental liability and expense (positive or negative) should be recognized ratably over the remaining future service period.

Recognition of Termination Benefit Liabilities and Expenditures in Modified Accrual Basis Financial Statements

16. In governmental fund financial statements, which are prepared on the modified accrual basis of accounting, liabilities and expenditures for termination benefits should be recognized to the extent the liabilities are normally expected to be liquidated with expendable available financial resources, as interpreted in paragraph 14 of Interpretation 6, as amended.

Effects of a Termination Benefit on an Employer's Defined Benefit Pension or Other Postemployment Benefit Obligations

17. The effects of a termination benefit on an employer's defined benefit pension or OPEB obligations (for example, a change in an employer's actuarial accrued liability for pension benefits or postemployment healthcare benefits) should be accounted for and reported in accordance with the requirements of Statement 27 or Statement 45, respectively.

Note Disclosures

18. In the period in which an employer becomes obligated for termination benefits and in any additional period in which employees are required to render future service in order to receive involuntary termination benefits, the employer should disclose in the notes to the financial statements a description of the termination benefit arrangement(s)--for example, information about the type(s) of benefits provided, the number of employees affected, and the period of time over which benefits are expected to be provided.

19. In addition, in the period in which an employer becomes obligated for termination benefits, the cost of termination benefits should be disclosed in the notes to the financial statements if that information is not otherwise identifiable from information displayed on the face of the financial statements. To meet this requirement, an employer that provides termination benefits that affect defined benefit pension or OPEB obligations should disclose in the notes to the financial statements the change in the actuarial accrued liability for the pension or OPEB plan attributable to the termination benefits.

20. In all periods in which termination benefit liabilities are reported, the employer should disclose the significant methods (for example, whether termination benefits are measured at the discounted present value of expected future benefit payments) and assumptions (for example, the discount rate and healthcare cost trend rate, if applicable) used to determine the liabilities.

21. If a termination benefit that otherwise meets the recognition criteria of this standard is not recognized because the expected benefits are not estimable, the employer should disclose that fact.

EFFECTIVE DATE AND TRANSITION

22. For termination benefits that affect an employer's obligations for defined benefit OPEB, the provisions of this Statement should be applied simultaneously with the requirements of Statement 45. For all other termination benefits, including those that affect an employer's obligations for defined benefit pension benefits, this Statement is effective for financial statements for periods beginning after June 15, 2005. Earlier application of this Statement is encouraged.

23. In the initial year of implementation, the requirements of this Statement should be applied to any previous commitments of termination benefits that remain unpaid at the effective date of the Statement. The cumulative effect of applying this Statement should be reported as a restatement of beginning net assets (or equity or fund balance, as appropriate). Financial statements for prior periods are not required to be restated.

The provisions of this Statement need not be applied to immaterial items.

This Statement was issued by unanimous vote of the seven members of the Governmental Accounting Standards Board:

Robert H. Attmore, Chairman

Cynthia B. Green

William W. Holder

Edward J. Mazur 

Paul R. Reilly

Richard C. Tracy

James M. Williams

Unless otherwise specified, pronouncements of the GASB apply to financial reports of all state and local governmental entities, including general purpose governments, public benefit corporations and authorities, public employee retirement systems, utilities, hospitals and other healthcare providers, and colleges and universities. Paragraph 6 discusses the applicability of this Statement.

(1) However, if the healthcare-related termination benefit affects the employer's obligation to provide defined benefit postemployment healthcare benefits (OPEB), the effects of the termination benefits on the employer's OPEB obligations should be accounted for as required by paragraph 17, instead of paragraphs 9 through 16, which otherwise would apply.

(2) See footnote 1.

(3) The healthcare cost trend rate is the rate of change in per capita health claims costs over time as a result of factors such as medical inflation, utilization of healthcare services, plan design, and technological developments.

(4) The estimated yield on investments of the employer that are committed to other uses (for example, investments of interest and sinking funds for repayment of bonded debt) should not be included for this purpose.

(5) See footnote 4.

(6) For this purpose, the future service period is considered to began when a plan of termination has been approved by those with the authority to commit the employer to the plan, the plan has been communicated to the employees, and the amounts can be estimated.