Project Pages

Postemployment Benefit Accounting and Financial Reporting

Primary Objective: The objective of this project is to consider the possibility of improvements to the existing standards of accounting and financial reporting for postemployment benefits—including pension benefits and other postemployment benefits (OPEB)—by state and local governmental employers and by the trustees, administrators, or sponsors of pension or OPEB plans. One objective of this project is to improve accountability, or the transparency of financial reporting, in regard to the financial effects of employers' commitments and actions related to pension benefits and OPEB. This objective would include improving the information provided to help financial report users assess the degree to which interperiod equity has been achieved. The other objective of this project is to improve the usefulness of information for decisions or judgments of relevance to the various users of the general-purpose external financial reports of governmental employers and pension or OPEB plans.

Status:

Invitation to Comment issued March 2009
Added to Research Agenda: January 2006
Added to Current Agenda: April 2008

Postemployment Benefit Accounting and Financial Reporting—Project Plan

Background: This project follows a research project approved by the Board in January 2006 to gather information regarding how effective the standards established for pension accounting and financial reporting—Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and Statement No. 27, Accounting for Pensions by State and Local Governmental Employers—have been in improving accountability and providing decision-useful information. The research project was conducted, in part, as a result of the Board's commitment to periodically reexamine its standards. The research project provided an opportunity to review how state and local governments and pension plans applied the requirements of Statements 25 and 27 and how financial reporting reflected the transactions and events affecting pensions from the issuance of those standards in 1996.

Conceptual Developments. Relevant conceptual points of reference not available when Statements 25 and 27 were developed include:

  • The definition of a liability in Concepts Statement No. 4, Elements of Financial Statements

  • The definition of communication methods—including recognition/display in basic financial statements, notes to basic financial statements, and required supplementary information (RSI)—in Concepts Statement No. 3, Communication Methods in General Purpose External Financial Statements That Contain Basic Financial Statements.

Other Pension Accounting Standards. Other pension standards identified by the project staff as part of the research include: 1

  • Financial Accounting Standards Board (FASB)—Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans, and Statement No. 87, Employers' Accounting for Pensions, as amended most recently by Statement No. 158, Employers' Accounting for Defined Benefit Pension Plans and Other Postretirement Plans

  • Federal Accounting Standards Advisory Board—Statement of Federal Financial Accounting Standards 5, Accounting for Liabilities of the Federal Government

  • International Public Sector Accounting Standards Board—International Public Sector Standard 25, Employee Benefits

  • International Accounting Standards Board—International Accounting Standard 19, Employee Benefits

  • ASB of the United Kingdom—Financial Reporting Standard 17, Retirement Benefits

  • Public Sector Accounting Board of the Canadian Institute of Chartered Accountants—Public Sector Accounting Handbook Section PS 3250, Retirement Benefits

  • Australian Accounting Standards Board (AASB)—AASB 119, Employee Benefits.

The following other standards setters also were identified as working on pension projects currently:

  • The FASB is engaged in the second phase of a pension project that produced FASB Statement 158 as the culmination of its first phase. Statement 158 requires employers in the U.S. private sector to recognize their accrued benefit obligation (currently measured as required by FASB Statement 87) on the balance sheet. In the second phase, the FASB is addressing other measurement, recognition, display, and disclosure issues. The FASB and the IASB also are engaged in a process of converging their standards.

  • As part of the Pro-active Accounting Activities in Europe initiative, the European Financial Reporting Advisory Group issued in January 2008 a Discussion Paper, The Financial Reporting of Pensions, developed under the leadership of the United Kingdom's ASB. The paper sets out views on how pension arrangements might best be reported and suggests broad principles that might be applied to all pension plans, including defined benefit, defined contribution, and increasingly common hybrid arrangements.

The project will draw upon the work of the various standards setters as furnishing useful contributions to the definition and analysis of issues and to the development of potential solutions consistent with the objectives of improving accountability and decision usefulness within the context of state and local governments, financial report users, and uses of financial information in the U.S. government environment.

Other Literature. Prominent in recent discussions of pension accounting issues in accounting and actuarial arenas has been a view of pensions reflecting the discipline of financial economics. Actuaries and financial analysts of that school of thought have expressed a distinctive analysis of pension benefits, the relationships among key parties having an interest in pension benefits, and the effects of accounting and financial reporting standards on decision making and the investment of plan assets. This view also has stimulated spirited response within the U.S. from some public pension actuaries that favor the traditional actuarial funding model.

State commissions, research groups, and consultants in various parts of the country have issued a number of studies of pension funding, governance, and other pension issues or problems that also may be useful as reference material for this project. The findings and recommendations of studies of this nature focus on particular facts and circumstances. Case-specific details may be helpful in analyzing accounting and financial reporting alternatives.

Accounting and Financial Reporting Issues: The scope of this project potentially includes issues (a) raised by participants in the pension accounting research project, (b) identified in literature on the subject, or (c) identified through the staff's review of transactions and other events affecting pensions, the application of existing standards by pension plans and employers, and the way that annual financial reports have reflected the effects of events in years since the effective dates of Statements 25 and 27. It also includes consideration of relevant conceptual developments by the Board subsequent to the issuance of Statements 25 and 27, in Concepts Statements 3 and 4. The project potentially will include consideration of a spectrum of potential approaches to pension accounting and the relative strengths and weaknesses of various approaches in addressing issues and achieving transparent and decision-useful financial reporting. Approaches will be considered within the context of the objectives and operating environment of governments and the various users and uses of reported financial information about pensions. The scope of the project also will include consideration of more specific issues and potential improvements related to measurement, recognition, and disclosure of pensions. Tentative decisions reached with regard to pensions also will be considered in relation to postemployment benefits generally, consistent with the objective of maintaining a common approach and similar standards for all postemployment benefits to the extent appropriate.

The following have been tentatively identified as potential major issues, subject to modification by the Board at checkpoints throughout the project:

Overall

  • What overall approach should be used in measuring the accrued benefit obligation?

Employer's Liability

  • What obligations associated with postemployment benefits meet the conceptual definition of a liability?

  • If determined to be a liability, should an employer's accrued benefit obligation be recognized in accrual-basis financial statements?

  • If the Board determines that an employer's accrued benefit obligation should be recognized in accrual-basis financial statements, in what manner should changes in the accrued benefit obligation from one financial report date to another be recognized in the financial statements:

    1. By immediate recognition of the total change as expense? If so, displayed in what way?

    2. By deferral and amortization of the total change or parts of the total change for expense recognition purposes? If so, (1) in what way, and (2) on what basis would recognition of costs be deferred to future periods?

Parameters

  • Should the parameter on benefits to be included in the projection of pension benefits be modified to include additional ad hoc cost-of-living adjustments if such ad hoc cost-of-living adjustments (COLAs) are substantively a part of the employment agreement?

  • Should parameters regarding the number and types of acceptable actuarial cost methods be kept the same or modified—and, if modified, how?

  • Should parameters related to maximum amortization periods and amortization methods be kept the same or modified—and, if modified, how? As a specific subset of that question, to what extent, if any, should deferral and amortization of the effects of retroactively applied benefit increases (ad hoc COLAs or other modifications of benefit terms) that are not substantively part of the employment agreement be permitted, and on what basis?

  • Should parameters regarding the basis for determination of the actuarial value of plan assets continue to require the use of a market-related value, or should the parameters be modified to require fair value?

  • Should parameters regarding the basis for determination of the discount rate continue to require the use of the long-term expected rate of return on assets, or should there be another basis (for example a current risk-free rate of return, the employer's borrowing rate, or some other)?

  • Is specific guidance needed in regard to the determination of an appropriate discount rate in circumstances in which an "excess earnings reserve," or "skim fund," is used—involving the allocation of earnings on plan assets above a stipulated benchmark to a separate net assets account as a basis for benefit increases or employer contribution reductions? 2

Changes in Accrued Benefit Obligations

  • Should the financial reporting by an employer include reporting of changes in accrued benefit obligations for pensions and OPEB by type? If so, what communication method and format should be used for reporting this information?

Disclosures

  • Should the standards require additional disclosures related to the nature, basis, and quantified effects of retroactively applied benefit increases that were not part of the employment agreement or were not previously included in the projection of pension benefits?

  • Should disclosures include information to help financial report users assess the sensitivity of reported measures (for example, total accrued benefit obligations or the annual required contribution of the employer(s)) to potential differences between actual experience and one or more key actuarial assumptions?

  • Should changes in actuarial methods used for accounting and financial reporting purposes be accounted for as changes in estimates or as changes of accounting policy? Should disclosure requirements include additional information about a significant change in actuarial method, including, for example, reasons, effects, or the plan's or employer's history of method changes?

  • Are there additional disclosures, disclosure modifications, or RSI that would improve accountability or the decision usefulness of financial reporting? Should the Board review and prioritize existing and proposed disclosures as a whole to pare down requirements to those most useful? Should disclosure requirements, illustrations, and terminology be reviewed to improve the overall clarity and user-friendliness of the communication of pension and OPEB information in financial reports?

Cost-Sharing Employers

  • Does the relationship between a cost-sharing employer and a cost-sharing multiple-employer plan sufficiently differ in economic substance from the relationship between a sole or agent employer and the plan in which it participates to support continuation of a distinctive employer accounting approach based on the contractually required contribution, rather than annual pension or OPEB cost?

The project would include consideration of potential issues related to small governments, including issues related to the cost of implementation, and issues related to special-purpose entities, including comparability of accounting and financial reporting among governmental entities versus comparability among publicly and privately owned entities engaged in the same types of economic activity.

Project History: Task force appointed in January 2009. Task force meeting scheduled for December 2009.

Work Plan:

May–July 2009:   Comment Period
July 2009:   Public hearing(s) and user forums
July 2009–May 2010:   Discussion of Invitation to Comment responses and next due process document
June 2010:   Issue next due process document
July–September 2010:   Comment Period

Postemployment Benefit Accounting and Financial Reporting—Recent Developments

Minutes of Teleconference, March 31, 2009

The Board reviewed and provided comments on a ballot draft of an Invitation to Comment on pension accounting and financial reporting issues. The Invitation to Comment includes seven chapters on key pension accounting and financial reporting issues. The Invitation to Comment will elicit feedback from readers through a series of questions at the end of each chapter. The Board primarily made suggestions to improve the understandability of the document. Because the Invitation to Comment is designed to present more than one view on the issues in a neutral manner, no tentative decisions on the issues were made.

The Board also reviewed and provided comments on a Plain-Language Supplement that is intended to be read by financial statement users in conjunction with the discussion of issues in the Invitation to Comment. The Plain-Language Supplement contains questions tailored to financial report users who are not also preparers, auditors, or actuaries asscociated with the financial reports.

Minutes of Meeting, March 10-12, 2009

The Board reviewed and provided comments on a preballot draft of a proposed Invitation to Comment on pension accounting and financial reporting. The proposed Invitation to Comment includes seven chapters on key pension accounting and financial reporting issues. The Invitation to Comment will elicit feedback from readers through a series of questions at the end of each chapter. The Board made primarily editorial suggestions with regard to the draft material. Because the Invitation to Comment is designed to present more than one view on the issues in a neutral manner, no tentative decisions on the issues were made.

The Board also reviewed and provided comments on a Plain-Language Supplement that is intended to be read by financial statement users in conjunction with the discussion of issues in the Invitation to Comment. The Plain-Language Supplement contains questions tailored to financial report users who are not also preparers or auditors of the financial reports.

Minutes of Meeting, January 27–29, 2009

The Board reviewed and provided comments on a draft of Chapter 5 of a proposed Invitation to Comment on pension accounting and financial reporting issues. As proposed, the chapter would focus on issues related to the use of actuarial methods in accounting measurement approaches that include amortization of pension costs, if the Board were to adopt such an approach. The Board made primarily editorial suggestions with regard to the draft material. Due to the neutral nature of the Invitation to Comment, no tentative decisions were made.

Minutes of Teleconference, January 6, 2009

The Board reviewed and provided comments on a draft of Chapter 7 of a proposed Invitation to Comment. As proposed, Chapter 7 would elicit feedback on issues related to financial reporting by pension plans. The Board made primarily editorial suggestions with regard to the draft. Because the Invitation to Comment will present issues in a neutral manner, no tentative decisions were reached.

Minutes of Meeting, December 16–18, 2008

The Board reviewed and provided comments on a draft of Chapter 6 of a proposed Invitation to Comment. As proposed, Chapter 6 would elicit feedback on whether, and how, accounting and financial reporting should be different for the defined benefit pension plans of cost-sharing employers and those of sole or agent employers. The Board made primarily editorial suggestions with regard to the draft.

Minutes of Teleconference, November 25, 2008

The Board reviewed and provided comments on drafts of Chapters 3 and 4 of a proposed Invitation to Comment. As proposed, Chapter 3 would elicit feedback on liability and expense recognition by sole and agent employers, and Chapter 4 would focus on issues related to the measurement of the unfunded accrued benefit obligation by sole and agent employers. The Board made primarily editorial suggestions with regard to the draft. Because the Invitation to Comment will present issues in a neutral manner, no tentative decisions were reached.

Minutes of November 4-6, 2008 Meeting

The Board reviewed and provided comments on a draft of Chapter 2 of a proposed Invitation to Comment. As proposed, the chapter would focus on the objectives of financial reporting identified by the GASB, two fundamental processes related to pensions, and the relationship of financial reporting of information about those processes to the identified objectives of financial reporting. The Board made primarily editorial suggestions with regard to the draft material. No tentative decisions were reached.

Minutes of September 24–26, 2008 Meeting

The Board discussed a draft of an introductory chapter and an annotated outline of the proposed content of other chapters for inclusion in an Invitation to Comment on postemployment benefits accounting and financial reporting. With regard to the introductory material, the Board members tentatively agreed that the chapter should include a concise discussion of relevant pronouncements that have been issued by the GASB since the issuance of Statements No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and No. 27, Accounting for Pensions by State and Local Governmental Employers—including Concepts Statements related to communication methods and elements of financial statements and standards addressing other postemployment benefits (OPEB). In addition, the Board members tentatively reaffirmed a prior decision that although the project as a whole anticipates consideration of issues related to both pensions and OPEB, the Invitation to Comment will focus primarily on issues related to pensions. The Board also tentatively agreed that the introductory chapter of the Invitation to Comment should remind readers that (a) the Board has previously concluded, for reasons explained in the Basis for Conclusions of Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, that pension benefits and OPEB are conceptually similar and should be accounted for in the same manner; (b) conclusions reached by the Board with regard to pensions may have an effect on OPEB, as well, unless the Board finds compelling reasons for different treatment; and (c) the Board will consider the implications of similarities and differences between pensions and OPEB in that regard as a separate step in the project.

Minutes of September 9, 2008 Teleconference

The Board discussed potential questions for inclusion in one or more Invitations to Comment on postemployment benefits accounting and financial reporting. The Board also considered several alternative presentations of potential questions—some that would divide potential questions into two Invitations to Comment and others that would present some or all of the questions in a single Invitation to Comment. In addition, the Board preliminarily discussed whether a plain-language document should accompany the Invitation to Comment as a means of communicating with some members of the financial statement user community. The Board tentatively decided that a single Invitation to Comment should be issued and that the document should include discussion and questions related to both employer and plan reporting. Board members tentatively agreed that the questions in the Invitation to Comment should elicit feedback on:

  • The focus of accounting and financial reporting

  • Issues related to liability recognition and attributing the effects of transactions and other events to financial reporting periods

  • Approaches to measurement of assets and liabilities

  • Parameters (for example, actuarial methods, amortization periods, discount rates)

  • Accounting by employers in a cost-sharing plan

  • Other, plan-specific reporting issues.

In addition, Board members tentatively agreed that each question (or set of questions) should be preceded in the Invitation to Comment by succinct introductory material to place the questions into context for potential respondents. The Board also tentatively agreed that the project staff should pursue development of a plain-language document to supplement the Invitation to Comment.

Minutes of Meeting, August 19–21, 2008

The Board discussed the general content and structure of an Invitation to Comment on issues related to postemployment benefits accounting and financial reporting. Board members tentatively agreed that:

  • The scope of the Invitation to Comment should include a limited set of key accounting and financial reporting questions derived primarily from the broader set of potential project issues identified in the Technical Plan for the second third of 2008.

  • The questions presented should be introduced by a brief history of the project and a concise discussion of financial reporting objectives, concepts, and alternative approaches with regard to the transactions and other events under consideration as needed to provide context.

  • The questions included in the Invitation to Comment should focus primarily on pensions. However, conclusions that the Board may reach with regard to pensions during a later stage of the project (and considering the feedback on the Invitation to Comment) also may be applicable, at least in part, to other postemployment benefits (OPEB), based on the Board’s previous conclusion that pensions and OPEB are conceptually similar forms of postemployment benefits. Therefore, consideration should be given to the possibility of including questions about OPEB in the document and the way in which that might be done. Regardless of the approach taken to presenting issues and questions, the scope of the Invitation to Comment should be clearly communicated to readers of the document.

As an alternative to issuing a single Invitation to Comment, the Board also discussed the possibility of issuing two separate Invitations to Comment—one for issues related to accounting and financial reporting by employers and the other for issues related to accounting and financial reporting by plans.

No tentative decisions were reached. The Board requested that the staff explore the advantages and disadvantages of issuing one or two Invitations to Comment, outline potential question sequences for both scenarios, and provide staff recommendations for discussion at the September teleconference meeting.

Minutes of Meeting, July 8–10, 2008

As part of its Postemployment Benefits Accounting and Financial Reporting project, the GASB held an educational session to obtain information and views from proponents of two different approaches to the measurement of pension costs and obligations and expenses by employers. The purpose of the session was to assist Board members in considering issues related to accounting and financial reporting for pension benefits, within the scope of the project. The session was part of the Board’s regular public meeting for July 2008 and proceeded under Board meeting rules. Addressing issues associated with a financial-economics, or fair-value, approach to measurement for accounting purposes was Jeremy Gold of Jeremy Gold Pensions. Addressing issues associated with an actuarial-funding, or asset-accumulation, measurement approach for accounting purposes was Paul Angelo of the Segal Company. Each speaker explained his advocated approach and responded to questions from Board members and project staff at the Board table. Following the individual segments, there was discussion among the speakers, the Board members, and the project staff related to matters raised in the presentations. No deliberations were conducted by the Board and no decisions were made.

Minutes of Meeting, May 21–23, 2008

At this meeting, the Board held its initial discussion of issues related to the postemployment benefits accounting and financial reporting project. Materials for discussion were the GASB Research Findings—Pension Accounting and Financial Reporting by Plans and Employers Applying GASB Statements 25 and 27, 1996–2005—distributed prior to the April 2008 meeting—and an issue paper with further comments on pension measurement, recognition, and disclosure issues identified during the research as they relate to Phase 1 of the project. Board members were in general agreement with the plan to develop in Phase 1 an Invitation to Comment that tentatively will include:

  • An introduction discussing pensions and pension accounting in broad terms as a means of framing the various approaches presented and the questions posed regarding them

  • A series of proposed accounting approaches and the way that each would address various facets of accounting for pensions

  • Potential advantages and disadvantages of each approach, framed in terms of its effectiveness in achieving the financial reporting objectives of accountability and decision usefulness in the government environment

  • A series of questions to respondents.

The Board also expressed agreement with a suggestion to arrange, at the earliest opportunity, an educational session with public-pension experts presenting differing pension measurement approaches that may be characterized as a funding or asset accumulation approach and a fair value approach. This educational session will be held during the July GASB meeting.

Postemployment Benefit Accounting and Financial Reporting—Relevant Links

1 Some of these organizations set standards for the private sector, some for the public sector, and some for both.

2 The preceding issues relate to recognition and measurement within an accrual accounting context. Another potential issue area is modified accrual accounting for an employer's expenditures for pension benefits or OPEB.