Official releases: GASB no. 45 ... ethics interpretation.

Statement No. 45 of the Governmental Accounting Standards Beard--Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions

SUMMARY

In addition to pensions, many state and local governmental employers provide other postemployment benefits (OPEB) as part of the total compensation offered to attract and retain the services of qualified employees. OPEB includes postemployment healthcare, as well as other forms of postemployment benefits (for example, life insurance) when provided separately from a pension plan. This Statement establishes standards for the measurement, recognition, and display of OPEB expense/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information (PSI) in the financial reports of state and local governmental employers.

The approach followed in this Statement generally is consistent with the approach adopted in Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, with modifications to reflect differences between pension benefits and OPEB. Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, addresses financial statement and disclosure requirements for reporting by administrators or trustees of OPEB plan assets or by employers or sponsors that include OPEB plan assets as trust or agency funds in their financial reports.

How This Statement Improves Financial Reporting

Postemployment benefits (OPEB as well as pensions) are part of an exchange of salaries and benefits for employee services rendered. Of the total benefits offered by employers to attract and retain qualified employees, some benefits, including salaries and active-employee healthcare, are taken while the employees are in active service, whereas other benefits, including postemployment healthcare and other OPEB, are taken after the employees' services have ended. Nevertheless, both types of benefits constitute compensation for employee services.

From an accrual accounting perspective, the cost of OPEB, like the cost of pension benefits, generally should be associated with the periods in which the exchange occurs, rather than with the periods (often many years later) when benefits are paid or provided. However, in current practice, most OPEB plans are financed on a pay-as-you-go basis, and financial statements generally do not report the financial effects of OPEB until the promised benefits are paid. As a result, current financial reporting generally fails to:

* Recognize the cost of benefits in periods when the related services are received by the employer

* Provide information about the actuarial accrued liabilities for promised benefits associated with past services and whether and to what extent those benefits have been funded

* Provide information useful in assessing potential demands on the employer's future cash flows.

This Statement improves the relevance and usefulness of financial reporting by (a) requiring systematic, accrual-basis measurement and recognition of OPEB cost (expense) over a period that approximates employees' years of service and (b) providing information about actuarial accrued liabilities associated with OPEB and whether and to what extent progress is being made in funding the plan.

Summary of Standards

Measurement (the Parameters)

Employers that participate in single-employer or agent multiple-employer defined benefit OPEB plans (sole and agent employers) are required to measure and disclose an amount for annual OPEB cost on the accrual basis of accounting. Annual OPEB cost is equal to the employer's annual required contribution to the plan (ARC), with certain adjustments if the employer has a net OPEB obligation for past under- or overcontributions,

The ARC is defined as the employer's required contributions for the year, calculated in accordance with certain parameters, and includes (a) the normal cost for the year and (b) a component for amortization of the total unfunded actuarial accrued liabilities (or funding excess) of the plan over a period not to exceed thirty years. The parameters include requirements for the frequency and tinting of actuarial valuations as well as for the actuarial methods and assumptions that are acceptable for financial reporting. If the methods and assumptions used in determining a plan's funding requirements meet the parameters, the same methods and assumptions are required for financial reporting by both a plan and its participating employer(s). However, if a plan's method of financing does not meet the parameters (for example, the plan is financed on a pay as-you-go basis), the parameters nevertheless apply for financial reporting purposes.

For financial reporting purposes, an actuarial valuation is required at least biennially for OPEB plans with a total membership (including employees in active service, terminated employees who have accumulated benefits but are not yet receiving them, and retired employees and beneficiaries currently receiving benefits) of 200 or more, or at least triennially for plans with a total membership of fewer than 200. The projection of benefits should include all benefits covered by the current substantive plan (the plan as understood by the employer and plan members) at the time of each valuation and should take into consideration the pattern of sharing of benefit costs between the employer and plan members to that point, as well as certain legal or contractual caps on benefits to be provided. The parameters require that the selection of actuarial assumptions, including the healthcare, cost trend rate for postemployment healthcare plans, be guided by applicable actuarial standards.

Alternative Measurement Method

A sole employer in a plan with fewer than one hundred total plan members (including employees in active service, terminated employees who have accumulated benefits but are not yet receiving them, and retirees and beneficiaries currently receiving benefits) has the option to apply a simplified alternative measurement method instead of obtaining actuarial valuations. The option also is available to an agent employer with fewer than one hundred plan members, in circumstances in which the employer's use of the alternative measurement method would not conflict with a requirement that the agent multiple-employer plan obtain an actuarial valuation for plan reporting purposes. Those circumstances are:

* The plan issues a financial report prepared in conformity with the requirements of Statement 43 but is not required to obtain an actuarial valuation because (a) the plan has fewer than one hundred total plan members (all employers) and is eligible to use the alternative measurement method, or (b) the plan is not administered as a qualifying trust, or equivalent arrangement, for which Statement 43 requires the presentation of actuarial information.

* The plan does not issue a financial report prepared in conformity with the requirements of Statement 43.

This alternative method includes the same broad measurement steps as an actuarial valuation (projecting future cash outlays for benefits, discounting projected benefits to present value, and allocating the present value of benefits to periods using an actuarial cost method). However, it permits simplification of certain assumptions to make the method potentially usable by nonspecialists.

Net OPEB Obligation--Measurement

An employer's net OPEB obligation is defined as the cumulative difference between annual OPEB cost and the employer's contributions to a plan, including the OPEB liability or asset at transition, if any. (Because retroactive application of the measurement requirements of this Statement is not required, for most employers the OPEB liability at the beginning of the transition year will be zero.) An employer with a net OPEB obligation is required to measure annual OPEB cost equal to (a) the ARC, (b) one year's interest on the net OPEB obligation, and (c) an adjustment to the ARC to offset the effect of actuarial amortization of past under--or overcontributions.

Financial Statement Recognition and Disclosure

Sole and agent employers should recognize OPEB expense in an amount equal to annual OPEB cost in government-wide financial statements and in the financial statements of proprietary funds and fiduciary funds from which OPEB contributions are made. OPEB expenditures should be recognized on a modified accrual basis in governmental fund financial statements. Net OPEB obligations, if any, including amounts associated with under- or overcontributions from governmental funds, should be displayed as liabilities (or assets) in government-wide financial statements. Similarly, net OPEB obligations associated with proprietary or fiduciary funds from which contributions are made should be displayed as liabilities (or assets) in the financial statements of those funds.

Employers are required to disclose descriptive information about each defined benefit OPEB plan in which they participate, including the funding policy followed. In addition, sole and agent employers are required to disclose in formation about contributions made in comparison to annual OPEB cost, changes in the net OPEB obligation, the funded status of each plan as of the most recent actuarial valuation date, and the nature of the actuarial valuation process and significant methods and assumptions used. Sole and agent employers also are required to present as RSI a schedule of funding progress for the most recent valuation and the two preceding valuations, accompanied by notes regarding factors that significantly affect the identification of trends in the amounts reported.

Cost-Sharing Employers

Employers participating in cost-sharing multiple employer plans that are administered as trusts, or equivalent arrangements, in which (a) employer contributions to the plan are irrevocable, (b) plan assets are dedicated to providing benefits to retirees and their beneficiaries in accordance with the terms of the plan, and (c) plan assets are legally protected from creditors of the employers or plan administrator, should report as cost-sharing employers. Employers participating in multiple employer plans that do not meet those criteria instead are required to apply the requirements of this Statement that are applicable to agent employers.

Cost-sharing employers are required to recognize OPEB expense/expenditures for their contractually required contributions to the plan on the accrual or modified accrual basis, as applicable. Required disclosures include identification of the way that the contractually required contribution rate is determined (for example, by statute or contract or on an actuarially determined basis). Employers participating in a cost sharing plan are required to present as RSI schedules of funding progress and employer contributions for the plan as a whole if a plan financial report, prepared in accordance with Statement 43, is not issued and made publicly available and the plan is not included in the financial report of a public employee retirement system or another entity.

Other Guidance

Employers that participate in defined contribution OPEB plans are required to recognize OPEB expense/expenditures for their required contributions to the plan and a liability for unpaid required contributions on the accrual or modified accrual basis, as applicable.

This Statement also includes guidance for employers that finance OPEB as insured benefits (as defined by this Statement) and for special funding situations.

Effective Dates and Transition

This Statement generally provides for prospective implementation--that is, that employers set the beginning net OPEB obligation at zero as of the beginning of the initial year. Implementation is required in three phases based on a government's total annual revenues in the first fiscal year ending after June 15, 1999. The definitions and cutoff points for that purpose are the same as those in Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments. This Statement is effective for periods beginning after December 15, 2006, for phase 1 governments (those with total annual revenues of $100 million or more); after December 15, 2007, for phase 2 governments (those with total annual revenues of $10 million or more but less than $100 million); and after December 15, 2008, for phase 3 governments (those with total annual revenues of less than $10 million). Earlier implementation is encouraged.

CONTENTS

Introduction/1-3
Standards of Governmental Accounting and Financial
 Reporting/4-35
 Scope and Applicability of This Statement/4-10
 Employers with Defined Benefit OPEB
  Plans/11-28
  Sole and Agent Employers/11-21
   Measurement of Annual OPEB Cost and
    Net OPEB Obligation/11-16
     Calculation of the ARC (the Parameters)/12-13
     Calculation of Interest on the Net
      OPEB Obligation and the Adjustment
       to the ARC/14-16
   Recognition of OPEB Expense/Expenditures,
    Liabilities, and Assets/17-21
    Recognition in Governmental Fund
     Financial Statements/9
    Recognition in Proprietary and Fiduciary
     Fund Financial Statements/20
    Recognition in Government-wide Financial
     Statements/21
 Cost-Sharing Employers/22-23
 Notes to the Financial Statements/24-25
 Required Supplementary Information/26-27
 Insured Benefits/28
Employers with Defined Contribution
 Plans/29-31
Special Funding Situations/32
Alternative Measurement Method for Employers
 with Fewer Than One Hundred
 Plan Members/33-35
Effective Date and Transition/36-39
 OPEB Liabilities (Assets) at Transition (Defined
  Benefit OPEB Plans)/37-39
  Sole and Agent Employers/37
  Cost-Sharing Employers/38
  Disclosures/39
Glossary/40
Actuarial Terminology/41
Appendix A: Background/42-50
Appendix B: Basis for Conclusions/51-204
Appendix C: Accounting Procedures for Annual
 OPEB Cost When an Employer Has a Net
 OPEB Obligation/205
Appendix D: Illustrations of Disclosures/206
Appendix E: Illustrations of Equivalent Single
 Amortization Period Calculations/207
Appendix F: Illustration of Calculations Using
 the Alternative Measurement Method/208
Appendix G: Codification Instructions/209

INTRODUCTION

1. The objective of this Statement is to improve the faithfulness of representations and usefulness of information included in the financial reports of state and local governmental employers regarding other postemployment benefits (1) (OPEB). OPEB refers to postemployment benefits other than pension benefits and includes (a) postemployment healthcare benefits and (b) other types of postemployment benefits (for example, life insurance) if provided separately from a pension plan. Like pensions, OPEB arises from an exchange of salaries and benefits for employee services rendered and constitutes part of the compensation for those services. However, current financial reporting practices for OPEB generally are based on pay-as-you-go financing approaches. They generally fail to measure or recognize the cost of OPEB during the periods when employees render the services or to provide relevant information about OPEB obligations and the extent to which progress is being made in funding those obligations. This Statement addresses those issues.

2. The approach adopted in this Statement generally is consistent with the approach taken in Statement No. 27, Accounting for Pensions by State and Local Governmental Employers. However, certain requirements of this Statement differ from the requirements of Statement 27 to reflect differences between pension benefits and OPEB.

3. Statement No. 43, Financial Reporting for Postemployment Benefit Plans- Other Than Pension Plans, establishes standards for reporting of OPEB plans--including reporting of the plan assets and liabilities and, where applicable, the net assets and the changes in plan net assets, held in trust or as an agent for OPEB--and for disclosure of information about the funded status and funding progress of the plan and about employer contributions to the plan. The effective dates and many of the measurement and disclosure requirements of Statement 43 and this Statement are closely related, and certain provisions of this Statement refer to Statement 43. The two Statements include provisions to coordinate disclosures to avoid duplication when a government that participates in an OPEB plan also reports the plan as a fiduciary fund or component unit, or when a separately issued plan report, prepared in accordance with the requirements of Statement 43, is publicly available.

STANDARDS OF GOVERNMENTAL ACCOUNTING AND FINANCIAL REPORTING

Scope and Applicability of This Statement

4. This Statement establishes standards of accounting and financial reporting for OPEB expense/expenditures and related OPEB liabilities or OPEB assets, note disclosures, and required supplementary information (RSI) in the financial reports of state and local governmental employers. Accounting and financial reporting for trust and agency funds of the employer are addressed in Statement 43.

5. The requirements of this Statement address employer reporting for participation in defined benefit OPEB plans and in defined contribution plans that provide postemployment benefits other than pensions. Defined benefit OPEB plans are plans having terms that specify the benefits to be provided at or after separation from employment. The benefits may be specified in dollars (for example, a flat dollar payment or an amount based on one or more factors such as age, years of service, and compensation), or as a type or level of coverage (for example, prescription drugs or a percentage of healthcare insurance premiums). In contrast, a defined contribution plan is a plan having terms that (a) provide an individual account for each plan member and (b) specify how contributions to an active plan member's account are to be determined, rather than the income or other benefits the member or his or her beneficiaries are to receive at or after separation from employment. In a defined contribution plan, those benefits will depend only on the amounts contributed to the member's account, earnings on investments of those contributions, and forfeitures of contributions made for other members that may be allocated to the member's account. For example, an employer may contribute a specified amount to each active member's postemployment healthcare account each month. At or after separation from employment, the balance of the account may be used by the member or on the member's behalf for the purchase of health insurance or other healthcare benefits.

6. The requirements of this Statement apply to the financial statements of all state and local governmental employers that provide postemployment benefits other than pension benefits. The requirements apply whether the employer's financial statements are presented in separately issued (stand-alone) financial reports or are included in the financial reports of another governmental entity.

7. OPEB arises from an exchange of salaries and benefits for employee services, and it is part of the compensation that employers offer for services received. As used in this Statement, OPEB includes:

a. Postemployment healthcare benefits--including medical, dental, vision, hearing, and other health-related benefits whether provided separately or provided through a defined benefit pension plan

b. Other forms of postemployment benefits--for example, life insurance, disability, long-term care, and other benefits when provided separately from a defined benefit pension plan.

8. Inducements offered by employers to employees to hasten the termination of services, or payments made in consequence of the early termination of services (collectively referred to as termination offers and benefits), are different in nature from compensation for services. Accordingly, termination offers and benefits--including special termination benefits as defined in National Council on Governmental Accounting (NCGA) Interpretation 8, Certain Pension Matters, early-retirement incentive programs, and other termination-related benefits--are distinguished from OPEB and are excluded from the scope of this Statement, regardless of who provides or administers them. However, the effects, if any, of an employee's acceptance of a special termination offer on OPEB obligations incurred through an existing defined benefit plan (for example, an increase in the employer's obligation to provide postemployment healthcare benefits) should be accounted for in accordance with the requirements of this Statement and Statement 43, rather than the requirements of NCGA Interpretation 8.

9. Conversion of a terminating employee's unused sick leave credits to an individual account to be used for payment of postemployment benefits on that person's behalf is a termination payment, as the term is used in Statement No. 16, Accounting for Compensated Absences. The portion of sick leave expected to be compensated in that manner should be accounted for as a compensated absence in accordance with the requirements of that Statement. However, when a terminating employee's unused sick leave credits are converted to provide or to enhance a defined benefit OPEB (for example, postemployment healthcare benefits), the resulting benefit or in crease in benefit should be accounted for in accordance with the requirements of this Statement and Statement 43.

10. This Statement supersedes or amends all previous authoritative guidance on accounting and financial reporting for an employer's OPEB expense/expenditures and related information. It supersedes GASB Statement No. 12, Disclosure of Information on Postemployment Benefits Other Than Pension Benefits by State and Local Governmental Employers, and paragraph 24 of GASB Statement 27. It amends paragraph 5 of NCGA Interpretation 6, Notes to the Financial Statements Disclosure; paragraph 2 of GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues; footnotes 6 and 7 of GASB Statement 16; paragraphs 6, 7, and 39 of GASB Statement 27; and paragraph 7 of GASB Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements.

Employers with Defined Benefit OPEB Plans

Sole and Agent Employers

Measurement of Annual OPEB Cost and Net OPEB Obligation (2)

11. For employers with single-employer or agent multiple-employer (agent) plans (sole and agent employers), annual OPEB cost should be equal to the annual required contributions of the employer (ARC) (3) to the plan for that year, calculated in accordance with paragraphs 12 and 13 (the parameters), unless the employer has a net OPEB obligation (4) to the plan at the beginning of the year. The require ments for measuring annual OPEB cost when an emplyer has a net OPEB obligation are discussed in paragraphs 14 through 16. However, a sole or agent employer may elect to base its annual OPEB cost on the ARC calculated in accordance with the alternative measurement method discussed in paragraphs 33 through 35, if the employer meets either of the following criteria:

a. The employer is the sole employer hi a plan with fewer than one hundred total plan members. b. The employer is an agent employer with fewer than one hundred total plan members, and the agent multiple-employer plan in which the employer participates (1) is not required to obtain an actuarial valuation for the purpose of financial reporting in conformity with Statement 43 (5) or (2) does not issue a financial report pre pared in conformity with the requirements of that Statement.

For purposes of this Statement, a plan's total membership is the sum of its employees in active service, terminated employees who have accumulated benefits but are not yet receiving them, and retired employees and beneficiaries currently receiving benefits.

Calculation of the ARC (the parameters)

12. For financial reporting purposes, an actuarial valuation should be performed in accordance with this paragraph and paragraph 13 at the following minimum frequency:

a. For plans with a total membership of 200 or more--at least biennially

b. For plans with a total membership of fewer than 200--at least triennially.

The actuarial valuation date need not be the employer's balance sheet (6) date, but generally should be the same date each year (or other applicable interval). However, a new valuation should be performed if, since the previous valuation, significant changes have occurred that affect the results of the valuation, including significant changes in benefit provisions, the size or composition of the population covered by the plan, or other factors that impact long-term assumptions. The ARC reported for the employer's current fiscal year should be baaed on the results of the most recent actuarial valuation, performed in accordance with the parameters as of a date not more than twenty-four months before the beginning of that year, if valuations are annual, or not more than twenty four months before the beginning of the first year of the two-year or three-year period for which that valuation provides the ARC, if valuations are biennial or triennial.

13. The ARC and all other actuarially determined OPEB information included in an employer's financial report should be calculated in accordance with tiffs paragraph, consistently applied. The actuarial methods and assumptions applied for financial reporting should he the same methods and assumptions applied in determining the plan's funding requirements, unless compliance with this paragraph requires the use of different methods or assumptions. A plan and its participating employer(s) should apply the same actuarial methods and assumptions in determining similar or related information included in their respective financial reports. (7)

a. Benefits to be included:

(1) The actuarial present value of total projected benefits should include all benefits to be provided to plan members or beneficiaries in accordance with the current substantive plan (the plan terms as understood by the employer and plan members) at the time of each valuation, including any changes to plan terms that have been made and communicated to employees. Usually, the written plan is the best evidence of the terms of the exchange; however, in some cases the substantive plan may differ from the written plan. Accordingly, other information also should be taken into consideration in determining the benefits to be provided, including other communications between the employer and plan members and an established pattern of practice with regard to the sharing of benefit costs between the employer and plan members. Calculations should be made based on the types of benefits in force at the time of the valuation and the pattern of sharing of benefit costs between the employer and plan members to that point.

(2) When an employer provides benefits to both active employees and retirees through the same plan, the benefits to retirees should be segregated for actuarial measurement purposes, and the projection of future retiree benefits should be based on claims costs, or age adjusted premiums approximating claims costs, for retirees, in accordance with actuarial standards issued by the Actuarial Standards Board. (8) However, when an employer participates in a community-rated plan, in which premium rates reflect the projected health claims experience of all participating employers rather than that of any single participating employer, and the in surer or provider organization charges the same unadjusted premiums for both active employees and retirees, it is appropriate to use the unadjusted premiums as the basis for projection of retiree benefits, to the extent permitted by actuarial standards. (9)

(3) A legal or contractual cap on the employer's share of the benefits to be provided to retirees and beneficiaries each period should be considered in projecting benefits to be provided by the employer(s) in future periods, if the cap in assumed to be effective taking into consideration the employer's record of enforcing the cap in the past and other relevant factors and circumstances.

(4) Benefits to be provided by means of allocated insurance contracts for which payments to an insurance company (a) have been made and (b) have irrevocably transferred to the insurer the responsibility for providing the benefits, should be excluded (and allocated insurance contracts should be excluded from plan assets).

b. Actuarial assumptions--The selection of all actuarial assumptions, including the healthcare cost trend rate in valuations of postemployment healthcare plans, should be guided by actuarial standards. Accordingly, actuarial assumptions should be based on the actual experience of the covered group, to the extent that credible experience data are available, but should emphasize expected tong-term future trends rather than give undue weight to recent past experience. The reasonableness of each actuarial assumption should be considered independently based on its own merits, its consistency with each other assumption, and the combined impact of all assumptions.

c. Economic assumptions--In addition to complying with the guidance in subparagraph b of this paragraph, the investment return assumption (discount rate) should be the estimated long-term investment yield on the investments that are expected to be used to finance the payment of benefits, with consideration given to the nature and mix of current and expected investments and the basis used to determine the actuarial value of assets (subparagraph e). For this purpose, the investments expected to be used to finance the payment of benefits are (1) plan assets for plans for which the employer's funding policy is to contribute consistently an amount at least equal to the ARC, (2) assets of the employer for plans that have no plan assets, or (3) a combination of the two for plans that are being partially funded. The discount rate for a partially funded plan should be a blended rate that reflects the proportionate amounts of plan and employer assets expected to be used. The investment return assumption and other economic assumptions should include the same assumption with respect to inflation.

d. Actuarial cost method--One of the following actuarial cost methods should be used: entry age, frozen entry age, attained age, frozen attained age, projected unit credit, (10) or aggregate, as described in paragraph 41, Section B.

e. Actuarial value of assets--Plan assets should be valued using methods and techniques that are consistent with the class and anticipated holding period of the assets, the investment return assumption, other assumptions used in determining the actuarial present value of total projected benefits, and current actuarial standards for asset valuation. (11) Accordingly, the actuarial value of plan assets generally should be market related.

f. Annual required contributions of the employer (ARC)--The ARC should be actuarially determined in accordance with the parameters. The amount should include the employer's normal cost and a provision(s) for amortizing the total unfunded actuarial accrued liability (UAAL), or unfunded actuarial liability (UAL), in accordance with the following requirements: (12)

(1) Maximum amortization period--The maximum acceptable amortization period for the total unfunded actuarial liability is thirty years. The total unfunded actuarial liability may be amortized as one amount, or components of the total may be separately amortized. When components are amortized over different periods, the individual amortization periods should be selected so that the equivalent single amortization period for all components combined does not exceed the maximum accept able period.

(2) Equivalent single amortization period--the equivalent single amortization period is the number of years incorporated in a weighted average amortization factor for all components of the total UAL combined and should be calculated as follows:

(a) Determine the amortization factor for each component of the total UAL using its associated amortization period and the discount rate selected in accordance with subparagraphs b and c of this paragraph.

(b) Calculate next year's amortization payment for each of the components by dividing each component by its associated amortization factor.

(c) Calculate the weighted average amortization factor by dividing the total UAL by the sum of next year's individual amortization payments.

(d) Calculate the equivalent single amortization period as the number of years incorporated in the weighted average amortization factor (from c) at the discount rate used in subparagraph f(2)(a) of this paragraph.

(3) Minimum amortization period--A significant decrease in the total unfunded actuarial liability generated by a change from one of the actuarial cost methods specified in subparagraph d of this paragraph to another of those methods, or by a change in the method(s) used to determine the actuarial value of assets (for example, a change from a method that spreads increases or decreases in market value over five years to a method that uses current market value), should be amortized over a period of not less than ten years. The minimum amortization period is not required when a plan is closed to new entrants and all or almost all of the plan members have retired.

(4) Amortization method--The provision(s) for amortizing the total unfunded actuarial liability may be determined in level dollar amounts or as a level percentage of projected payroll of active plan members. If the level percentage of projected payroll method is used, the assumed payroll growth rate should not include an assumed increase in the number of active plan members; however, projected decreases in that number should be included if no new members are permitted to enter the plan (for example, a plan that covers only employees hired before a certain date).

g. Contribution deficiencies or excess contributions of the employer--A contribution deficiency or excess contribution is the difference between the ARC for a given year and the employer's contributions (13) in relation to the ARC. For the purposes of this Statement, an employer has made a contribution in relation to the ARC if the employer has (1) made payments of benefits directly to or on behalf a retiree or beneficiary, (2) made premium payments to an insurer, or (3) irrevocably transferred assets to a trust, or equivalent arrangement, in which plan assets are dedicated to providing benefits to retirees and their beneficiaries in accordance with the terms of the plan and are legally protected from creditors of the employer(s) or plan administrator. Earmarking of employer assets or other means of financing that do not meet the conditions in the preceding sentence do not constitute contributions in relation to the ARC., and the assets earmarked or otherwise accumulated should be considered employer assets for the purposes of this Statement. Amortization of a contribution deficiency or excess contribution should begin at the next actuarial valuation, unless settlement is expected not more than one year after the deficiency or excess occurred. If settlement has not occurred by the end of that term, amortization should begin at the next actuarial valuation.

Calculation of interest on the net OPEB obligation and the adjustment to the ARC

14. The employer's net OPEB obligation comprises (a) the OPEB liability (asset) at transition, if any, determined in accordance with paragraph 37, and (b) the cumulative difference since the effective date of this Statement between annual OPEB cost and the employer's contributions, excluding (1) short term differences and (2) unpaid contributions that have been converted to OPEB-related debt. A short-term difference is one that the employer intends to settle by the first actuarial valuation date after the difference occurred or, if the first valuation is scheduled within a year, not more than one year after the difference occurred. If the amount remains unsettled at the end of that term, the employer should include the entire unsettled difference in the net OPEB obligation. (An amount tot actuarial amortization of the difference should be included in the next and subsequent ARCs, as required by paragraph 13g.) As discussed in footnote 3, an OPEB-related debt is any long-term liability of an employer to an OPEB plan that is not included in the ARC. (14)

15. When an employer has a net OPEB obligation, annual OPEB cost should be equal to the ARC, one year's interest on the net OPEB obligation, and an adjustment to the ARC. The interest should be calculated on the balance of the net OPEB obligation at the beginning of the year, using the investment return rate assumed in determining the ARC for that year (paragraph 13c). Because this calculation of interest is independent of the actuarial calculation, the ARC should be adjusted to offset the amount of interest (and principal, if any) already included in the ARC for amortization of past contribution deficiencies or excess contributions of the employer. That portion of the ARC is not precisely determinable but can be reasonably approximated based on the net OPEB obligation, as discussed in paragraph 16.

16. The adjustment to the ARC should be equal to the discounted present value (ordinary annuity) of the balance of the net OPEB obligation at the beginning of the year, calculated using the same amortization methodology used in determining the ARC for that year. (The adjustment applies only for that year; a new calculation should be made each year.) That is, the adjustment should be calculated using the same (a) amortization method (level dollar or level percentage of projected payroll), (b) actuarial assumptions used in applying the amortization method, and (c) amortization period that were used in determining the ARC for that year) (15) The adjustment should be deducted from the ARC if the beginning balance of the net OPEB obligation is positive (cumulative annual OPEB cost is greater than cumulative employer contributions), or added to the ARC if the net OPEB obligation is negative.

Recognition of OPEB Expense/Expenditures, Liabilities, and Assets

(17.) When an employer contributes to Inure than one OPEB plan, all recognition require meats should be applied separately for each plan. (16) (Separate display in the financial statements is not required, except as indicated in subsequent paragraphs.) OPEB expense/expenditures include either or both of the following: (a) contributions in relation to the ARC and (b) accrual or payments of OPEB-related debt (which is not included in the ARC or the net OPEB obligation). Liabilities for OPEB-related debt should be adjusted consistent with the recognition of related expense/expenditures. ARC related liabilities (assets) should be adjusted to equal the year-end balance of the net OPEB obligation, as discussed in paragraphs 20 and 21.

(18.) When an employer makes ARC-related contributions to the same plan from more than one fund, the employer should determine what portion of the ARC applies to each fund. When the employer has a net OPEB obligation and the related liability (asset) is allocated to more than one fund, between fund(s) and general long-term liabilities, or between govern mental and business-type activities in the government-wide statement of net assets, the employer should allocate the interest and ARC adjustment components of annual OPEB cost to each liability (asset), based on its proportionate share of the beginning balance of the net OPEB obligation.

Recognition in governmental fund financial statements

19. OPEB expenditures from governmental funds should be recognized on the modified accrual basis. The amount recognized should be equal to the amount contributed to the plan or expected to be liquidated with expendable available financial resources. The recognition of expenditures in relation to the ARC also should be consistent with the criteria for contributions in relation to the ARC stated in paragraph 13g.

Recognition in proprietary and fiduciary fund financial statements

(20.) OPEB expense of proprietary and fiduciary funds should be recognized on the accrual basis in fund financial statements. The employer should report OPEB expense for the year in relation to the ARC equal to annual OPEB cost. The net OPEB obligation should be adjusted for any difference between OPEB expense in relation to the ARC and contributions made in relation to the ARC (including short-term differences incurred), based on the criteria for contributions stated in paragraph 13g. A positive (negative) year-end balance in the net OPEB obligation should be recognized as the year-end liability (asset) in relation to the ARC. OPEB expense arising from the incurrence of OPEB-related debt should be recognized in full in the year the debt is incurred. (17) Year-end balances of short-term differences or OPEB related debt should be recognized as liabilities separate from the net OPEB obligation. OPEB liabilities and assets to different plans should not be offset in the financial statements.

Recognition in government-wide financial statements

(21.) OPEB expense reported in government-wide financial statements should be recognized on the accrual basis. The employer should report OPEB expense for the year in relation to the ARC equal to annual OPEB cost. The net OPEB obligation should be adjusted for any difference between OPEB expense in relation to the ARC and contributions made in relation to the ARC (including short-term differences incurred). A positive (negative) year-end balance in the net OPEB obligation should be recognized as the year-end liability (asset) in relation to the ARC. OPEB expense arising from the incurrence of OPEB-related debt should be recognized in full in the year the debt is incurred. (18) Year-end balances of short-term differences or OPEB-related debt should be recognized as liabilities separate from the net OPEB obligation. OPEB liabilities and assets to different plans should not be offset in the financial statements.

Cost-Sharing Employers

22. Employers that participate in cost-sharing multiple-employer plans (cost-sharing employers) should apply the following accounting and financial reporting requirements of this Statement:

a. Employers should apply the requirements of this Statement applicable to cost-sharing employers if the plan is administered as a formal trust, or equivalent arrangement, in which all of the following conditions are met:

(1) Employer contributions to the plan are irrevocable.

(2) Plan assets are dedicated to providing benefits to retirees and their beneficiaries in accordance with the terms of the plan.

(3) Plan assets are legally protected from creditors of the employer(s) or plan administrator.

b. If any multiple employer plan is not administered as a formal trust, or equivalent arrangement, in which all of the preceding conditions are met, that plan should be classified as an agent multiple-employer plan for financial reporting purposes, and employers should apply the requirements of this Statement applicable to agent employers.

(23.) Cost-sharing employers in plans that meet the conditions of paragraph 22a should recognize annual OPEB expense/expenditures for their contractually required contributions to the plan in fund financial statements on the accrual basis or on the modified accrual basis, whichever applies for the fund(s) used to report the employer's contributions. Modified accrual recognition should be in accordance with the criteria stated in the second sentence of paragraph 19. Recognition of expense in government-wide financial statements should be on the accrual basis. OPEB liabilities and assets result from the difference between contributions required and contributions made. OPEB liabilities and assets to different plans should not be offset in the financial statements.

Notes to the Financial Statements

(24.) Employers should include the following information in the notes to their financial statements (19) for each defined benefit OPEB plan in which they participate, regardless of the type of plan (except as indicated). Disclosures for more than one plan should be combined in a manner that avoids unnecessary duplication.

a. Plan description.

(1) Name of the plan, identification of the public employee retirement system (PERS) or other entity that administers the plan, and identification of the plan as a single-employer, agent multiple-employer, or cost-sharing multiple employer defined benefit OPEB plan.

(2) Brief description of the types of benefits and the authority under which benefit provisions are established or may be amended.

(3) Whether the OPEB plan issues a standalone financial report or is included in the report of a PERS or another entity, and, if so, how to obtain the report.

b. Funding policy.

(1) Authority under which the obligations of the plan members, employer(s), and other contributing entities (for example, state contributions to local government plans) to contribute to the plan are established or may be amended.

(2) Required contribution rate(s) of plan members. The required contribution rate(s) could be expressed as a rate (amount) per member or as a percentage of covered payroll.

(3) Required contribution rate(s) of the employer in accordance with the funding policy, in dollars or as a percentage of current year covered payroll, and, if applicable, legal or contractual maximum contribution rates, If the plan is a single-employer or agent plan and the rate differs significantly from the ARC, disclose how the rate is determined (for example, by statute or by contract) or that the plan is financed on a pay-as-you-go basis. If the plan is a cost-sharing plan, disclose the required contributions in dollars and the percentage of that amount contributed for the current year and each of the two preceding years, and how the required contribution rate is determined (for example, by statute or by contract, or on an actuarially determined basis) or that the plan is financed on a pay-as-you-go basis.

(25.) Sole and agent employers should disclose the following information for each plan, in addition to the information required by paragraph 24:

a. For the current year, annual OPEB cost and the dollar amount of contributions made. if the employer has a net OPEB obligation, also disclose the components of annual OPEB cost (ARC, interest on the net OPEB obligation, and adjustment to the ARC), the increase or decrease in the net OPEB obligation, and the net OPEB obligation at the end of the year.

b. For the current year and each of the two preceding years, annual OPEB cost, percentage of annual OPEB cost contributed that year, and net OPEB obligation at the end of the year. (For the first two years, the required information should be presented for the transition year, and for the current and transition years, respectively.)

c. Information about the funded status of the plan as of the most recent valuation date, including the actuarial valuation date, the actuarial value of assets, the actuarial accrued liability, the total unfunded actuarial liability (or funding excess), the actuarial value of assets as a percentage of the actuarial accrued liability (funded ratio), the annual covered payroll, and the ratio of the unfunded actuarial liability (or funding excess) to annual covered payroll. (20) The information should be calculated in accordance with the parameters. However, employers that meet the criteria in paragraph 11 may elect to use the alternative measurement method discussed in paragraphs 33 through 35. Employers that use the aggregate actuarial cost method should prepare this information using the entry age actuarial cost method for that purpose only. (21)

d. Disclosure of information about actuarial methods and assumptions used in valuations on which reported reformation about the ARC, annual OPEB cost, and the funded status and funding progress of OPEB plans is based, including the following:

(1) Disclosure that actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events far into the future, and that actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future.

(2) Disclosure that the required schedule of funding progress immediately following the notes to the financial statements presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.

(3) Disclosure that calculations are based on the types of benefits provided under the terms of the substantive plan at the time of each valuation and on the pattern of sharing of costs between the employer and plan members to that point. In addition, if applicable, the employer should disclose that the projection of benefits for financial reporting purposes does not explicitly incorporate the potential effects of legal or contractual funding limitations (as discussed in the disclosure of funding policy in paragraph 24b(3)) on the pattern of cost sharing between the employer and plan members in the future. (22)

(4) Disclosure that actuarial calculations reflect a long-term perspective. In addition, if applicable, disclosure that, consistent with that perspective, actuarial methods and assumptions used include techniques that are designed to re duce short-term volatility in actuarial accrued liabilities and the actuarial value of assets.

(5) Identification of the actuarial methods and significant assumptions used to determine the ARC for the current year and the information required by paragraph 25c. The disclosures should include:

(a) The actuarial cost method.

(b) The method(s) used to determine the actuarial value of assets.

(c) The assumptions with respect to the inflation rate, investment return (including the method used to determine a blended rate for a partially funded plan, if applicable), postretirement benefit increases if applicable, projected salary increases if relevant to determination of the level of benefits, and, for postemployment healthcare plans, the healthcare cost trend rate. If the economic assumptions contemplate different rates for successive years (year-based or select and ultimate rates), the rates that should be disclosed are the initial and ultimate rates.

(d) The amortization method (level dollar or level percentage of projected payroll) and the amortization period (equivalent single amortization period, for plans that use multiple periods) for the most recent actuarial valuation and whether the period is dosed or open. Employers that use the aggregate actuarial cost method should disclose that because the method does not identify or separately amortize unfunded actuarial liabilities, information about funded status and funding progress has been prepared using the entry age actuarial cost method for that purpose, and that the information presented is intended to approximate the funding progress of the plan.

Required Supplementary Information

26. Sole and agent employers should present the following information for the most recent actuarial valuation and the two preceding valuations. (23)

a. Information about the funding progress of the plan, including, for each valuation, each of the elements of information listed in paragraph 25c

b. Factors that significantly affect the identification of trends in the amounts reported, including, for example, changes in benefit provisions, the size or composition of the population covered by the plan, or the actuarial methods and assumptions used. (The amounts reported for prior years should not be restated.)

The information should be calculated in accordance with the parameters and should be presented as RSI. Employers that use the aggregate actuarial cost method should prepare the information using the entry age actuarial cost method and should disclose that fact and that the purpose of this disclosure is to provide information that approximates the funding progress of the plan. (24)

27. If the cost-sharing plan in which an employer participates does not issue and make publicly available a stand-alone plan financial report prepared in accordance with the requirements of Statement 43, and the plan is not included in the financial report of a PEPS or another entity, the cost-sharing employer should present as RSI in its own financial report schedules of funding progress and employer contributions for the plan (and notes to these schedules), prepared in accordance with the requirements of Statement 43. The employer should disclose that the information presented relates to the cost-sharing plan as a whole, of which the employer is one participating employer, and should provide information helpful for understanding the scale of the information presented relative to the employer.

Insured Benefits

28. For purposes of this Statement, an insured benefit is an OPEB financing arrangement whereby an employer pays premiums to an insurance company while employees are in active service, in return for which the insurance company unconditionally undertakes an obligation to pay the postemployment benefits of those employees or their beneficiaries, as defined in the employer's plan. If an employer's OPEB financing arrangement with the insurance company does not meet these criteria, the benefit is not an insured benefit for financial reporting purposes, and the employer should comply with all requirements of this Statement for sole and agent employers. Employers with insured benefits should recognize OPEB expense (in proprietary and fiduciary fund financial statements and in the government-wide statement of activities) or expenditures (in governmental fund financial statements) equal to the annual contributions or premiums required in accordance with their agreement with the insurance company and should disclose the following information in the notes to the financial statements:

a. A brief description of the insured benefit, including the authority under which benefit provisions are established or may be amended.

b. The fact that the obligation for the payment of benefits has been effectively transferred from the employer to one or more insurance companies. Also disclose whether the employer has guaranteed benefits in the event of the insurance company's insolvency.

c. The current-year OPEB expense/expenditures and contributions or premiums paid.

Employers with Defined Contribution Plans

29. Employers with defined contribution plans should recognize annual OPEB expense (in proprietary and fiduciary fund financial statements and in the government wide statement of activities) or expenditures (in governmental fund financial statements) equal to their required contributions, in accordance with the terms of the plan. Recognition in the fund financial statements should be on the accrual or modified accrual basis, whichever applies for the fund(s) used to report the employer's contributions. Recognition in government-wide financial statements should be on the accrual basis. An OPEB liability or asset results from the difference between contributions required and contributions made to a plan. OPEB liabilities and assets to different plans should not be offset in the financial statements.

30. An OPEB plan may have both defined benefit and defined contribution characteristics. If the plan provides a defined benefit in some form--that is, if the benefit to be provided is a function of factors other than the amounts contributed to an active member's account during employment and amounts earned on contributed assets--the employer should apply the requirements of this Statement for defined benefit plans.

31. Employers should include the following information in the notes to their financial statements for each defined contribution plan to which they are required to contribute: (25)

a. Name of the plan, identification of the PEPS or other entity that administers the plan, and identification of the plan as a defined contribution plan

b. Brief description of the plan provisions and the authority under which they are established or may be amended

c. Contribution requirements (for example, the contribution rate in dollars or as a percentage of salary) of the plan members, employer, and other contributing entities (for example, state contributions to local government plans) and the authority under which the requirements are established or may be amended

d. The contributions actually made by plan members and the employer.

Special Funding Situations

32. Some governmental entities are legally responsible for contributions to OPEB plans that cover the employees of another governmental entity or entities. For example, a state government may be legally responsible for the annual "employer" contributions to an OPEB plan that covers employees of school districts within the state. In those cases, the entity that is legally responsible for the contributions should comply with all applicable provisions of this Statement for measurement and recognition of expense/ expenditures, liabilities, assets, note disclosures, and RSI. If the plan is a defined benefit OPEB plan and the entity with legal responsibility for contributions is the only contributing entity, the requirements of this Statement for sole employers apply, regardless of the number of entities whose employees are covered by the plan. (26)

Alternative Measurement Method for Employers with Fewer Than One Hundred Plan Members

33. The parameters of paragraphs 12 and 13 concerning the measurement of the ARC and of the funded status of OPEB plans, including the requirements of paragraph 12 regarding the minimum frequency of actuarial valuations and the requirement of paragraph 13b that the selection of actuarial assumptions should be guided by actuarial standards, generally are applicable to all sole and agent employers. However, employers that meet the criteria in paragraph 11 may elect to apply certain simplifying modifications for the selection of actuarial assumptions, as stated ha paragraph 34.

34. Employers that meet the eligibility test in paragraph 33 may elect either to apply the parameters of paragraphs 12 and 13 in their entirety or to apply the parameters with one or more of the following specific modifications. Employers that apply these modifications should disclose that they have used the alternative measurement method permitted by this Statement and should disclose in the notes to the financial statements the source or basis of all significant assumptions or methods selected in accordance with this paragraph, in addition to all other disclosure requirements of this Statement.

a. General considerations--The projection of benefits should include assumptions regarding all significant factors affecting the amount and taming of projected future benefit payments, including, where applicable, the factors listed be low. Additional assumptions may be needed depending on the benefits being provided. Assumptions generally should be based on the actual experience of the covered group, to the extent that credible experience data are available, but should emphasize expected long-term future trends rather than give undue weight to recent past experience. However, grouping techniques that base the selection of assumptions on combined experience data for similar plans may be used, as discussed in subparagraph i of this paragraph. The reasonableness of each assumption should be considered independently based on its own merits and its consistency with each other assumption. For example, each assumption of which general inflation is a component should include the same assumption with regard to that component. In addition, consideration should be given to the reasonableness of the combined impact of all assumptions.

b. Expected point in time at which benefits will begin to be provided--The assumption should reflect past experience and future expectations for the covered group. The assumption may incorporate a single assumed retirement age for all active employees or an assumption that all active employees will retire upon attaining a certain number of years of service.

c. Marital and dependency status--The employer may base these assumptions on the current status of active and retired plan members or on historical demographic data for retirees in the covered group.

d. Mortality--The employer should base this assumption on current published mortality tables.

e. Turnover--The employer generally should base both the assumed probability that an active plan member will remain employed until the assumed retirement age and the expected future working lifetime of plan members, for purposes of allocating the present value of expected benefits to periods, on the historical age-based turnover experience of the covered group using the calculation method in paragraph 35a. However, if experience data are not available, the employer should assign the probability of remaining employed until the assumed retirement age using Table 1 in paragraph 35b, and should determine the expected future working lifetime of plan members using Table 2 in paragraph 35c.

f. Healthcare cost trend rate--The employer should derive select and ultimate assumptions about healthcare cost trends in future years for which benefits are projected from an objective source.

g. Use of health insurance premiums--An employer participating in an experience-rated healthcare plan that provides benefits through premium payments to an insurer or other service provider may use the plan's current premium structure as the initial per capita healthcare rates for the purpose of projecting future healthcare benefit payments. However, if the same premium rates are given for both active employees and retirees, and the plan is not a community-rated plan, as discussed in paragraph 13a(2), the employer should (1) obtain from the insurer age-adjusted premium rates for retirees or, if that information cannot be obtained from the insurer, (2) estimate age adjusted premiums for retirees using the method provided in Tables 3 through 5 of paragraph 35d, as appropriate.

h. Plans with coverage options--When a postemployment benefit plan provides plan members more than one coverage option, the employer should base assumptions regarding members' coverage choices on the experience of the covered group, considering differences, if any, in the choices of pre- and post-Medicare-eligible members.

i. Use of grouping--The employer may use grouping techniques. One such technique is to group participants based on common demographic characteristics (for example, participants within a range of ages or years of service), where the obligation for each participant in the group is expected to be similar for commonly grouped individuals. Another technique is to group plans with similar expected costs and benefits.

35. This paragraph includes calculation methods and default values for use with the alternative measurement method in determining (a) the probability that active plan members will remain employed until retirement age, (b) the expected future working lifetime of plan members, and (c) age-adjusted premiums for retirees in certain situations.

a. Employers that use historical age-based turnover experience of the covered group when applying the alternative measurement method, as discussed in paragraph 34e, should use the following methodology to calculate the probability of remaining employed until retirement age and the expected future working lifetime of plan members [see table at right].

b. Employers that are not using historical age-based turnover experience of the covered group when applying the alternative measurement method, as discussed in paragraph 34e, should use [Table 1] to determine the probability of remaining employed until the assumed retirement age.

c. Employers that are not using historical age-based turnover experience of the covered group when applying the alternative measurement method, as discussed in paragraph 34e, should use [Table 2] to determine the expected future working lifetime of plan members.

d. When the same premiums are charged to active employees and retirees, and the employer or plan sponsor is unable to obtain age adjust ed premium information for retirees from the insurer or service provider, the following approach should be used to age-adjust premiums for purposes of projecting future benefits for retirees:

(1) To adjust premiums for ages under 65:

(a) Identify the premium charged for active and retired plan members under age 65.

(b) Calculate the average age of plan members (actives and retirees or beneficiaries) to which the premium identified in step a applies.

(c) For each active plan member, and each retired member or beneficiary under age 65, identify the greater of expected retirement age or current age.

(d) Calculate the average of the ages identified in step c.

(e) Calculate the midpoint age between the result of step d and age 65: result of step d + (0.5 X [65--result of step d]).

(f) Using the results of steps b and e, locate the appropriate factor in Table 3. The factor also can be calculated directly as [1.04.sup.(result of step e--result of step b)].

(g) Multiply the factor identified in step f by the premium identified in step a. The result is the current year age-adjusted premium that should be used as the basis for projecting future benefits for ages under age 65.

(2) To adjust premiums for ages 65 or older; (31)

(a) Identify the premium charged for active and retired plan members age 65 or older.

(b) Calculate the average age of plan members (actives and retirees or beneficiaries) to which the premium identified in step a applies.

(c) For each active plan member, and each retired member or beneficiary (whether age pre-65 or age 65 or older), identify the greater of current age or age 65.

(d) Calculate the average of the ages identified in step c.

(e) Calculate the average life expectancy of all plan members (actives and retirees or beneficiaries).

(f) Calculate the midpoint age between the result of step d and the result of step e: result of step d + (0.5 X [result of step e--result of step d]).

(g) Using the results of steps b and f, locate the appropriate factor in Table 4 (for plans with no Medicare coordination) or Table 5 (for plans with Medicare coordination). The factor in Table 4 also can be calculated directly as [1.04.sup.(64--result of step b)] x [1.03.sup.(result of step f--64)]. The factor in Table 5 also can be calculated directly as 0.5 x [1.04.sup.(64--result of step b)] x [1.03.sup.(result of step f--64)].

(h) Multiply the factor identified in step g by the premium identified in step a. The result is the current-year age-adjusted premium that should be used as the basis for projecting future benefits for ages 65 or older.

EFFECTIVE DATE AND TRANSITION

36. The requirements of this Statement are effective in three phases. Governments that were phase 1 governments for the purpose of implementation of Statement 34 should apply the requirements of this Statement in financial statements for periods beginning after December 15, 2006. Governments that were phase 2 governments for the purpose of implementation of Statement 34 should apply the requirements of this Statement in financial statements for periods beginning after December 15, 2007. Governments that were phase 3 governments for the purpose of implementation of Statement 34 should apply the requirements of this Statement in financial statements for periods beginning after December 15, 2008. The related Statement 43 on OPEB plan reporting is effective for plan reporting periods beginning after December 15, 2005, 2006, or 2007, for plans in which the largest participating employer is a phase 1, phase 2, or phase 3 government, respectively, for purposes of this paragraph. Earlier application of this Statement is encouraged. All component units should implement the requirements of this Statement no later than the same year as their primary government.

OPEB Liabilities (Assets) at Transition (Defined Benefit OPEB Plans)

Sole and Agent Employers

37. When first implementing the requirements of this Statement, sole and agent employers should set their net OPEB obligation at zero as of the beginning of the transition year and should apply the measurement and recognition requirements of this Statement on a prospective basis. However, a sole or agent employer that has actuarial information for years prior to implementation may elect to compute its net OPEB obligation (asset) at transition retroactively. An employer that elects to apply the requirements of this Statement retroactively should follow the method required for calculation of pension liabilities (assets) in paragraphs 30 through 35 of Statement 27. However, the calculation period set forth in paragraph 32 of that Statement is not mandatory. Employers should disclose in the notes to the financial statements the calculation period used.

Cost-Sharing Employers

38. The OPEB liability at the beginning of the transition year for a cost-sharing employer should be equal to the employer's (a) contractually required contributions that are due and payable at the effective date and (b) OPEB-related debt, if applicable. If a cost-sharing employer has recognized OPEB liabilities for amounts other than those specified in this paragraph, those liabilities should be reduced to zero.

Disclosures

39. In the transition year, employers should make the following disclosures for each single-employer, agent, and cost-sharing plan, even if the OPEB liability (asset) was zero both before and at the effective date. The employer should disclose either that this Statement was implemented prospectively (zero net OPEB obligation at transition) or that an OPEB liability (asset) at transition was determined in accordance with this Statement. The employer also should disclose the amount of the OPEB liability (asset) at transition, if any, and the difference, if any, between that amount and any previously reported liability (asset) to the same plan.

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

This Statement was adopted by the affirmative votes of six members of the Governmental Accounting Standards Board. Mr. Reilly dissented.

Mr. Reilly dissents to this Statement because he objects to the requirement to account for health insurance premium rate differentials (implied rate subsidy) as OPEB when an employer otherwise provides no explicit OPEB benefits. Mr. Reilly objects primarily because he believes the cost will far exceed the perceived benefits and also because of many conceptual and practical considerations.

Mr. Reilly points out that the decision to permit retired employees to participate in a health insurance program is not always made by the employer. In most instances health insurance companies have independent policies that allow retirees to pay the premiums and remain in an insurance program. Some states have legislation that provides the same option. Under these circumstances--that is, when the employer does not provide the option--Mr. Reilly believes that continued participation by retirees does not constitute "part of an exchange of salaries and benefits for employee services rendered."

Mr. Reilly believes that this Statement will require thousands of governments to incur the high cost of an actuarial study to determine the implicit rate subsidy, or premium differential, and the related annual OPEB cost. The financial statements will, therefore, reflect what the impact would be if health insurance companies charged a different premium for retirees than for active employees. He believes this information is neither relevant nor valid because financial statements should not reflect "what if" situations.

Mr. Reilly believes the accounting effort necessary to implement the requirement is excessive. In addition to having to accrue a liability to reflect the premium differential for participating retirees, employers will need to adjust the premium cost for active employees. The accounting treatment becomes more difficult when retirees reach the age of 65 and start receiving Medicare benefits. Depending on how premiums are calculated, there may be a reverse rate subsidy that will result in complex adjustments to the accounting records. These same governments will also have to provide elaborate note disclosures and numerous detailed financial and statistical schedules as RSI. The questionable net results, he believes, do not justify the substantial cost and effort. In fact, there has been no evidence introduced or shown to indicate that financial statements would be improved as a result of treating health insurance premium differentials as OPEB. Nor has there been a field test or illustration prepared to show that the perceived benefits gained justify the cost and effort necessary to account for and report premium rate differentials as OPEB.

Mr. Reilly believes that this standard will impose a funding-based approach on circumstances and events that do not require advance funding. Consequently, he believes that very few governments, if any, will fund the annual required contributions. These governments will, therefore, be forced to carry a liability (the net OPEB obligation) that will never be liquidated.

Mr. Reilly also points out that this requirement ignores and conflicts with the basic nature and theory of insurance. All participants in insurance programs receive economic benefit by being protected against certain financial losses. Professional administrators of health insurance programs consider health insurance to be one of the purest forms of insurance. They state this because various groups of people with diverse risks all pay the same premiums. The more one moves to "risk rating"--that is, different rates for different groups such as gender, age, health condition, family size, profession, and so forth--the more one moves away from the concept of insurance. Retirees are a group within the overall risk pool, and the manner in which health claims costs are measured and re covered through premiums, he believes, is a matter of public policy and should not be dictated by actuarial standards.

Mr. Reilly also disagrees with the reasons stated in the Basis for Conclusions of this Statement regarding the requirement to account for premium rate differentials as OPEB. He points out that the types and variety of OPEB plans in existence are numerous and that loss of comparability of financial statements is not an issue. Most fundamentally, he believes that requiring calculated premium rate differentials to be treated as OPEB could have a negative impact on the reliability and usefulness of financial statements. Because of the potential for liabilities that will never be liquidated and the uncertainties associated with reducing healthcare expenses for active employees, users of financial statements could be misled, and their ability to assess financial position, results of operations, and future cash flows could be diminished.

Although Mr. Reilly recognizes that healthcare claims cost for retirees is, on the average, greater than for active employees, the retirees are, nevertheless, part of a large risk group. If one accepts separate measurement of costs for retirees, then one should advocate risk rating for all groups. Because people in some professions, for example, incur claims costs that are two or more times greater than average, risk rating would result in more precise expenses being reflected in the statement of activities. Such practice, however, like the requirement to account for premium rate differentials, would suggest that insurance premiums are an inappropriate measurement for financial reporting. Mr. Reilly therefore believes that the Board should recognize and accept the nature of insurance and risk pools and the fact that common or blended premiums constitute all acceptable method for measuring and recording healthcare costs.

Mr. Reilly also points out that the original Exposure Draft did not require premium rate differentials to be treated as OPEB. He believes the Board made the change in the revised Exposure Draft and the final document primarily because of objections raised by actuaries and a hypothetical (and what he believes is a biased) example furnished by them to illustrate their point. During due process of the revised Exposure Draft, the majority of respondents supported not requiring premium rate differentials to be treated as OPEB. He believes that their arguments, including many conceptual as well as practical reasons, were well founded and compelling. Therefore, he believes that a case has not been made to require health insurance premium rate differentials to be accounted for as OPEB when an employer otherwise provides no explicit benefits.

Members of the Governmental Accounting Standards Board:

Tom L. Allen, Chairman

Cynthia B. Green

William W. Holder

Edward J. Mazur

Paul R. Reilly

Richard C. Tracy

James M. Williams

GLOSSARY

40. This paragraph contains definitions of certain terms as they are used in this Statement; the terms may have different meanings in other contexts. Terms defined in paragraph 41, "Actuarial Terminology," are cross-referenced to that paragraph.

Actuarial accrued liability. See paragraph 41, A-4.

Actuarial assumptions. See paragraph 41, C2.

Actuarial cost method. See paragraph 41, A2.

Actuarial experience gain or loss. See paragraph 41, A-8.

Actuarial present value of total projected benefits. Total projected benefits include all benefits estimated to be payable to plan members (retirees and beneficiaries, terminated employees entitled to benefits but not yet receiving them, and current active members) as a result of their service through the valuation date and their expected future service. The actuarial present value of total projected benefits as of the valuation date is the present value of the cost to finance benefits payable in the future, discounted to reflect the expected effects of the time value (present value) of money and the probabilities of payment. Expressed another way, it is the amount that would have to be invested on the valuation date so that the amount invested plus investment earnings will provide sufficient assets to pay total projected benefits when due.

Actuarial valuation. See paragraph 41, C-3.

Actuarial valuation date. The date as of which an actuarial valuation is performed.

Actuarial value of assets. See paragraph 41, A-5.

Agent multiple-employer plan (agent plan). An aggregation of single-employer plans, with pooled administrative and investment functions. Separate accounts are maintained for each employer so that the employer's contributions provide benefits only for the employees of that employer. A separate actuarial valuation is performed for each individual employer's plan to determine the employer's periodic contribution rate and other information for the individual plan, based on the benefit formula selected by the employer and the individual plan's proportionate share of the pooled assets. The results of the individual valuations are aggregated at the administrative level.

Aggregate actuarial cost method. See paragraph 41, B-4.

Allocated insurance contract. A contract with an insurance company under which related payments to the insurance company are currently used to purchase an immediate or deferred benefit for individual members.

Amortization (of unfunded actuarial accrued liability). See paragraph 41, C-5.

Annual OPEB cost. An accrual-basis measure of the periodic cost of an employer's participation in a defined benefit OPEB plan.

Annual required contributions of the employer (ARC). The employer's periodic required contributions to a defined benefit OPEB plan, calculated in accordance with the parameters.

Attained age actuarial cost method. See paragraph 41, B-3.

Closed amortization period (closed basis). A specific number of years that is counted from one date and, therefore, declines to zero with the passage of time. For example, if the amortization period initially is thirty years on a closed basis, twenty-nine years remain after the first year, twenty-eight years after the second year, and so forth. In contrast, an open amortization period (open basis) is one that begins again or is recalculated at each actuarial valuation date. Within a maximum number of years specified by law or policy (for example, thirty years), the period may increase, decrease, or remain stable.

Contribution deficiencies (excess contributions). The difference between the annual required contributions of the employer(s) (ARC) and the employer's actual contributions in relation to the ARC.

Cost-sharing multiple-employer plan. A single plan with pooling (cost-sharing) arrangements for the participating employers. All risks, rewards, and costs, including benefit costs, are shared and are not attributed individually to the employers. A single actuarial valuation covers all plan members, and the same contribution rate(s) applies for each employer.

Covered group. Plan members included in an actuarial valuation.

Covered payroll. Annual compensation paid to active employees covered by an OPEB plan. If employees also are covered by a pension plan, the covered payroll should include all elements included in compensation on which contributions to the pension plan are based. For example, if pension contributions are calculated on base pay including overtime, covered payroll includes overtime compensation.

Defined benefit OPEB plan. An OPEB plan having terms that specify the benefits to be provided at or after separation from employment. The benefits may be specified in dollars (for example, a flat dollar payment or an amount based on one or more factors such as age, years of service, and compensation), or as a type or level of coverage (for example, prescription drugs or a percentage of healthcare insurance premiums).

Defined benefit pension plan. A pension plan having terms that specify the amount of pension benefits to be provided at a future date or after a certain period of time. The amount specified usually is a function of one or more factors such as age, years of service, and compensation.

Defined contribution plan. A pension or 1 OPEB plan having terms that (a) provide an individual account for each plan member and (b) specify how contributions to an active plan member's account are to be determined, rather than the in come or other benefits the member or his or her beneficiaries are to receive at or after separation from employment. Those benefits will depend only on the amounts contributed to the member's account, earnings on investments of those contributions, and forfeitures of contributions made for other members that may be alto cared to the member's account. For example, an employer may contribute a specified amount to each active member's postemployment healthcare account each month. At or after separation from employment, the balance of the account may be used by the member or on the member's behalf for the purchase of health insurance or other healthcare benefits.

Employer's contributions. Contributions made in relation to the annual required contributions of the employer (ARC). An employer has made a contribution in relation to the ARC if the employer has (a) made payments of benefits directly to or on behalf of a retiree or beneficiary, (b) made premium payments to an insurer, or (c) irrevocably transferred assets to a trust, or equivalent arrangement, in which plan assets are dedicated to providing benefits to retirees and their beneficiaries in accordance with the terms of the plan and are legally protected from creditors of the employer(s) or plan administrator.

Entry age actuarial cost method. See paragraph 41, B-2.

Equivalent single amortization period. The weighted average of all amortization periods used when components of the total unfunded actuarial accrued liability are separately amortized and the average is calculated in accordance with the parameters.

Excess contributions (contribution deficiencies). See Contribution deficiencies (excess contributions).

Frozen attained age actuarial cost method. See paragraph 41, B-6.

Frozen entry age actuarial cost method. See paragraph 41, B-5.

Funded ratio. The actuarial value of assets expressed as a percentage of the actuarial accrued liability.

Funding excess. The excess of the actuarial value of assets over the actuarial accrued liability. See also paragraph 41, A-6.

Funding policy. The program for the amounts and timing of contributions to be made by plan members, employer(s), and other contributing entities (for example, state government contributions to a local government plan) to provide the benefits specified by an OPEB plan.

Healthcare cost trend rate. 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.

Insured benefit. An OPEB financing arrangement whereby an employer pays premiums to an insurance company, while employees are in active service, in return for which the insurance company unconditionally undertakes an obligation to pay the postemployment benefits of those employees or their beneficiaries, as defined in the employer's plan.

Investment return assumption (discount rate). The rate used to adjust a series of future payments to reflect the time value of money.

Level dollar amortization method. The amount to be amortized is divided into equal dollar amounts to be paid over a given number of years; part of each payment is interest and part is principal (similar to a mortgage payment on a building). Because payroll can be expected to increase as a result of inflation, level dollar payments generally represent a decreasing percentage of payroll; in dollars adjusted for inflation, the payments can be expected to decrease over time.

Level percentage of projected payroll amortization method. Amortization payments are calculated so that they are a constant percentage of the projected payroll of active plan members over a given number of years. The dollar amount of the payments generally will increase over time as payroll increases due to inflation; in dollars adjusted for inflation, the payments can be expected to remain level.

Market-related value of plan assets. A term used with reference to the actuarial value of assets. A market related value may be fair value, market value (or estimated market value), or a calculated value that recognizes changes in fair value or market value over a period of, for example, three to five years.

Net OPEB obligation. The cumulative difference since the effective date of this Statement between annual OPEB cost and the employer's contributions to the plan, including the OPEB liability (asset) at transition, if any, and excluding (a) short-term differences and (b) unpaid contributions that have been converted to OPEB-related debt.

Normal cost. See paragraph 41, A-3. In this Statement, the term refers to employer normal cost.

OPEB assets. The amount recognized by an employer for contributions to an OPEB plan greater than OPEB expense.

OPEB expenditures. The amount recognized by an employer in each accounting period for contributions to an OPEB plan on the modified accrual basis of accounting.

OPEB expense. The amount recognized by an employer in each accounting period for contributions to an OPEB plan on the accrual basis of accounting.

OPEB liabilities. The amount recognized by an employer for contributions to an OPEB plan less than OPEB expense/expenditures.

OPEB-related debt. All long-term liabilities of an employer to an OPEB plan, the payment of which is not included in the annual required contributions of a sole or agent employer (ARC) or the actuarially determined required contributions of a cost-sharing employer. Payments generally are made in accordance with installment contracts that usually include interest. Examples include contractually deferred contributions and amounts assessed to an employer upon joining a multiple-employer plan.

Open amortization period (open basis). See Closed amortization period (closed basis).

Other postemployment benefits. Postemployment benefits other than pension benefits. Other postemployment benefits (OPEB) include postemployment healthcare benefits, regardless of the type of plan that provides them, and all postemployment benefits provided separately from a pension plan, excluding benefits defined as termination offers and benefits.

Parameters. The set of requirements for calculating actuarially determined OPEB information included in financial reports.

Pay-as-you-go. See paragraph 41, C-8.

Payroll growth rate. An actuarial assumption with respect to future increases in total covered payroll attributable to inflation; used in applying the level percentage of projected payroll amortization method.

Pension benefits. Retirement income and all other benefits, including disability benefits, death benefits, life insurance, and other ancillary benefits, except healthcare benefits, that are provided through a defined benefit pension plan to plan members and beneficiaries after termination of employment or after retirement. Postemployment healthcare benefits are considered other postemployment benefits, whether they are provided through a defined benefit pension plan or another type of plan.

Plan assets. Resources, usually in the form of stocks, bonds, and other classes of investments, that have been segregated and restricted in a trust, or equivalent arrangement, in which (a) employer contributions to the plan are irrevocable, (10) assets are dedicated to providing benefits to retirees and their beneficiaries, and (c) assets are legally protected from creditors of the employer(s) or plan administrator, for the payment of benefits in accordance with the terms of the plan.

Plan members. The individuals covered by the terms of an OPEB plan. The plan membership generally includes employees in active service, terminated employees who have accumulated benefits but are not yet receiving them, and retired employees and beneficiaries currently receiving benefits.

Postemployment. The period between termination of employment and retirement as well as the period after retirement.

Postemployment healthcare benefits. Medical, dental, vision, and other health related benefits provided to terminated or retired employees and their dependents and beneficiaries.

Postretirement benefit increase. An increase in the benefits of retirees or beneficiaries granted to compensate for the effects of inflation (cost-of-living adjustment) or for other reasons. Ad hoc increases may be granted periodically by a decision of the board of trustees, legislature, or other authoritative body; both the decision to grant an increase and the amount of the in crease are discretionary. Automatic increases are periodic increases specified in the terms of the plan; they are nondiscretionary except to the extent that the plan terms can be changed.

Projected salary increase assumption. An actuarial assumption with respect to future increases in the individual salaries and wages of active plan members; used in determining the actuarial present value of total projected benefits when the benefit amounts are related to salaries and wages. The expected increases commonly include amounts for inflation, enhanced productivity, and employee merit and seniority.

Projected unit credit actuarial cost method. See paragraph 41, B-1.

Public employee retirement system (PERS). A state or local governmental entity entrusted with administering one or more pension plans. A PERS also may administer other types of employee benefit plans, including postemployment healthcare plans and deferred compensation plans. A PEPS also may be an employer that provides or participates in a pension plan or other types of employee benefit plans for employees of the system.

Required supplementary information (RSI). Schedules, statistical data, and other information that are an essential part of financial reporting and should be presented with, but are not part of, the basic financial statements of a governmental entity.

Select and ultimate rates. Actuarial assumptions that contemplate different rates for successive years. Instead of a single assumed rate with respect to, for example, the investment return assumption, the actuary may apply different rates for the early years of a projection and a single rate for all subsequent years. For example, if an actuary applies an assumed investment return of 8 percent for year 20W0, 7.5 percent for 20W1, and 7 percent for 20W2 and thereafter, then 8 percent and 7.5 percent are select rates, and 7 percent is the ultimate rate.

Single-employer plan. A plan that covers the current and former employees, including beneficiaries, of only one employer.

Special termination benefits. Benefits offered by an employer for a short period of time as an inducement to employees to hasten the termination of services. For example, to reduce payroll and related costs, an employer might offer enhanced pension benefits or OPEB to employees as an inducement to take early termination, for employees who accept the offer within a sixty-day window of opportunity.

Sponsor. The entity that established the plan. The sponsor generally is the employer or one of the employers that participate in the plan to provide benefits for their employees. Some times, however, the sponsor establishes the plan for the employees of other entities but does not include its own employees and, therefore, is not a participating employer of that plan. An example is a state government that establishes a plan for the employees of local governments within the state, but the employees of the state government are covered by a different plan.

Stand-alone plan financial report. A report that contains the financial statements of a plan and is issued by the plan or by the public employee retirement system that administers the plan. The term stand-alone is used to distinguish such a financial report from plan financial statements that are included in the financial report of the plan sponsor or employer (pension or other employee benefit trust fired).

Substantive plan. The terms of an OPEB plan as understood by the employer(s) and plan members.

Terminal funding. See paragraph 41, C-10.

Termination offers and benefits. Inducements offered by employers to employees to hasten the termination of services, or payments made in consequence of the early termination of services. Termination offers and benefits include special termination benefits, early retirement incentive programs, and other termination-related benefits.

Transition year. The fiscal year in which this Statement is first implemented.

Ultimate rate. See Select and ultimate rates.

Unfunded actuarial accrued liability (unfunded actuarial liability). See paragraph 41, A-6.

Unprojected unit credit actuarial cost method. See paragraph 41, B-1.

Year-based assumptions. See Select and ultimate rates.

ACTUARIAL TERMINOLOGY

41. This paragraph contains terms and definitions adopted by the Interim Actuarial Standards Board (now the Actuarial Standards Board) of the American Academy of Actuaries in 1988. The terms and definitions are reproduced, with permission, including the original section headings and item numbers, as published in "Appendix II: Pension Actuarial Terminology" of Actuarial Standard of Practice No. 4, Measuring Pension Obligations, approved for publication by the Actuarial Standards Board in October 1993. (32) Although specifically adopted in relation to pensions, these terms and definitions also are generally applicable to other postemployment benefits. Five items in the original (B-7, B-8, B-9, C-1, and C-6) are not included in this paragraph because they describe actuarial cost methods not included in the parameters or define terms not used in this Statement or in Statement 43. Terms with an asterisk are not used in this Statement or Statement 43 but have been included because they are used in the definitions of other terms.

Section A CORE TERMS

A-1. * Actuarial Present Value The value of an amount or series of amounts payable or receivable at various times, determined as of a given date by the application of a particular set of Actuarial Assumptions. For purposes of this standard, each such amount or series of amounts is:

a. adjusted for the probable financial effect of certain intervening events (such as changes in compensation levels, Social Security, marital Status, etc.),

b. multiplied by the probability of the occurrence of an event (such as survival, death, disability, termination of employment, etc.) on which the payment is conditioned, and

c. discounted according to an assumed rate (or rates) of return to reflect the time value of money.

A-2. Actuarial Cost Method or Funding Method

A procedure for determining the Actuarial Present Value of pension plan benefits and expenses and for developing an actuarially equivalent allocation of such value to time periods, usually in the form of a Normal Cost and an Actuarial Accrued Liability

Note: An Actuarial Cost Method is under stood to be a Closed Group Actuarial Cost Method unless otherwise stated.

A-3. Normal Cost or Normal Actuarial Cost

That portion of the Actuarial Present Value of pension plan benefits and expenses which is allocated to a valuation year by the Actuarial Cost Method.

Note 1: The presentation of Normal Cost should be accompanied by reference to the Actuarial Cost Method used.

Note 2: Any payment in respect of an Unfunded Actuarial Accrued Liability is not part of Normal Cost (see Amortization Payment).

Note 3: For pension plan benefits which are provided in part by employee contributions, Normal Cost refers to the total of employee contributions and employer Normal Cost unless otherwise specifically stated.

A-4. Actuarial Accrued Liability, Actuarial Liability, Accrued Liability, or Actuarial Reserve

That portion, as determined by a particular Actuarial Cost Method, of the Actuarial Present Value of pension plan benefits and expenses which is not provided for by future Normal Costs.

Note: The presentation of an Actuarial Accrued Liability should be accompanied by reference to the Actuarial Cost Method used; for example, by hyphenation ("Actuarial Accrued Liability--XYZ," where "XYZ" denotes the Actuarial Cost Method) or by a footnote.

A-5. Actuarial Value of Assets or Valuation Assets

The value of cash, investments and other property belonging to a pension plan, as used by the actuary for the purpose of an Actuarial Valuation.

Note: The statement of Actuarial Assumptions should set forth the particular procedures used to determine this value.

A-6. Unfunded Actuarial Accrued Liability, Unfunded Actuarial Liability, Unfunded Accrued Liability, or Unfunded Actuarial Reserve

The excess of the Actuarial Accrued Liability over the Actuarial Value of Assets.

Note: This value may be negative in which case it may be expressed as a negative Unfunded Actuarial Accrued Liability, the excess of the Actuarial Value of Assets over the Actuarial Accrued Liability, or the Funding Excess.

A-7. * Unfunded Frozen Actuarial Accrued Liability or Unfunded Frozen Actuarial Liability

An Unfunded Actuarial Accrued Liability which is not adjusted ("frozen") from one Actuarial Valuation to the next to reflect Actuarial Gains (Losses) under certain Actuarial Cost Methods. Generally, tiffs amount is adjusted by any increments or decrements in Actuarial Accrued Liability due to changes in pension plan benefits or Actuarial Assumptions subsequent to the date it is frozen. Adjustments are made from one Actuarial Valuation to the next to reflect the addition of interest and deduction of Amortization Payments.

A-8. Actuarial Gain (Loss) or Experience Gain (Loss)

A measure of the difference between actual experience and that expected based upon a set of Actuarial Assumptions, during the period between two Actuarial Valuation dates, as determined in accordance with a particular Actuarial Cost Method.

Note 1: The effect on the Actuarial Accrued Liability and/or the Normal Cost resulting from changes in the Actuarial Assumptions, the Actuarial Cost Method or pension plan provisions should be described as such, not as an Actuarial Gain (Loss).

Note 2: The manner in which the Actuarial Gain (Loss) affects future Normal Cost and Actuarial Accrued Liability allocations depends upon the particular Actuarial Cost Method Used.

Section B

ACTUARIAL COST METHODS

B-1. Unit Credit Actuarial Cost Method A method under which the benefits (projected or unprojected) of each individual included in an Actuarial Valuation are allocated by a consistent formula to valuation years. The Actuarial Present Value of benefits allocated to a valuation year is called the Normal Cost. The Actuarial Present Value of benefits allocated to all periods prior to a valuation year is called the Actuarial Accrued Liability.

Note 1: The description of this method should state the procedures used, including:

(a) how benefits are allocated to specific time periods;

(b) the procedures used to project benefits, if applicable; and

(c) a description of any other method used to value a portion of the pension plan's benefits.

Note 2: Under this method, the Actuarial Gains (Losses), as they occur, generally reduce (increase) the Unfunded Actuarial Accrued Liability

B-2. Entry Age Actuarial Cost Method or Entry Age Normal Actuarial Cost Method

A method under which the Actuarial Present Value of the Projected Benefits of each individual included in an Actuarial Valuation is allocated on a level basis over the earnings or service of the individual between entry age and assumed exit age(s). The portion of this Actuarial Present Value allocated to a valuation year is called the Normal Cost. The portion of this Actuarial Present Value not provided for at a valuation date by the Actuarial Present Value of future Normal Costs is called the Actuarial Accrued Liability.

Note 1: The description of this method should state the procedures used, including:

(a) whether the allocation is based on earnings or service;

(b) where aggregation is used in the calculation process;

(c) how entry age is established;

(d) what procedures are used when different benefit formulas apply to various periods of service; and

(e) a description of any other method used to value a portion of the pension plan's benefits.

Note 2: Under this method, the Actuarial Gains (Losses), as they occur, reduce (increase) the Unfunded Actuarial Accrued Liability.

B-3. Attained Age Actuarial Cost Method

A method under which the excess of the Actuarial Present Value of Projected Benefits over the Actuarial Accrued Liability in respect of each individual included in an Actuarial Valuation is allocated on a level basis over the earnings or service of the individual between the valuation date and assumed exit. The portion of this Actuarial Present Value which is allocated to a valuation year is called the Normal Cost. The Actuarial Accrued Liability is determined using the Unit Credit Actuarial Cost Method.

Note 1: The description of this method should state the procedures used, including:

(a) whether the allocation is based on earnings or service;

(b) where aggregation is used in the calculation process; and

(c) a description of any other method used to value a portion of the pension plan's benefits.

Note 2: Under this method, the Actuarial Gains (Losses), as they occur, reduce (increase) the Unfunded Actuarial Accrued Liability.

Note 3: The differences which regularly arise between the Normal Cost under this method and the Normal Cost under the Unit Credit Actuarial Cost Method will affect the determination of future Actuarial Gains (Losses).

B-4. Aggregate Actuarial Cost Method

A method under which the excess of the Actuarial Present Value of Projected Benefits of the group included in an Actuarial Valuation over the Actuarial Value of Assets is allocated on a level basis over the earnings or service of the group between the valuation date and assumed exit. This allocation is performed for the group as a whole, not as a sum of individual allocations. That portion of the Actuarial Present Value allocated to a valuation year is called the Normal Cost. The Actuarial Accrued Liability is equal to the Actuarial Value of Assets.

Note 1: The description of this method should state the procedures used, including:

(a) whether the allocation is based on earnings or service;

(b) how aggregation is used in the calculation process; and

(c) a description of any other method used to value a portion of the pension plan's benefits.

Note 2: Under this method, the Actuarial Gains (Losses), as they occur, reduce (increase) future Normal Costs.

B-5. Frozen Entry Age Actuarial Cost Method

A method under which the excess of the Actuarial Present Value of Projected Benefits of the group included in an Actuarial Valuation, over the sum of the Actuarial Value of Assets plus the Unfunded Frozen Actuarial Accrued Liability, is allocated on a level basis over the earnings or service of the group between the valuation date and assumed exit. This allocation is performed for the group as a whole, not as a sum of individual allocations. The Frozen Actuarial Accrued Liability is determined using the Entry Age Actuarial Cost Method. The portion of this Actuarial Present Value allocated to a valuation year is called the Normal Cost.

Note 1: The description of this method should state the procedures used, including:

(a) whether the allocation is based on earnings or service;

(b) how aggregation is used in the calculation process; and

(c) a description of any other method used to value a portion of the pension plan's benefits.

Note 2: Under this method, the Actuarial Gains (Losses), as they occur, reduce (increase) future Normal Costs.

B-6. Frozen Attained Age Actuarial Cost Method

A method under which the excess of the Actuarial Present Value of Projected Benefits of the group included in an Actuarial Valuation, over the sum of the Actuarial Value of Assets plus the Unfunded Frozen Actuarial Accrued Liability, is allocated on a level basis over the earnings or service of the group between the valuation date and assumed exit. This allocation is performed for the group as a whom not as a sum of individual allocations. The Unfunded Frozen Actuarial Accrued Liability is determined using the Unit Credit Actuarial Cost Method. The portion of this Actuarial Present Value allocated to a valuation year is called the Normal Cost.

Note 1: The description of this method should state the procedures used, including:

(a) whether the allocation is based on earnings or service;

(b) how aggregation is used in the calculation process; and

(c) a description of any other method used to value a portion of the pension plan's benefits.

Note 2: Under this method, the Actuarial Gains (Losses), as they occur, reduce (increase) future Normal Costs.

Section C

SUPPLEMENTAL GLOSSARY

C-2. Actuarial Assumptions

Assumptions as to the occurrence of future events affecting pension costs, such as: mortality, withdrawal, disablement and retirement; changes in compensation and Government provided pension benefits; rates of investment earnings and asset appreciation or depreciation; procedures used to determine the Actuarial Value of Assets; characteristics of future entrants for Open Group Actuarial Cost Methods; and other relevant items.

C-3. Actuarial Valuation

The determination, as of a valuation date, of the Normal Cost, Actuarial Accrued Liability, Actuarial Value of Assets, and related Actuarial Present Values for a pension plan.

C-4.* Actuarially Equivalent

Of equal Actuarial Present Value, determined as of a given date with each value based on the same set of Actuarial Assumptions.

C-5. Amortization Payment

That portion of the pension plan contribution which is designed to pay interest on and to amortize the Unfunded Actuarial Accrued Liability or the Unfunded Frozen Actuarial Accrued Liability.

C-7.* Open Group/Closed Group

Terms used to distinguish between two classes of Actuarial Cost Methods. Under an Open Group Actuarial Cost Method, Actuarial Present Values associated with expected future entrants are considered; under a Closed Group Actuarial Cost Method, Actuarial Present Values associated with future entrants are not considered.

C-8. Pay-as-You-Go

A method of financing a pension plan under which the contributions to the plan are generally made at about the same time and in about the same amount as benefit payments and expenses becoming due.

C-9. * Projected Benefits

Those pension plan benefit amounts which are expected to be paid at various future times under a particular set of Actuarial Assumptions, taking into account such items as the effect of advancement in age and past and anticipated future compensation and service credits. That portion of an individual's Projected Benefit allocated to service to date, determined in accordance with the terms of a pension plan and based on future compensation as projected to retirement, is called the Credited Projected Benefit.

C-10. Terminal Funding

A method of funding a pension plan under which the entire Actuarial Present Value of benefits for each individual is contributed to the plan's fund at the time of withdrawal, retirement or benefit commencement.

Space considerations prevent publishing here the appendices to GASB Statement no. 45. 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].

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; and public utilities, hospitals and other healthcare providers, and colleges and universities. Paragraphs 4 and 6 discuss the applicability of this Statement.

(1) Consistent with previous GASB pronouncements, the glossary and actuarial terminology presented in paragraphs 40 and 41 are authoritative elements of tiffs Statement. Terms defined in those paragraphs are printed in boldface type when they first appear.

(2) The terms annual OPEB cost and net OPEB obligation are used to refer to the results of applying the measurement requirements of this Statement, regardless of the amounts that should be recognized in the financial statements using the accrual or modified accrual basis of accounting Recognition requirements are addressed in paragraphs 17 through 21, after the measurement requirements. When the modified accrual basis is used, the amount recognized as OPEB expenditures may not be equal co annual OPEB cost. However, regardless of the amount recognized, paragraph 25 requires the disclosure of annual OPEB cost and, if applicable, the components of annual OPEB cost and net OPEB obligation balances.

(3) When the actuarial determination of the ARC is based on a projection of covered payroll for the period to which the ARC will apply, the payroll measure used may be the projected covered payroll, the budgeted pay roll, or the actual covered payroll for the year. Any of those measures of covered payroll, consistently applied, is acceptable for calculating annual OPEB cost and the net OPEB obligation, if any. Comparisons between the ARC and contributions made should be based on the same measure of covered payroll, consistently applied, whether that measure is projected, budgeted, or actual payroll The ARC does not include payments of OPEB-related debt. An OPEB-related debt is any long-term liability of an employer to an OPEB plan that at is not included in the ARC. Payments generally are made in accordance with installment contracts that usually include interest. Examples include contractually deferred contributions and amounts assessed to an employer upon joining a multiple-employer plan. Therefore, payments of OPEB-related debt are not included in annual OPEB cost.

(4) The net OPEB obligation may be either positive (a liability) or negative (an asset). The term net OPEB obligation, as used in this Statement, refers to either situation

(5) That is, the plan does not meet the criteria of paragraph 4 of Statement 43 for financial reporting as a trust, or equivalent arrangement, or the plan meets those criteria but has fewer than one hundred total plait members and, therefore, is eligible to use the alternative measurement method.

(6) For purposes of this Statement, the term balance sheet includes the government-wide and proprietary fund statements of net assets and the statement of fiduciary net as sets, required to be presented as components of the basic financial statements, as discussed in Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysts--for State and Local Governments.

(7) This provision and the parameters also are included in Statement 43.

(8) See Actuarial Standard of Practice No. 6 (ASOP 6), Measuring Retiree Group Benefit Obligations, revised edition (Washington, DC: Actuarial Standards Board, December 2001), or its successor documents.

(9) ASOP 6, as revised in December 2001, discusses the is sue as follows:

Use of Premium Rates--Although an analysis of the plan sponsor's actual claims experience is preferable, the actuary may use premium rates as the basis for initial per capita health care rates, with appropriate analysis and adjustment for the premium rate basis. The actuary who uses premium rates for this purpose should adjust them for changes in benefit levels, covered population, or program administration. The actuary should consider that the actual cost of health insurance varies by age ..., but the premium rates paid by the plan sponsor may not For example, the actuary may use a single unadjusted premium rate applicable to both active employees and non-Medicare eligible retirees if the actuary, has determined that the insurer would offer the same premium rate if only non-Medicare-eligible retirees were covered. |paragraph 3.4.5]

(10) Unprojected unit credit is acceptable for plans in which benefits already accumulated for years of service are not affected by future salary levels.

(11) See footnote 8.

(12) The total unfunded actuarial liability may be positive (actuarial accrued liability greater than the actuarial value of assets) or negative (actuarial accrued liability less than the actuarial value of assets, or funding excess). The term unfunded actuarial liability refers to either situation. Separate determination and amortization of the unfunded actuarial liability are not part of the aggregate actuarial cost method and are not required when that method is used with regard to the computation of the ARC; however, the disclosure requirements of paragraphs 25c, 25d(5)(d), and 26 are applicable when that method is used.

(13) As used in this Statement, the term employer's contributions means contributions made in relation to the ARC. The term does not include amounts attributable to plan members under the terms of the plan (for example, employee contributions transmitted to the plan by the employer and contributions paid by the employer on the employees' behalf that are not included in the ARC). Similarly, the net OPEB obligation should not include amounts attributable to plan members under the terms of the plan.

(14) Or in the actuarially determined required contributions of a cost-sharing employer.

(15) When more than one period is used in determining the ARC, the period for the adjustment to the ARC should be the period used to amortize net actuarial experience gains and losses. When the ARC is determined according to the frozen entry age, frozen attained age, or aggregate actuarial cost method, the period for the adjustment to theARC should be the average remaining service life of active plan members.

(16) An employer contributes to more than one OPEB plan if any portion of the total assets contributed to a plan administrator(s) is accumulated solely for the payment of benefits to certain classes of employees (for example, public safety employees) and may not legally be used to pay benefits to other classes of employees (for example, general employees) That portion of the total assets and the associated benefits constitutes a separate plan for which separate recognition by the employer is required, even if the assets are pooled by the plan administrator with other assets for investment purposes.

(17) For example, if a government enters a cost-sharing OPEB plan and, as a condition of entry, incurs an OPEB-related debt to the plan in the amount of the unfunded actuarial accrued liabilities for past service of its employees at the time of entry, the government should recognize the full amount of the debt in the year that it enters the plan.

(18) See footnote 17.

(19) Statement 43 includes the requirements for the notes to the financial statements (and schedules of RSI. if applicable) of OPEB plans reported as trust or agency funds in the employer's financial reports. When similar information is required by this Statement and Statement 43, the employer should present the disclosures in a manner that avoids unnecessary, duplication.

(20) Paragraph 26a requires sole and agent employers to present as RSI (schedule of funding progress) the same elements of information for the most recent actuarial valuation and the two preceding valuations.

(21) For sole employers that include the plan in the financial reporting entity (as a trust fund), presentation of information about the plan's funded status and funding progress as required for the plan by Statement 43 meets the requirements of this paragraph and paragraph 26. For agent employers, the requirements of this paragraph and paragraph 26 apply to the employer's individual plan The information should he presented even if the aggregate multiple-employer plan (all employers) is included as an OPEB trust fired in the employer's report and the required funded status and funding progress information is presented for the aggregate plan.

(22) If an employer also elects to include in the annual financial report pro forma quantitative information about postemployment healthcare benefits (for example, pro forma calculations of the ARC, annual OPEB cost, or the funded status of the plan) recalculated to take into consideration a funding limitation, that information should be presented as supplementary information.

(23) Until three actuarial valuations have been performed in accordance with the parameters, the required information should be presented for as many years as it is available. Retroactive application of this Statement is not required. However, as provided in paragraph 37, employers that have available actuarial information that was calculated using methods and assumptions that do not differ significantly from the parameters for periods prior to the implementation date may elect to apply the measurement requirements of this Statement retroactively. Those employers may be able to provide information in accordance with the parameters for the prior three actuarial valuations when this Statement is first implemented.

(24) See footnote 21.

(25) Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, discusses the requirements for the notes to the financial statements of defined contribution plans that are reported as trust funds in the employer's financial reports. When similar information is required by this Statement and Statement 25, the employer should present the disclosures in a manner that avoids unnecessary duplication.

(26) Statement No. 24, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance, provides standards for recognizing payments made on a government's behalf by another entity.

(31) The procedures described in paragraph 35d(2) would be applied only in cases in which retirees age 65 or older are included in a single, blended premium rate assessed by the insurer or service provider. If separate premium rates are assessed for retirees age 65 or older, preparers would follow the steps in paragraph 35d(1) for age-adjusting blended premiums for under age 65 and would use the separately assessed premium rates (without additional age adjustment) for age 65 or older.

(32) Actuarial Standard of Practice No 4 may be obtained from the Actuarial Standards Board, 1100 Seventeenth Sneer, NW, 7th Floor, Washington, DC 20036.

Ethics Interpretation

Ethics interpretation and rulings are promulgated by the executive committee of the professional ethics division to provide guidelines as to the scope and application of the rules but are not intended to limit such scope or application. Publication of an interpretation or ethics ruling in the Journal of Accountancy constitutes notice to members. A member who departs from interpretations or rulings shall have the burden of justifying such departure in any disciplinary hearing.

(The Professional Ethics Executive Committee has made editorial revisions to an interpretation under Rule 101 of the Code of Professional Conduct [AICPA Professional Standards, ET section 101.05] to clarify the interpretation. The remainder of the interpretation is unchanged. Added text is in boldface italics; deleted text is struck through.)

INTERPRETATION 101-3 UNDER RULE OF CONDUCT 101

.05 101-3--Performance of nonattest services. Before a member or his or her firm ("member") performs nonattest services (for example, tax or consulting services) for an attest client, (4) the member should determine that the requirements described in this interpretation have been met. In cases where the requirements have not been met during the period of the professional engagement or the period covered by the financial statements, the member's independence would be impaired.

Engagements Subject to Independence Rules of Certain Regulatory Bodies

This interpretation requires compliance with independence regulations of authoritative regulatory bodies (such as the Securities and Exchange Commission [SEC], the General Accounting Office [GAO], the Department of Labor [DOL], and state boards of accountancy) where a member performs nonattest services for an attest client and is required to be independent of the client under the regulations of the applicable regulatory body. Accordingly, failure to comply with the nonattest services provisions contained in the independence rules of the applicable regulatory body that are more restrictive than the provisions of this interpretation would constitute a violation of this interpretation.

General Requirements for Performing Nonattest Services

1. The member should not perform management functions or make management decisions for the attest client. However, the member may provide advice, research materials, and recommendations to assist the client's management in performing its functions and making decisions.

2. The client must agree to perform the following functions in connection with the engagement to perform nonattest services:

a. Make all management decisions and perform all management functions;

b. Designate a competent employee, preferably within senior management, to oversee the services;

c. Evaluate the adequacy and results of the services performed;

d. Accept responsibility for the results of the services; and

e. Establish and maintain internal controls, including monitoring ongoing activities.

The member should be satisfied that the client will be able to meet all of these criteria and make an informed judgment on the results of the member's nonattest services, in assessing the competency of the client's designated employee, the member should be satisfied that such individual understands the services to be performed sufficiently to oversee them. In cases where the client is unable or unwilling to assume these responsibilities (for example, the client does not have an individual with the necessary competence to oversee the nonattest services provided, or is unwilling to perform such functions due to lack of time or desire), the member's provision of these services would impair independence.

3. Before performing nonattest services, the member should establish and document in writing (5) or her understanding with the client (board of directors, audit committee, or management, as appropriate in the circum stances) regarding the following:

a. Objectives of the engagement

b. Services to be performed

c. Client's acceptance of its responsibilities

d. Member's responsibilities

e. Any limitations of the engagement The documentation requirement does not apply to:

a. Certain routine activities performed by the member such as providing advice and responding to the client's technical questions as part of the normal client-member relationship.

b. Nonattest services performed prior to January 1, 2005.

c. Nonattest services performed prior to the client becoming an attest client. (6)

General Activities

The following are some general activities that would impair a member's independence:

* Authorizing, executing, or consummating a transaction, otherwise exercising authority on behalf of a client, or having the authority to do so

* Preparing source documents, (67) in electronic or other form, evidencing the occurrence of a transaction

* Having custody of client assets

* Supervising client employees in the performance of their normal recurring activities

* Determining which recommendations of the member should be implemented

* Reporting to the board of directors on behalf of management

* Serving as a client's stock transfer or escrow agent, registrar, general counsel or its equivalent

                               Probability
                                   of       Probability
                                Remaining       of
                                Employed     Remaining    Expected
                  Probability     from       Employed      Future
     Probability      of        Earliest     from Age      Working
         of       Remaining    Entry Age    Shown to     Lifetime
     Termination   Employed        to         Assumed    for Assumed
       in Next        for       Beginning   Retirement   Retirement
        Year       Next Year     of Year        Age          Age
Age      (a)          (b)          (c)          (d)          (e)

Column a: For each age (n) from the earliest entry age to assumed
retirement age, list the age-based probabilities of termination in
the next year for the covered group.

Column b: Compute the probability at each age of remaining employed
for the next year. This value should be calculated as 1-a.

Column c: Set the initial value in column c to equal 1.000. For
each subsequent age (n), column c values should be calculated as:
[c.sub.(n-1)] x [b.sub.(n-1)].

Column d: For each age (n), these values should be calculated as the
product of the values in column b from age n to the year prior to the
assumed retirement age.

Column e: These values should be calculated as the sum of c from age
(n) to the year prior to the assumed retirement age, divided by the
value of c at age (n). At the assumed retirement age, this value
should be set to 0.

Table 1-Probability of Remaining Employed until Assumed
Retirement Age, by Age (27)--Default Values (28)

Age                        Assumed Retirement Age

      50 and over     49       48       47       46       45

20       0.296      0.300    0.304    0.309    0.314    0.319
21       0.321      0.326    0.330    0.335    0.340    0.346
22       0.349      0.354    0.359    0.364    0.370    0.376
23       0.379      0.384    0.389    0.395    0.401    0.408
24       0.410      0.416    0.421    0.428    0.434    0.441
25       0.440      0.446    0.453    0.460    0.467    0.474
26       0.472      0.478    0.485    0.493    0.500    0.508
27       0.503      0.510    0.517    0.525    0.533    0.542
28       0.534      0.541    0.549    0.558    0.566    0.575
29       0.564      0.572    0.580    0.589    0.598    0.607
30       0.593      0.602    0.610    0.620    0.629    0.639
31       0.622      0.631    0.640    0.650    0.660    0.670
32       0.650      0.659    0.669    0.679    0.689    0.700
33       0.677      0.687    0.696    0.707    0.718    0.730
34       0.703      0.713    0.723    0.734    0.745    0.758
35       0.729      0.739    0.749    0.761    0.772    0.785
36       0.753      0.764    0.775    0.787    0.799    0.812
37       0.777      0.788    0.799    0.811    0.824    0.837
38       0.799      0.811    0.822    0.835    0.847    0.861
39       0.821      0.832    0.844    0.857    0.870    0.884
40       0.841      0.853    0.865    0.878    0.891    0.906
41       0.860      0.873    0.885    0.899    0.912    0.927
42       0.879      0.891    0.904    0.918    0.932    0.947
43       0.896      0.909    0.922    0.936    0.950    0.965
44       0.912      0.925    0.938    0.953    0.967    0.983
45       0.928      0.941    0.955    0.969    0.984    1.000
46       0.943      0.957    0.970    0.985    1.000    1.000
47       0.958      0.971    0.985    1.000    1.000    1.000
48       0.972      0.986    1.000    1.000    1.000    1.000
49       0.986      1.000    1.000    1.000    1.000    1.000
50+    For ages 50+, the probability of remaining
       employed until retirement age is 1.000.

(27) Age could be the retry age or the attained (current) age of the
plan member, depending upon the calculation being made.

(28) These default probabilities were adapted from data maintained by
the U.S. Office of Personnel Management regarding the experience of the
employee group covered by the Federal Employees Retirement System.

Table 2--Expected Future Working Lifetimes of Employees,
by Age (29)--Default Values (30)

Age                        Assumed Retirement Age

       75    74    73    72    71    70    69    68    67    66

20     22    22    21    21    21    21    20    20    20    19
21     23    23    22    22    22    21    21    21    20    20
22     24    23    23    23    22    22    22    21    21    21
23     25    24    24    24    23    23    22    22    22    21
24     26    25    25    24    24    24    23    23    22    22
25     26    26    26    25    25    24    24    23    23    23
26     27    27    26    26    25    25    24    24    24    23
27     28    28    27    27    26    26    25    25    24    24
28     29    28    28    27    27    26    25    25    24    24
29     29    29    28    28    27    26    26    25    25    24
30     30    29    29    28    27    27    26    26    25    24
31     30    30    29    28    28    27    26    26    25    25
32     30    30    29    28    28    27    27    26    25    25
33     31    30    29    29    28    27    27    26    25    25
34     31    30    29    29    28    27    27    26    25    24
35     31    30    29    29    28    27    27    26    25    24
36     31    30    29    29    28    27    26    26    25    24
37     31    30    29    28    28    27    26    25    25    24
38     31    30    29    28    27    27    26    25    24    23
39     30    30    29    28    27    26    26    25    24    23
40     30    29    29    28    27    26    25    24    23    23
41     30    29    28    27    26    26    25    24    23    22
42     30    29    28    27    26    25    24    23    22    22
43     29    28    27    26    25    25    24    23    22    21
44     29    28    27    26    25    24    23    22    21    20
45     28    27    26    25    24    23    22    22    21    20
46     27    27    26    25    24    23    22    21    20    19
47     27    26    25    24    23    22    21    20    19    18
48     26    25    24    23    22    21    20    19    19    18
49     26    25    24    23    22    21    20    19    18    17
50+   For ages 50+, expected future working lifetime
      equals assumed retirement age minus age.

Age                        Assumed Retirement Age

       65    64    63    62    61    60    59    58    57    56

20     19    19    19    18    18    18    17    17    17    16
21     20    19    19    19    18    18    18    17    17    17
22     20    20    20    19    19    19    18    18    17    17
23     21    21    20    20    19    19    19    18    18    18
24     22    21    21    20    20    19    19    19    18    18
25     22    22    21    21    20    20    19    19    19    18
26     23    22    22    21    21    20    20    19    19    18
27     23    23    22    21    21    20    20    19    19    18
28     23    23    22    22    21    21    20    20    19    19
29     24    23    22    22    21    21    20    20    19    19
30     24    23    23    22    21    21    20    20    19    18
31     24    23    23    22    21    21    20    20    19    18
32     24    23    23    22    21    21    20    19    19    18
33     24    23    23    22    21    21    20    19    18    18
34     24    23    22    22    21    20    20    19    18    17
35     24    23    22    21    21    20    19    18    18    17
36     23    23    22    21    20    20    19    18    17    17
37     23    22    22    21    20    19    18    18    17    16
38     23    22    21    20    19    19    18    17    16    16
39     22    21    21    20    19    18    17    17    16    15
40     22    21    20    19    18    18    17    16    15    14
41     21    20    20    19    18    17    16    15    14    14
42     21    20    19    18    17    16    15    15    14    13
43     20    19    18    17    17    16    15    14    13    12
44     19    19    18    17    16    15    14    13    12    11
45     19    18    17    16    15    14    13    12    11    10
46     18    17    16    15    14    13    12    11    11    10
47     17    16    15    14    13    13    12    11    10     9
48     17    16    15    14    13    12    11    10     9     8
49     16    15    14    13    12    11    10     9     8     7

Age                        Assumed Retirement Age

       55    54    53    52    51    50    49    48    47    46    45

20     16    16    16    15    15    15    14    14    14    13    13
21     16    16    16    15    15    15    15    14    14    14    13
22     17    16    16    16    15    15    15    14    14    14    13
23     17    17    16    16    16    15    15    14    14    14    13
24     17    17    17    16    16    15    15    15    14    14    13
25     18    17    17    16    16    15    15    15    14    14    13
26     18    17    17    16    16    16    15    15    14    14    13
27     18    17    17    16    16    15    15    14    14    13    13
28     18    17    17    16    16    15    15    14    14    13    13
29     18    17    17    16    16    15    15    14    13    13    12
30     18    17    17    16    15    15    14    14    13    12    12
31     18    17    16    16    15    15    14    13    13    12    11
32     17    17    16    15    15    14    14    13    12    11    11
33     17    16    16    15    14    14    13    12    12    11    10
34     17    16    15    15    14    13    13    12    11    10    10
35     16    16    15    14    13    13    12    11    10    10     9
36     16    15    14    14    13    12    11    11    10     9     8
37     15    15    14    13    12    11    11    10     9     8     7
38     15    14    13    12    12    11    10     9     8     7     7
39     14    13    12    12    11    10     9     8     7     7     6
40     13    13    12    11    10     9     8     7     7     6     5
41     13    12    11    10     9     8     8     7     6     5     4
42     12    11    10     9     8     8     7     6     5     4     3
43     11    10     9     8     8     7     6     5     4     3     2
44     10     9     9     8     7     6     5     4     3     2     1
45      9     9     8     7     6     5     4     3     2     1     0
46      9     8     7     6     5     4     3     2     1     0     0
47      8     7     6     5     4     3     2     1     0     0     0
48      7     6     5     4     3     2     1     0     0     0     0
49      6     5     4     3     2     1     0     0     0     0     0

(29) See footnote 27.

(30) See footnote 28.

Table 3--Default Factors for Calculating
Age-Adjusted Premiums for Ages under 65

Average
Age of
 Plan
Members       Midpoint Age (from paragraph 35d(1)(e))

           52     53     54     55     56     57     58

25        2.88   3.00   3.12   3.24   3.37   3.51   3.65
26        2.77   2.88   3.00   3.12   3.24   3.37   3.51
27        2.67   2.77   2.88   3.00   3.12   3.24   3.37
28        2.56   2.67   2.77   2.88   3.00   3.12   3.24
29        2.46   2.56   2.67   2.77   2.88   3.00   3.12
30        2.37   2.46   2.56   2.67   2.77   2.88   3.00
31        2.28   2.37   2.46   2.56   2.67   2.77   2.88
32        2.19   2.28   2.37   2.46   2.56   2.67   2.77
33        2.11   2.19   2.28   2.37   2.46   2.56   2.67
34        2.03   2.11   2.19   2.28   2.37   2.46   2.56
35        1.95   2.03   2.11   2.19   2.28   2.37   2.46
36        1.87   1.95   2.03   2.11   2.19   2.28   2.37
37        1.80   1.87   1.95   2.03   2.11   2.19   2.28
38        1.73   1.80   1.87   1.95   2.03   2.11   2.19
39        1.67   1.73   1.80   1.87   1.95   2.03   2.11
40        1.60   1.67   1.73   1.80   1.87   1.95   2.03
41        1.54   1.60   1.67   1.73   1.80   1.87   1.95
42        1.48   1.54   1.60   1.67   1.73   1.80   1.87
43        1.42   1.48   1.54   1.60   1.67   1.73   1.80
44        1.37   1.42   1.48   1.54   1.60   1.67   1.73
45        1.32   1.37   1.42   1.48   1.54   1.60   1.67
46        1.27   1.32   1.37   1.42   1.48   1.54   1.60
47        1.22   1.27   1.32   1.37   1.42   1.48   1.54
48        1.17   1.22   1.27   1.32   1.37   1.42   1.48
49        1.12   1.17   1.22   1.27   1.32   1.37   1.42
50        1.08   1.12   1.17   1.22   1.27   1.32   1.37
51        1.04   1.08   1.12   1.17   1.22   1.27   1.32
52        1.00   1.04   1.08   1.12   1.17   1.22   1.27
53        0.96   1.00   1.04   1.08   1.12   1.17   1.22
54        0.92   0.96   1.00   1.04   1.08   1.12   1.17
55        0.89   0.92   0.96   1.00   1.04   1.08   1.12
56        0.85   0.89   0.92   0.96   1.00   1.04   1.08
57        0.82   0.85   0.89   0.92   0.96   1.00   1.04
58        0.79   0.82   0.85   0.89   0.92   0.96   1.00
59        0.76   0.79   0.82   0.85   0.89   0.92   0.96
60        0.73   0.76   0.79   0.82   0.85   0.89   0.92

Average
Age of
 Plan
Members   Midpoint Age (from paragraph 35d(1)(e))

           59     60     61     62     63     64

25        3.79   3.95   4.10   4.27   4.44   4.62
26        3.65   3.79   3.95   4.10   4.27   4.44
27        3.51   3.65   3.79   3.95   4.10   4.27
28        3.37   3.51   3.65   3.79   3.95   4.10
29        3.24   3.37   3.51   3.65   3.79   3.95
30        3.12   3.24   3.37   3.51   3.65   3.79
31        3.00   3.12   3.24   3.37   3.51   3.65
32        2.88   3.00   3.12   3.24   3.37   3.51
33        2.77   2.88   3.00   3.12   3.24   3.37
34        2.67   2.77   2.88   3.00   3.12   3.24
35        2.56   2.67   2.77   2.88   3.00   3.12
36        2.46   2.56   2.67   2.77   2.88   3.00
37        2.37   2.46   2.56   2.67   2.77   2.88
38        2.28   2.37   2.46   2.56   2.67   2.77
39        2.19   2.28   2.37   2.46   2.56   2.67
40        2.11   2.19   2.28   2.37   2.46   2.56
41        2.03   2.11   2.19   2.28   2.37   2.46
42        1.95   2.03   2.11   2.19   2.28   2.37
43        1.87   1.95   2.03   2.11   2.19   2.28
44        1.80   1.87   1.95   2.03   2.11   2.19
45        1.73   1.80   1.87   1.95   2.03   2.11
46        1.67   1.73   1.80   1.87   1.95   2.03
47        1.60   1.67   1.73   1.80   1.87   1.95
48        1.54   1.60   1.67   1.73   1.80   1.87
49        1.48   1.54   1.60   1.67   1.73   1.80
50        1.42   1.48   1.54   1.60   1.67   1.73
51        1.37   1.42   1.48   1.54   1.60   1.67
52        1.32   1.37   1.42   1.48   1.54   1.60
53        1.27   1.32   1.37   1.42   1.48   1.54
54        1.22   1.27   1.32   1.37   1.42   1.48
55        1.17   1.22   1.27   1.32   1.37   1.42
56        1.12   1.17   1.22   1.27   1.32   1.37
57        1.08   1.12   1.17   1.22   1.27   1.32
58        1.04   1.08   1.12   1.17   1.22   1.27
59        1.00   1.04   1.08   1.12   1.17   1.22
60        0.96   1.00   1.04   1.08   1.12   1.17

Table 4--Default Factors for Calculating Age-Adjusted
Premiums for Ages 65 or Older (No Medicare Coordination)

Average
Age of
Plan
Members   Midpoint Age (from paragraph 35d(2)(f))

           65     66     67     68     69     70

25        4.75   4.90   5.04   5.20   5.35   5.51
26        4.57   4.71   4.85   5.00   5.15   5.30
27        4.40   4.53   4.66   4.80   4.95   5.10
28        4.23   4.35   4.48   4.62   4.76   4.90
29        4.06   4.19   4.31   4.44   4.57   4.71
30        3.91   4.03   4.15   4.27   4.40   4.53
31        3.76   3.87   3.99   4.11   4.23   4.36
32        3.61   3.72   3.83   3.95   4.07   4.19
33        3.47   3.58   3.69   3.80   3.91   4.03
34        3.34   3.44   3.54   3.65   3.76   3.87
35        3.21   3.31   3.41   3.51   3.62   3.72
36        3.09   3.18   3.28   3.38   3.48   3.58
37        2.97   3.06   3.15   3.25   3.34   3.41
38        2.86   2.94   3.03   3.12   3.21   3.31
39        2.75   2.83   2.91   3.00   3.09   3.18
40        2.64   2.72   2.80   2.89   2.97   3.06
41        2.54   2.61   2.69   2.77   2.86   2.94
42        2.44   2.51   2.59   2.67   2.75   2.83
43        2.35   2.42   2.49   2.56   2.64   2.72
44        2.26   2.32   2.39   2.47   2.54   2.62
45        2.17   2.24   2.30   2.37   2.44   2.52
46        2.09   2.15   2.21   2.28   2.35   2.42
47        2.01   2.07   2.13   2.19   2.26   2.33
48        1.93   1.99   2.05   2.11   2.17   2.24
49        1.85   1.91   1.97   2.03   2.09   2.15
50        1.78   1.84   1.89   1.95   2.01   2.07
51        1.72   1.77   1.82   1.87   1.93   1.99
52        1.65   1.70   1.75   1.80   1.86   1.91
53        1.59   1.63   1.68   1.73   1.78   1.84
54        1.52   1.57   1.62   1.67   1.72   1.77
55        1.47   1.51   1.56   1.60   1.65   1.70
56        1.41   1.45   1.50   1.54   1.59   1.63
57        1.36   1.40   1.44   1.48   1.53   1.57
58        1.30   1.34   1.38   1.42   1.47   1.51
59        1.25   1.29   1.33   1.37   1.41   1.45
60        1.20   1.24   1.28   1.32   1.36   1.40

Average
Age of
Plan                Midpoint Age
Members      (from paragraph 35d(2)(f))

           71     72     73     74     75

25        5.68   5.85   6.02   6.20   6.39
26        5.46   5.62   5.79   5.97   6.14
27        5.25   5.41   5.57   5.74   5.91
28        5.05   5.20   5.35   5.52   5.68
29        4.85   5.00   5.15   5.30   5.46
30        4.67   4.81   4.95   5.10   5.25
31        4.49   4.62   4.76   4.90   5.05
32        4.31   4.44   4.58   4.71   4.86
33        4.15   4.27   4.40   4.53   4.67
34        3.99   4.11   4.23   4.36   4.49
35        3.84   3.95   4.07   4.19   4.32
36        3.69   3.80   3.91   4.03   4.15
37        3.55   3.65   3.76   3.88   3.99
38        3.41   3.51   3.62   3.73   3.84
39        3.28   3.38   3.48   3.58   3.69
40        3.15   3.25   3.34   3.44   3.55
41        3.03   3.12   3.22   3.31   3.41
42        2.91   3.00   3.09   3.18   3.28
43        2.80   2.89   2.97   3.06   3.15
44        2.69   2.78   2.86   2.94   3.03
45        2.59   2.67   2.75   2.83   2.92
46        2.49   2.57   2.64   2.72   2.80
47        2.40   2.47   2.54   2.62   2.70
48        2.30   2.37   2.44   2.52   2.59
49        2.21   2.28   2.35   2.42   2.49
50        2.13   2.19   2.26   2.33   2.40
51        2.05   2.11   2.17   2.24   2.30
52        1.97   2.03   2.09   2.15   2.22
53        1.89   1.95   2.01   2.07   2.13
54        1.82   1.88   1.93   1.99   2.05
55        1.75   1.80   1.86   1.91   1.97
56        1.68   1.73   1.79   1.84   1.89
57        1.62   1.67   1.72   1.77   1.82
58        1.56   1.60   1.65   1.70   1.75
59        1.50   1.54   1.59   1.64   1.68
60        1.44   1.48   1.53   1.57   1.62

Table 5--Default Factors for Calculating Age-Adjusted
Premiums for Ages 65 or Older (with Medicare Coordination)

Average
Age of
Plan
Members   Midpoint Age (from paragraph 35d(2)(f))

           65     66     67     68     69     70

25        2.38   2.45   2.52   2.60   2.68   2.76
26        2.29   2.35   2.43   2.50   2.57   2.65
27        2.20   2.26   2.33   2.40   2.47   2.55
28        2.11   2.18   2.24   2.31   2.38   2.45
29        2.03   2.09   2.16   2.22   2.29   2.36
30        1.95   2.01   2.07   2.14   2.20   2.27
31        1.88   1.94   1.99   2.05   2.11   2.18
32        1.81   1.86   1.92   1.97   2.03   2.09
33        1.74   1.79   1.84   1.90   1.96   2.01
34        1.67   1.72   1.77   1.83   1.88   1.94
35        1.61   1.65   1.70   1.76   1.81   1.86
36        1.54   1.59   1.64   1.69   1.74   1.79
37        1.48   1.53   1.58   1.62   1.67   1.72
38        1.43   1.47   1.51   1.56   1.61   1.66
39        1.37   1.41   1.46   1.50   1.55   1.59
40        1.32   1.36   1.40   1.44   1.49   1.53
41        1.27   1.31   1.35   1.39   1.43   1.47
42        1.22   1.26   1.29   1.33   1.37   1.41
43        1.17   1.21   1.25   1.28   1.32   1.36
44        1.13   1.16   1.20   1.23   1.27   1.31
45        1.09   1.12   1.15   1.19   1.22   1.26
46        1.04   1.07   1.11   1.14   1.17   1.21
47        1.00   1.03   1.06   1.10   1.13   1.16
48        0.96   0.99   1.02   1.05   1.09   1.12
49        0.93   0.96   0.98   1.01   1.04   1.08
50        0.89   0.92   0.95   0.97   1.00   1.03
51        0.86   0.88   0.91   0.94   0.97   0.99
52        0.82   0.85   0.87   0.90   0.93   0.96
53        0.79   0.82   0.84   0.87   0.89   0.92
54        0.76   0.79   0.81   0.83   0.86   0.88
55        0.73   0.75   0.78   0.80   0.83   0.85
56        0.70   0.73   0.75   0.77   0.79   0.82
57        0.68   0.70   0.72   0.74   0.76   0.79
58        0.65   0.67   0.69   0.71   0.73   0.76
59        0.63   0.65   0.66   0.68   0.71   0.73
60        0.60   0.62   0.64   0.66   0.68   0.70

Average
Age of
Plan                 Midpoint Age
Members      (from paragraph 35d(2)(f))

           71     72     73     74     75

25        2.84   2.92   3.01   3.10   3.20
26        2.73   2.81   2.90   2.98   3.07
27        2.62   2.70   2.78   2.87   2.95
28        2.52   2.60   2.68   2.76   2.84
29        2.43   2.50   2.57   2.65   2.73
30        2.33   2.40   2.48   2.55   2.63
31        2.24   2.31   2.38   2.45   2.53
32        2.16   2.22   2.29   2.36   2.43
33        2.07   2.14   2.20   2.27   2.33
34        1.99   2.05   2.12   2.18   2.24
35        1.92   1.98   2.03   2.10   2.16
36        1.84   1.90   1.96   2.02   2.08
37        1.77   1.83   1.88   1.94   2.00
38        1.70   1.76   1.81   1.86   1.92
39        1.64   1.69   1.74   1.79   1.85
40        1.58   1.62   1.67   1.72   1.77
41        1.52   1.56   1.61   1.66   1.71
42        1.46   1.50   1.55   1.59   1.64
43        1.40   1.44   1.49   1.53   1.58
44        1.35   1.39   1.43   1.47   1.52
45        1.30   1.33   1.37   1.42   1.46
46        1.25   1.28   1.32   1.36   1.40
47        1.20   1.23   1.27   1.31   1.35
48        1.15   1.19   1.22   1.26   1.30
49        1.11   1.14   1.17   1.21   1.25
50        1.06   1.10   1.13   1.16   1.20
51        1.02   1.05   1.09   1.12   1.15
52        0.98   1.01   1.04   1.08   1.11
53        0.95   0.98   1.00   1.03   1.07
54        0.91   0.94   0.97   0.99   1.02
55        0.88   0.90   0.93   0.96   0.99
56        0.84   0.87   0.89   0.92   0.95
57        0.81   0.83   0.86   0.88   0.91
58        0.78   0.80   0.83   0.85   0.88
59        0.75   0.77   0.79   0.82   0.84
60        0.72   0.74   0.76   0.79   0.81

(4) A member who performs a compilation engagement for a client should modify the compilation report to indicate a lack of independence if the member does not meet all of the conditions set out in this interpretation when providing a nonattest service to that client (see Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statement [AR section 100.19]). [Footnote added, effective December 31, 2003. by the Professional Ethics Executive Committee.]

(5) An isolated and inadvertent failure to prepare the required documentation would not impair independence, provided that the member did establish the understanding with the client, the member documents the understanding promptly upon discovery of the failure to do so, and all other provisions of the interpretation are met. [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee.

(6) However, upon the acceptance of an attest engagement, the member should prepare written documentation demonstrating his or her compliance with the other general requirements during the period covered by the financial statements, including the requirement to establish an understanding with the client.

(7) Source documents are the documents upon which evidence of an accounting transaction are initially recorded Source documents are often followed by the creation of many additional records and reports, which do not, however, qualify as initial recordings. Examples of source documents are purchase orders, payroll time cards, and customer orders [Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered and revised, September 2003, by the Professional Ethics Executive Committee.]

(The remainder of Interpretation 101-3 is unchanged except for the footnotes, which have been renumbered. The interpretation in its entirety can be downloaded at http://www.aicpa.org/download/ethics/interp_revisions_Sept03.pdf.)

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