Printer Friendly

Final GASB guidance on pensions for employers: GASB Statement No. 68, issued in June 2012, will primarily affect employers that participate in defined benefit pension plans. It will also change accounting and financial reporting for non-employer contributors in special funding situations.

In June 2012, the Governmental Accounting Standards Board (GASB) issued its much anticipated final standard on employer accounting and financial reporting for pensions. GASB Statement No. 68, Accounting and Financial Reporting for Pensions, is scheduled to be implemented starting with the fiscal year that will end June 30, 2015.The new guidance will primarily affect employers that participate in defined benefit pension plans. It will also change accounting and financial reporting for non-employer contributors in special funding situations.

SINGLE-EMPLOYER AND AGENT MULTIPLE-EMPLOYER DEFINED BENEFIT PLANS

In an agent multiple-employer plan, participating employers place their individual plans under centralized management. Stated differently, employers in an agent plan are really just "outsourcing" the management of their own individual plans. Accordingly, employers that participate in an agent plan use the same accounting and financial reporting as employers that offer benefits through a single-employer plan.

GASB Statement No. 68 significantly alters accounting and financial reporting for employers in single-employer and agent plans with regard to each of the following:

* The amount to be reported as a liability by the employer.

* The amount to be reported as pension expense by the employer.

* The discount rate used to calculate the present value of the employer's obligation.

* The method used by the actuary to allocate costs.

* The technique used by the actuary to compensate for changes in assumptions and for differences between assumptions and actual results.

The amount to be reported as a liability by the employer. Currently, employers report a liability for pensions only if they fail to fully fund their actuarially determined annual required contribution (ARC). Under GASB Statement No. 68, they have to report a net pension liability (NPL) for the difference between the present value of the benefits earned to date by employees (total pension liability--TPL) and the accumulated resources held in trust to pay those benefits (plan net position--PNP).

Assume, for example, that Employer A has always paid the full amount of its ARC each year, but there is a $1,000 difference between its total pension liability and plan net position. Under current standards, Employer A would report no pension liability at all; under GASB Statement No. 68, that same employer would report a $1,000 net pension liability. (The change just described might be compared to the difference between a homeowner reporting a liability for arrears in monthly mortgage payments versus a homeowner reporting a liability for the unpaid balance of the underlying mortgage.)

The amount to be reported as pension expense by the employer. Currently, the amount that an employer reports as pension expense is based on what the actuary calculates that the employer should be contributing each period (that is, the employer's annual required contribution) to accumulate sufficient resources to pay pension benefits on a timely basis. Thus, the calculation of pension expense could be described as funding driven. In contrast, under GASB Statement No. 68, the calculation of employer pension expense will be driven by changes in the employer's net pension liability (and related deferred inflows and outflows of resources), rather than by funding.

The discount rate used to calculate the present value of the employer's obligation. As already mentioned, an employer's total pension liability represents the present value of projected benefits. The calculation of present value, of course, requires the use of a discount rate. Currently, the rate used for discounting is based on the estimated long-term investment yield for the plan. Under GASB Statement No. 68, a different approach would be required if projections indicated that plan resources would not be sufficient to pay benefits for current employees and retirees, which would involve the use of a less favorable discount rate.

The method used by the actuary to allocate costs. Actuaries use a variety of methods (entry age, frozen entry age, attained age, frozen attained age, projected unit credit, or aggregate) to calculate employer contributions for funding purposes. Currently, employers use the actuarial method they select for funding purposes for accounting and financial reporting, as well. Under GASB Statement No. 68, however, a single method will be used by all employers for accounting and financial reporting purposes (entry age), regardless of the method selected for funding.

The technique used by the actuary to compensate for changes in assumptions and differences between assumptions and actual results. A number of circumstances could affect the calculation of an employer's net pension liability:

* A change in benefit terms.

* A change in economic and demographic assumptions.

* A difference between an economic or demographic assumption and actual experience (including a difference between expected and actual investment returns).

Currently, the net effect of any of these items on an employer net pension obligation would be amortized over a period not to exceed 30 years. Under GASB Statement No. 68, the effect will have to be recognized over a much shorter period, as follows:

* A change in benefit terms = recognize immediately.

* A change in an economic or demographic assumption--amortize over a closed period equal to the average remaining service period of plan members, including retirees (the "average remaining service life" of a retiree = 0 years).

* A difference between an economic or demographic assumption and actual experience--amortize over a closed period equal to the average remaining service period of plan members, including retirees.

* A difference between expected and actual investment returns--amortize over a closed five-year period.

COST-SHARING DEFINED BENEFIT PLANS

GASB Statement No. 68 also proposes significant changes in accounting and financial reporting for employers that participate in cost-sharing defined benefit pension plans.

Currently, such employers report a liability only if they fail to make their contractually required contribution to the plan. Under GASB Statement No. 68, employers in cost-sharing plans will have to report their proportionate share of the net pension liability for all employers that participate in the plan.

Also, employers that participate in cost-sharing defined benefit pension plans currently recognize pension expense based on their contractually required contribution to the plan. In contrast, under GASB Statement No. 68, such employers will have to report their proportionate share of total pension expense for all employers participating in the plan.

SPECIAL FUNDING SITUATIONS

A special funding situation occurs when one entity (for example, the state) is legally required to make pension contributions on behalf of the employees of another entity (for example, a school district) and:

* The non-employer alone is legally obligated to make contributions to the plan.

* The amount that must be contributed does not depend on events unrelated to pensions.

GASB Statement No. 68 will require that the non-employer contributor in a special funding situation recognize in its own financial statements its proportionate share of the net pension liability, pension expense, and pension-related deferred inflows and outflows of resources.

STEPHEN J. GAUTHIER is director of the GFOA's Technical Services Center in Chicago, Illinois, {deletethisline}
COPYRIGHT 2012 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2012 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:The Accounting Angle; Governmental Accounting Standards Board
Author:Gauthier, Stephen J.
Publication:Government Finance Review
Geographic Code:1USA
Date:Oct 1, 2012
Words:1123
Previous Article:SEC report makes case for muni oversight, despite opposition: the SEC completed its review of the municipal securities market and released its...
Next Article:Understanding local public finance in California (and everywhere else).
Topics:

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters