Transcript Reporting Postemployment Benefits Other Than Pensions: AN

Basic Information about
GASB Statement 45
Karl Johnson
Project Manager
Governmental Accounting Standards Board
Norwalk, CT
International Association of Fire Fighters
Public Employee Forum on GASB Statement #45
Washington, DC, February 7, 2007
The views expressed are those of the speaker and are not official
representations of the Governmental Accounting Standards Board,
which expresses itself through written pronouncements issued after
extensive due process.
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What Is the GASB?
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An independent, professional standardsetting Board
Operates as a function of the Financial
Accounting Foundation—a private, NFP
foundation created to ensure continuity,
support, and independence to the FASB and
the GASB
Establishes generally accepting
accounting principles (GAAP) for
accounting and financial reporting by state
and local governmental entities
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Why the Board’s Sudden
Interest in Accounting for Retiree
Healthcare Benefits?
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Nothing sudden about it:
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The subject of “other postemployment benefits” (OPEB)
was first placed on the Board’s technical agenda for
research and development of transactions in 1987
GASB issued interim guidance related to OPEB reporting
in 1989, 1990, and 1994, but even then contemplated a
more comprehensive look at the subject (the OPEB Project
that produced Statements 43 and 45 in 2004)
Why was OPEB considered important from an
accounting and financial reporting perspective?
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Potential materiality, complex issues related to
measurement and recognition of costs and obligations
Inadequacy of pay-as-you-go accounting practice to
provide complete, decision useful information to financial
report users
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The OPEB Project
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Nov. 1994 —GASB Statements 25, 26, and 27 on
pension accounting issued
1995-1996—the staff and Board attempted a quick
adaptation of Statements 25 and 27 to OPEB, but ran
out of time (competing project priorities, including
Statement 34)
1999-2004—intensive, sustained work resumed on
OPEB issues, leading to issuance of Statements 43 and
45
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Settling on a basic approach (same as for pensions)
Adapting pension requirements to OPEB
Addressing Issues unique to OPEB (including alternative
measurement method for very small plans and implicit rate
subsidies)
Exposure Drafts (two required for Statement 45) and analysis of
respondents’ comments
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In a Nutshell:
GASB Statement 45 (for Employers)
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Subject: accounting and
reporting by employers for
their OPEB expenses and
obligations—most notably,
for retiree healthcare
benefits
Applies to all employers
that pay all or part of the
cost of the benefits,
including “implicit rate
subsidies”
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In a Nutshell:
GASB Statement 45 (for Employers)
(continued)
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Requires a change:
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From pay-as-you-go
accounting—in which expense
is not recognized until OPEB
obligations are finally paid in
years after retirement
To accrual-basis accounting–
in which expense is recognized
during years of active service
(for which OPEB is part of the
total compensation package)
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In a Nutshell:
GASB Statement 45 (for Employers)
(continued)
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Requires measurement and
disclosure of the total actuarial
accrued liabilities for past
service costs, the net unfunded
actuarial accrued liabilities after
subtracting plan assets, if any,
that have been set aside to pay
accrued benefits as they come
due, and the plan’s funded ratio
Requires actuarial valuations
every 2 or 3 years for accounting
and financial reporting purposes
(sooner if something major
changes)
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Objective of Statement 45
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To faithfully represent (reflect like a good, nondistorting mirror) the financial effects of the
underlying financial transaction that creates OPEB
The Board concluded that the underlying transaction
is an exchange transaction between an employer
and employees in which an employer:
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Acquires employee services, for which it
Pays or provides salaries, active-employee healthcare,
etc., and promises to pay or provide after employment a
pension and OPEB such as retiree healthcare, all as
components of a total compensation package
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Measurement Approach:
Broad Steps of Process to Develop Information
for Accrual Accounting and Financial Reporting
1. Project cash outflows for benefits
2. Discount projected benefits to present value
(PV)
3. Allocate the PV of projected benefits to
financial reporting periods using an
acceptable actuarial cost method and
amortization method
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How Allocated Portions of the PV of
Projected Benefits Affect Financial
Reporting
Amounts allocated to past periods ~ actuarial
accrued liabilities
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Disclosed in notes to financial statements
Also, an amount that would amortize the total AAL within an
acceptable period of years if paid as part of a regular funding
policy is included in the measurement of annual OPEB cost,
or expense
Amount allocated to current period ~ normal cost
(service cost)
•
The other principal component of annual OPEB cost
Amounts allocated to future periods ~ future
normal cost
•
Not reported—pertains to services that haven’t occurred yet
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Annual OPEB Cost and Net OPEB
Obligation: Illustration
(Employer in Year 2 of Applying Statement 45)
Normal cost (current service cost)
Amortization of the UAAL (for past services)
Annual required contribution (ARC)*
Interest on beginning net OPEB obligation*
ARC adjustment*
Annual OPEB cost* = expense
Actual employer contribution* (PAYGO method
of financing)
Increase in net OPEB obligation*
Net OPEB obligation—beginning*
Net OPEB obligation—ending*
$ 350,000
600,000
950,000
50,000
(58,500)
941,500
(250,000)
691,500
650,000
1,341,500
* The ARC, the annual OPEB cost and its components, actual
employer contributions, and changes in the net OPEB obligation
are required to be disclosed in the employer’s notes to the
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financial statements.
What Do the ARC and the Net OPEB
Obligation Tell Me as a Reader of the
Financial Report?
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The ARC expressed as a % of covered payroll
represents the level of employer contribution
effort that would be needed on a sustained,
consistent basis to cover normal cost and amortize
the UAAL over not more than 30 years:
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An indicator of the “size” of the employer’s commitment,
expressed in terms of the ongoing contribution effort required
to sustain it
An indicator of potential long-term demands on future
cash flows
The net OPEB obligation indicates whether since
implementation of Statement 45 an employer has
contributed less (more) than the ARC
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Funded Status Information:
Illustration (Two Employers)
Information Disclosed in Notes to Financial
Statements and Presented in RSI
Actuarial accrued liabilities (AAL) (a)
Actuarial value of plan assets (b)
Unfunded actuarial accrued
liabilities (UAAL) (a-b)
Funded ratio (b/a)
Covered payroll (c)
UAAL as a % of covered payroll (a-b/c)
Govt. A
Unfunded
(PAYGO)
Govt. B
Partially
Funded
$13,500,000
-0--
$13,500,000
9,000,000
13,500,000
0.0%
$7,600,000
177.6%
4,500,000
66.7%
$7,600,000
59.2%
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What Does the UAAL Tell Me as a
Reader of the Financial Report?
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The UAAL is the portion of the present value of projected
benefits attributed to past periods
It can be thought of as a measure of the value of
employee services that were received by the employer
and tax/rate payers or constituents in past periods but
not paid or funded
Other things being equal, the higher the UAAL, the
higher will be the following going forward:
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Amortization component of the ARC
The ARC
Annual OPEB cost, or expense
Demands on future cash flows, or budgets
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Disclosure of Actual Employer
Contributions as a Percentage of
Annual OPEB Cost
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A key factor affecting the funded status of the
benefits is the level of employer contributions
Accordingly, employers also should disclose for
each of the past three years the annual OPEB
cost, the percentage of annual OPEB cost
actually contributed, and the ending net OPEB
obligation
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Effective Dates and Transition
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Staggered implementation of Statement 45 based on a
government’s phase for implementing GASB 34:
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Phase 1 ($100M+ revenue)—first fiscal year beginning after Dec.
15, 2006
Phase 2 ($10M to < $100M revenue)—one year setback
Phase 3 (< $10M revenue)—two year setback
Earlier implementation is encouraged
 Employers may apply Statement 45 prospectively—that is,
may report zero beginning net OPEB obligation as of the
beginning of the year of implementation
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Concluding Comments
Implementation planning tasks may include, for example:
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Analyzing and classifying employee benefits offered
Gathering information about plan terms and covered group
Obtaining an initial actuarial valuation and absorbing the new
information it provides (a watershed event)
Considering how OPEB will be managed and accounted for going
forward:
 Initiating discussions and decision processes regarding variables
that can be managed to make or keep benefits sustainable
 If planning to fund, establishing a qualifying OPEB plan trust
 Separating active-employee and retiring healthcare benefits for
accounting purposes, if combined
 Working out issues related to fund structure, funds flows, and
accounting and financial report preparation
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Concluding Comments
(continued)
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In the end, the information that Statement 45 requires to
be developed and reported is intended to provide the
diverse users of governments’ financial reports:
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A more transparent accounting for employers’ costs and
obligations associated with OPEB
More decision-useful financial information to better inform
discussion and decision-making about important matters such as:
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Benefits and plan design
Cost sharing between the employer and plan members
The method of financing benefits
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Additional Resources
GASB website, www.gasb.org:
• OPEB fact sheet
• Plain language summary
• Summaries of standards
• Order information (Statements, Implementation
Guides, Technical Bulletins, etc.)
• A system for submitting technical accounting and
financial reporting questions to GASB’s professional
staff
Telephone (203) 847-0700
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