Published July 17, 2012

Financial Reporting Changes Loom For Governmental Entities That Provide Defined Benefit Pensions

The Governmental Accounting Standards Board (“GASB”) recently approved an accounting and financial reporting standard that modifies and institutes new financial reporting requirements intended to substantially improve how governmental entities report pension obligations and expenses.   The most significant changes that will result from the eventual issuance of Statement No. 68, Accounting and Financial Reporting for Pensions (“the Statement”), will be the requirement that governmental entities which provide defined benefit pensions report a Net Pension Liability on their balance sheets and recognize more pension expense than is currently required.

Currently, the pension liability reported on governmental entities’ balance sheets represents the variance between the actuarially determined contributions they are required to make in a given year and the amounts actually funded.  Under the new requirements, the Net Pension Liability reflected in the financial statements will equal the difference between the present value of the actuarially determined projected benefit obligation (“PBO”) and the fair value of the assets set aside to fulfill those obligations.

In addition, the Statement will establish the requirement of immediate expense recognition of the annual service cost and interest on the PBO as well as the effect of any change on the Net Pension Liability resulting from modifications in benefit terms.  Other items such as the effects on the Net Pension Liability resulting from changes in actuarial assumptions, differences between those assumptions and actual experience, and variances between expected and actual returns on plan assets will be recognized as pension expense over a closed, five-year period.

Finally, other changes that will result from the issuance of the Statement are aimed at improving the consistency and comparability of how governmental entities calculate their PBO and improving the information that is disclosed about their pension obligations.  These other changes include the following:

  • Standardization of the manner in which projections of benefit payments is based
  • Standardization of the way the rate used to discount projected benefit payments is determined
  • Requirement that governmental entities use a single actuarial method- the ‘entry age’ method
  • Enhanced disclosure requirements such as providing information about the types of benefits provided, how contributions to the plan are determined, assumptions and methods used to calculate the PBO, the composition of  employees covered by the terms of the plan, and the sources of changes in the components of the Net Pension Liability for the current year
  • Presentation of required supplementary information (“RSI”) schedules covering the past ten years with respect to sources of changes in the components of the Net Pension Liability, ratios that help in evaluating the magnitude of the Net Pension Liability, and comparisons of actual contributions to the plan with actuarially determined contribution requirements

The provisions of the Statement will be effective for fiscal years beginning after June 15, 2014, and earlier application is allowed and encouraged. Downloadable copies of the Statement are expected to be available on the GASB website in early August and you can learn more by reading the related GASB news release.

If you or your organization have any questions or would like additional information regarding the Statement or any other financial reporting matters, please contact the expert listed below at PYA, (800) 270-9629.

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