While the implementation of Governmental Accounting Standards Board (GASB) Statement No. 68 (Statement 68), Accounting and Financial Reporting for Pensions, is currently top-of-mind for many governments this year, the GASB continues to issue new statements that also will significantly impact financial reporting for governments. In particular, two recent statements addressing other post-employment benefits (OPEB) will dramatically change the way that OPEB is accounted for and presented within governmental financial statements.
The two new statements, GASB Statements No. 74 and 75, were approved by the GASB on June 2. These statements apply many of the concepts first introduced in GASB Statement No. 67 (Statement 67), Financial Reporting for Pension Plans, and Statement 68 to OPEB accounting.
GASB Statement No. 74 (Statement 74), Financial Reporting for Postemployment Benefit Plans Other Than Pensions, sets forth requirements for OPEB plan financial statements that are similar to the requirements set forth in Statement 67 for pension plan financial statements. Statement 74 requires two financial statements – a statement of fiduciary net position and a statement of changes in fiduciary net position – as well as various footnote disclosures including a description of the benefits provided and classes of members covered. Similar to Statement 67, Statement 74 does not require that the actuarially determined underfunded status of the plan be reported as a liability on the plan’s financial statements. However, the actuarially determined OPEB liability is required to be disclosed in the footnotes to the financial statements and required supplementary information (RSI), as well as the actuarial assumptions utilized in calculating the liability and various other ratios and disclosures of the composition of the OPEB liability. Additionally, RSI is to be presented for the past 10 years under Statement 74, as opposed to the past six years as is currently required.
Since the OPEB plans of many governments operate on a pay-as-you-go basis, meaning that no assets are set aside in a trust to pay OPEB benefits, Statement 74 will not affect as many governments as did Statement 67. However, for those governments who have established trust funds to pay OPEB benefits, Statement 74 will be applicable.
Statement 74 is effective for fiscal years beginning after June 15, 2016. The full text of Statement 74 is available here.
GASB Statement No. 75 (Statement 75), Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, focuses on the accounting for OPEB within employers’ financial statements. Statement 75 establishes accounting and financial reporting requirements for OPEB that are similar to the requirements set forth in Statement 68 for governments with defined benefit pension plans.
Similar to Statement 68, Statement 75 requires governments to report a liability on the face of the financial statements for OPEB. The “net OPEB liability” is calculated as the present value of projected OPEB benefit payments (the “total OPEB liability”) less the OPEB plan’s fiduciary net position, if any. This calculation mirrors the way that the net pension liability is calculated under Statement 68. Additionally, governments participating in a cost-sharing OPEB plan are required to recognize a liability for the government’s proportionate share of the plan’s net OPEB liability.
Governments with OPEB should be aware that the calculation of the net OPEB liability pursuant to Statement 75 will likely result in a substantially larger liability than is currently reported as a net OPEB obligation under GASB Statement No. 45. First of all, the net OPEB obligation as currently reported involves determining the actuarially-calculated contribution necessary for the current year, subtracting any benefits paid or plan contributions actually made, and adding the difference to the outstanding liability balance. Thus, under Statement 45, small increments were added to the net OPEB liability each year. By contract, the new net OPEB liability calculation will involve determining the much larger total pension liability (regardless of what year contributions will be made) and subtracting plan net position, resulting in a larger net liability. Secondly, as mentioned above, most OPEB plans operate on a pay-as-you-go basis, meaning there are no plan assets to net against the total OPEB liability when determining the net OPEB liability. At least when performing net pension liability calculations under Statement 68, the pension plan’s fiduciary net position helps to reduce the outstanding liability reported on the financial statements.
Statement 75 requires that actuarial valuations be performed at least once every two years to calculate the net OPEB liability. Plans with less than 100 active and inactive employees can utilize an alternative measurement method, instead of an actuarial valuation, to calculate the net OPEB liability.
Statement 75 also specifies which portions of the change in the net OPEB liability should be recognized as expenses of the current period, and which portions should be recognized as deferred inflows and outflows and amortized over future periods. Finally, Statement 75 requires various footnote disclosures and RSI, including the significant assumptions and inputs utilized in calculating the net OPEB liability, the components of the net OPEB liability, and other related ratios. Similar to Statement 74, RSI is required for the past 10 years.
Statement 75 is effective for fiscal years beginning after June 15, 2017. The full text of Statement 75 is available here.
Governments offering other post-employment benefits to their employees are encouraged to familiarize themselves with the provisions of Statements 74 and 75. In particular, governments should prepare to explain to members of their governing boards and citizens the reasons for the much larger net OPEB liability that will likely appear on their financial statements pursuant to the requirements of Statement 75.
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