Project Pages

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: The Board reviewed a project prospectus at the April 2008 Board meeting and the Chairman added the Postemployment Benefit Accounting and Financial Reporting project to the Current Technical Agenda. Discussions will continue at the July meeting.

• Project Plan
• Recent Developments—UPDATED (06/10/08)

• Relevant Links

• Project staff:
  • Karl Johnson
  • Michelle Czerkawski
  • Katherine Cancro

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: As noted above, the Board added a project on pension accounting and reporting to the research agenda in January 2006. The research included reviews by project staff of pension plans' annual financial reports and of literature regarding pension accounting and reporting issues as well as surveys of pension plans, users of financial reports, and actuaries. In addition, in fall 2007, the staff conducted five meetings in which questions were posed for discussion among the participants in regard to pension accounting and financial reporting issues. These included a meeting of a project advisory committee of persons knowledgeable in the field of pensions—including preparers of employer and plan financial statements, auditors, actuaries, and users such as municipal bond analysts, legislative and oversight staff, and taxpayer groups—and four regional roundtables (in New York City, San Francisco, Chicago, and Austin) with similarly knowledgeable and diverse groups of participants.

Regional Roundtables. Among the issues discussed at the advisory committee meeting and regional roundtables were:

• The objectives of financial accounting for pensions and how effectively those have been achieved within the framework of an approach that harmonizes financial accounting measurement and recognition with the objectives and techniques of actuarial funding methodology
• The underlying relationships among parties at interest—employer, employees/retirees, citizens/taxpayers, and pension plan—with regard to pension benefits and whether those are accurately and clearly reflected in financial reporting
• The observed absence, in many cases, of reporting of (a) the quantified financial effects of retroactively applied benefit increases that were not part of the original employment agreement or not previously included in pension liability calculations and (b) the quantified effects of other transactions and events that create or change the amount of an employer's accrued benefit obligation
• Issues related to key parameters for measuring actuarial accrued liabilities and annual pension cost, including parameters related to (a) actuarial cost and amortization methods, (b) the extent of deferral and amortization of pension costs attributed to employee services in past periods (amortization periods), (c) the discount rate for determining the present value of projected benefits, and (d) methods of determining the actuarial value of plan assets
• Issues related to accounting for the effects of changes in the actuarial methods used for financial reporting purposes
• Suggestions made by participants related to improving pension disclosures, including, among others, disclosure of additional information to help report users assess potential future cash flow demands for pension contributions and disclosure of information useful in assessing the sensitivity of reported pension information to deviations of actual experience from key economic or demographic assumptions.

Project staff have prepared a research report that encompasses the research efforts and findings to date.

Current Developments: A draft prospectus for this project was discussed with the Governmental Accounting Standards Advisory Council (GASAC) at its March 2008. GASAC members ranked the project relatively high in priority.

Work Plan:

• Other Post Employment Benefits Project
• Pension Disclosures—Conforming Changes Project

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.

³ The conclusions reached in these discussions are intended to establish the direction for future due process (for example, a Preliminary Views document versus an Exposure Draft).