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GASB's new pensions package.

The Governmental Accounting Standards Board has changed the way state and local governments account for pensions. Three new GASB statements will affect all governments, including public benefit corporations and authorities, utilities, hospitals and other health care providers, colleges and universities, school districts and public employee retirement systems.

Although each statement--GASB Statements no. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, no. 26, Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans, and no. 27, Accounting for Pensions by State and Local Governmental Employers--focuses on a different aspect of pension reporting, the three statements were developed as a "package" and include interrelated requirements and illustrations; plans and employers should be familiar with all three before implementing any one of them. This article highlights how the new standards depart from existing standards and examines the defined benefit pension provisions of Statements no. 25 and no. 27.


Most plans traditionally have used the same actuarial methods for accounting and funding. The new statements use the same approach but establish requirements (parameters) that funding methods must meet to be used for accounting (see exhibit, page 57). These parameters apply when measuring both a plan's funded status (Statement no. 25) and the annual pension cost (Statement no. 27) for employers with single-employer or agent multiple-employer plans (sole and agent employers). Although costsharing multiple-employer plans must apply the parameters, the pension expenditures or expense of participating employers are exempt.

When the funding methods and assumptions meet the parameters, the same methods and assumptions must be used for financial reporting. Because of this, a first step in understanding the implications of the new standards is to determine whether the plan's funding methods comply with the accounting parameters. If they do not, the entity must choose between making two calculations at each actuarial valuation-one for funding and one for accounting-or modifying the funding approach to meet the parameters. Using different methods for accounting and funding may result in mounting employer liabilities. But some entities' funding requirements are set by statute and may be difficult to change. Choosing the best course of action may require legal advice as well as accounting and actuarial expertise.

Many entities will find that their plan's funding methods meet the parameters or need only minor adjustments. For example, most plans use an acceptable actuarial cost method--a majority use entry age. Also, relatively few plans have remaining amortization periods greater than 40 years and a large proportion are between 20 and 30 years. However, some plans have longer periods, and actuarial advice will be needed to determine how the periods can be reduced before the effective date of Statement no. 25 (effective for periods beginning after June 15, 1996), and what the effect will be on the employers' contribution rates.

Another change that may affect contribution rates is the treatment of cost-of-living adjustments (COLAs). Many plans prefund COLAs in the same way as regular pension benefits. Others, however, finance certain types of COLAs on a pay-as-you-go basis, which is not acceptable for accounting. Sometimes the treatment of COLAs is constrained by statute, and prefunding may not be possible without new legislation.

Because time will be needed to determine whether these and other possible differences between curre'nt funding practices and the patameters can or should be resolved, it is important for CPAs and actuaries to consider what the impact of the new accounting requirements will be in specific plan and employer situations and to advise the plan's board of trustees and other decision-making authorities.


Statement no. 25 distinguishes between two kinds of plan information. Current financial information, including the fair value of investments, will be reported in two accrual-based financial statements: a statement of plan net assets and a statement of changes in plan net assets. These statements will not include actuarially determined information. That information will be reported in two six-year schedules that generally will be presented as required supplementary information. (However, plans may report one or more years of information from the required schedules in a separate financial statement or in the notes.) A schedule of funding progress will report dollar and ratio information about the plan's funded status--the actuarial value of assets compared with the actuarial accrued liability for benefits. This schedule will show whether the plan's funded status is improving or deteriorating. Because regular contributions by the employer are critical to improving funded status, a schedule of employer contributions will show whether the employer is paying all required contributions. The schedule will report the percentage of the employers' annual required contributions (ARC) that was actually paid to the plan.

What does Statement no. 25 change?

* Many plans will have to change from reporting plan investments at cost or amortized cost to reporting at fair value.

* It will end many plans' current practice of reporting actuarial reserves or an actuarial measure of the pension benefit obligation in the equity section of a balance sheet.

* All actuarially determined information--funded status and ARC--must be based on the plan's funding methods, provided it meets the accounting parameters. The current requirement to disclose a standardized measure of the pension benefit obligation has been eliminated.

* It streamlines the note disclosure required under GASB Statement no. 5, Disclosure of Pension Information by Public Employee Retirement Systems and State and Local Governmental Employers, which the new statements supersede.


Sole and agent employers. Statement no. 27 introduces some new acronyms into government pension accounting, such as APC and NPO (net pension obligation). The APC will be equal to the employer's required contribution for funding purposes, when the plan's funding is within the parameters. The NPO includes the employer's transition liability (asset), if any, for past under- or overfunding of contribution requirements between the effective date of Statement no. 5 (1987) and the effective date of Statement no. 27. The NPO, after the effective date, also will include the cumulative difference between annual pension cost and the employer's actual contribution payments.

Measurement Of annual pension cost. When there is no NPO (all required contributions have been paid), annual pension cost is equal to the ARC. This will be the case for many employers. However, to qualify as annual pension cost when there is an NPO, the ARC must be adjusted to include one year's interest on the NPO and exclude the fect on the ARC of actuarial amortization of past shortfalls in contributions. Amortization of shortfalls must be included in the ARC for funding purposes, but if it is not removed for accounting, pension cost will be overstated shortfalls are recognized in pension cost the year they occur). Adjustments must be made to each year's ARC until the NPO is fully paid. The adjustment requirements will be a change for many employers. Currently, liabilities may be carried for many years without adding interest or adjusting contribution requirements.

Recognition requirements. Sole and agent employers must measure and disclose annual pension costs on an accrual basis, even if the pension expenditures recognized in a governmental fund, on the modified accrual basis, are greater or less than annual pension cost. For governmental funds, the NPO is adjusted for any difference between the two amounts and reported in the general long-term debt account group. Proprietary funds universities that apply the AICPA audit guide model, and aH other entities that apply accrual-basis accounting, will recognize pension expense equal to annual pension cost and a fund liability (or asset) for any NPO. In addition to current-year information, employers must disclose annual pension cost, contributions and NPO balances for two prior years and the plan's funded status for the past three valuations.


Employers that participate in cost-sharing multiple-employer plans or defined contribution plans will recognize pension expenditures or expense equal to their contractually required contributions and a liability for unpaid contributions. These requirements are similar to current GASB standards and to those of Financial Accounting Standards Board Statement no. 87, Employers' Accouting for Pensions, for similar situations in the private sector. The transition liability, if any, should be equal to required contributions that are due and payable at the effective date. Disclosures include descriptive information about the plan and the required and actual contributions.


Statement no. 26 supplemen s St ement no. 25 by providin guidance on how defined benefit pension plans should report postemployment health care assets and benefits pending completion of the GASB's project on other postemployment benefits (OPEB). It requires separate financial statements and disclosures for postemployment health care net assets and changes in net assets, similar to the requirements of Statement no. 25 for pension plan assets. Supplementary information about the funded status of postemployment health care benefits and the employer's required and actual contributions is not required until the GASB establishes measurement standards in its OPEB project.

Interim guidance for employers was provided in 1990 in GASB Statement no. 12, Disclosure of Information on Postemployment Benefits Other Than Pension Benefits by State and Local Governmental Employers. Statement no. 12 still applies but is amended by Statement no. 27 to provide guidance for employers that elect to apply the pension parameters in accounting for postemployment health care, pending completion of the OPEB project. An exposure draft on OPEB accounting for plans and employers is expected in late 1996.

RELATED ARTICLE: Statement nos. 25 and 27 Pension Measurement Requirements

Actuarial valuations

Must occur at least every two years and the results must be applied within 12 months (24 months for biennial valuations) for plans and 24 months for employers. AR pension benefits in force at the actuarial valuation date are included, whether in plan terms or separate agreements (for example, COLAs).

Actuarial assumptions

Best estimate of individual assumptions and consistency of all assumptions, investment return assumptions (discount rates) based on estimated longterm investment yield for plan.

Actuarial cost method

Entry age, frozen entry age, attained age, frozen attained age, aggregate or projected unit credit.

Actuarial value of assets

Generally market related (market or market with 3-to-5-year averaging of short-term fluctuations).

Annual required contributions of employers

Must include normal (current service) cost and amortization of the plan's total unfunded actuarial liability (UAL).

Amortization period

Periods of up to 40 years will be acceptable for the first 10 years after the effective date of statement no. 25. After that periods cannot exceed 30 years. Significant decreases in UAL caused by changing actuarial methods must be amortized over at least 10 years.

Amortization method

Level dollar or level percentage of projected payroll, open or closed basis.

Contribution deficiencies or excess contributions

Difference between ARC and employer's actual contributions in relation to the ARC; actuarial amortization must begin at next valuation, unless settlement is expected within a year.


* GASB STATEMENT nos. 25, 26 and 27 are a package" of interrelated pension accounting requirements that will affect most government entities, including "special" entities, such as utilities, hospitals and universities.

* AS THE FIRST STEP TOWARD implementation, each plan and employer should determine whether the plan's funding methods meet the new "parameters" for reporting the plan's funded status and the employer's pension cost.

* STATEMENT no. 25 REQUIRES two financial statements and two supplementary schedules for defined benefit pension plans. It applies to pension trust funds of employers as well as separate plan reports. The financial statements will report current financial information about net assets, including the fair value of investments. Schedules will report the plan's funded status and the employer's required and actual contributions. Statement no. 25 is effective for periods beginning after June 15, 1996.

* SOLE AND AGENT EMPLOYERS are required by Statement no. 27 to measure and disclose annual pension cost on the accrual basis, and a net pension obligation (NPO) for any difference between pension cost and actual contributions. If there is no NPO, annual pension cost is equal to the employer's annual required contributions (ARC), calculated according to the parameters. When there is an NPO, the APC must be adjusted to qualify as pension cost. Statement no. 27 is effective for periods beginning after June 15, 1997.

* COST-SHARING EMPLOYERS and those with defined contribution plans will recognize pension expenditures or expense equal to their contractually required contributions and a liability for unpaid amounts.

* PLAN ASSETS HELD by pension plans for postemployment health care benefits must be reported in separate financial statements under Statement no. 26. Statement no. 26 is effective for periods beginning after June 15, t996.
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Article Details
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Title Annotation:Governmental Accounting Standards Board statements no. 25, 26 and 27
Author:Wardlow, Penelope S.
Publication:Journal of Accountancy
Date:Jul 1, 1995
Previous Article:Retirement plan options.
Next Article:Never fear change.

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