On June 27, 2011 the Governmental Accounting Standards Board (GASB) issued exposure drafts of two statements that will supersede existing guidance on financial reporting for defined benefit pension plans.
The proposed statements represent a major departure from existing financial reporting requirements. Most significant is the change in the manner of calculating the net pension liability for governments.
Under current accounting guidance, employers recognize a liability only to the extent that they have failed to make their annually required “principal payments” on their pension “debt.”
Under the new statements, the entire pension “debt” minus the assets set aside to pay this “debt” will be recorded as a liability. This will likely result in governments reporting substantially larger pension liabilities than in the past.
Financial Reporting For Pension Plans
The first proposed statement, Financial Reporting For Pension Plans, supersedes GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Notes Disclosures for Defined Contribution Plans, and GASB Statement No. 50, Pension Disclosures.
This exposure draft modifies the format of financial statements for plans, whether presented as stand-alone financial statements or as a pension trust fund within the financial statements of the plan sponsor.
Under this proposal, plans will present two statements—a statement of plan net position and a statement of changes in plan net position. In addition to assets and liabilities, the statement of plan net position will also include deferred inflows and outflows of resources, which are new financial statement elements that are described within GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position.
The statement also calls for various disclosure requirements for plan financial statements.
Finally, the statement mandates that required supplementary information (RSI) be presented for plans covering the past ten years. Current reporting standards require pension-related RSI to be presented for the past six years.
Accounting and Financial Reporting For Pensions
The second exposure draft, Accounting and Financial Reporting for Pensions, will supersede GASB Statement No. 27, Accounting for Pensions by State and Local Government Employers, as well as GASB Statement No. 50, Pension Disclosures.
This statement establishes the methodology to be used by governments to value and report the liability associated with their participation in a defined benefit pension plan.
The statement defines the term total pension liability, which represents the present value of the government’s obligation under the plan that is attributable to past service by employees.
As in the past, the total pension liability will be calculated for the government by an actuary. The statement requires that such a valuation be obtained at least once every two years.
Additionally, under existing guidance, governments may choose from several different actuarial methods for calculating this liability. However, the proposed statement requires that all governments use the same method (the entry age normal method using a level percentage of payroll) in order to promote consistency.
Finally, the statement outlines how the discount rate to be used in this calculation is determined and how cost of living adjustments are to be incorporated into the projection of future benefit payments.
Once the total pension liability has been calculated, the net position of the plan is subtracted from the total pension liability to arrive at the net pension liability for the plan. The net pension liability is the amount that the government must report as a liability within its government-wide financial statements and proprietary fund financial statements, as applicable.
Governmental fund financial statements will only report a net pension liability to the extent this liability is expected to be liquidated with current financial resources.
Additionally, under existing guidance, governments participating in cost-sharing plans are not required to present employer-specific actuarial data. Instead, they present actuarial data related to the plan in total.
Under the proposed statement, however, governments participating in cost-sharing plans will be required to report a net pension liability representing the government’s proportional share of the plan’s net pension liability.
The statement also specifies the portion of the net pension liability that will be reported as pension expense immediately, and the portion that will be reported as a deferred inflow or outflow of financial resources and recognized as pension expense in future years.
The statement also specifies the disclosures and RSI (again covering the past ten years) to be included in the financial statements of plan sponsors.
Both statements will be effective for periods beginning after June 15, 2012 for plans with net assets of $1 billion or more in the first fiscal year ending after June 15, 2010. All other plans and employers will implement the statements for periods beginning after June 15, 2013.
Comments in response to these exposure drafts are due September 30, 2011. The full text of the exposure drafts are available at www.gasb.org.
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