Highlights of the Major Changes Required Under GASB Statement Nos. 44 (& 45)
By Dr. William Holder
Dr. William W. Holder was the LAMAAA guest speaker on January 18, 2006 held at the DWP auditorium. He discussed GASB Statement Nos. 44 and 45 that highlights major changes required under GASB Statement Nos. 44 and 45. The GASB is the independent, not-for-profit organization formed in 1984 that establishes and improves financial accounting and reporting standards for state and local governments. Its seven members are drawn from the Board's diverse constituency, including preparers and auditors of government financial statements, users of those statements and members of the academic community Dr. Holder is one of the driving forces behind GASB No. 45, which requires government agencies at all levels to begin reporting liabilities for retiree medical costs.
Dr. Holder is Ernst & Young Professor of Accounting at the University of Southern California's Marshall School of Business. He has been named among the 100 most influential people in accounting. He chairs the committee responsible for developing and overseeing the implementation of a computerized uniform CPA examination. As Director of the SEC and Financial Reporting Institute at USC, he promotes exchange among academia, policy setters at the SEC and in the private sector, and business and accounting executives through periodic meetings and roundtables. His interests include a wide range of financial reporting issues, among them auditing standards, fraudulent financial reporting, accounting education standards and governmental and non-business financial accounting policies.
William W. Holder began his term as a member of the GASB effective July 1, 2000. Mr. Holder has served as a member of the AICPA’s Board of Directors and Council and its State and Local Government Committee. He also served as chair of the American Accounting Association’s Public Sector Section. Mr. Holder has a bachelor’s degree from Oklahoma State University and master’s and doctoral degrees from the University of Oklahoma. He is a CPA and has published extensively in the area of g governmental financial reporting.
He is of particular interest to government accountants and auditors because he is currently a member of the Governmental Accounting Standards Board. He is also the recipient of various awards as an accounting educator.
Recent Publications:
Holder, W. and Carmichael, D. Audits of Local Governments. 17th Edition. Ft. Worth, TX: Warren, Gorham and Lamont. Holder, W. 'Financial Accounting, Control and Auditing.' Chapter in Management Policies in Local Government Finance. Washington D.C: International City Management Association. Holder, W. 'Pathways to Improving the Financial Reporting System.' Marshall Magazine (Winter 2003): 52-53. Holder, W., Schermann, K. R. and Whittington, R. 'Materiality Considerations.' Journal of Accountancy (November 2003): 61-66 Holder, W. 'Deposit and Investment Risk Disclosures.' GASB Statement (40) (June 2003). Holder, W. 'Budgetary Comparison Schedules -Perspective Differences, an Amendment of GASB Statement (34).' GASB Statement (41) (June 2003).
Below are the summaries of GASB 44 and 45 that can be found at its website www.gasb.org.
Summary of Statement No. 45: Accounting and Financial Reporting by Employers for Post employment Benefits Other Than Pensions (Issued 6/04)
In addition to pensions, many state and local governmental employers provide other post employment benefits (OPEB) as part of the total compensation offered to attract and retain the services of qualified employees. OPEB includes post employment healthcare, as well as other forms of post employment benefits (for example, life insurance) when provided separately from a pension plan. This Statement establishes standards for the measurement, recognition, and display of OPEB expense/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information (RSI) in the financial reports of state and local governmental employers.
The approach followed in this Statement generally is consistent with the approach adopted in Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, with modifications to reflect differences between pension benefits and OPEB. Statement No. 43, Financial Reporting for Post employment Benefit Plans Other Than Pension Plans, addresses financial statement and disclosure requirements for reporting by administrators or trustees of OPEB plan assets or by employers or sponsors that include OPEB plan assets as trust or agency funds in their financial reports.
How This Statement Improves Financial Reporting
Post employment benefits (OPEB as well as pensions) are part of an exchange of salaries and benefits for employee services rendered. Of the total benefits offered by employers to attract and retain qualified employees, some benefits, including salaries and active-employee healthcare, are taken while the employees are in active service, whereas other benefits, including post employment healthcare and other OPEB, are taken after the employees’ services have ended. Nevertheless, both types of benefits constitute compensation for employee services.
From an accrual accounting perspective, the cost of OPEB, like the cost of pension benefits, generally should be associated with the periods in which the exchange occurs, rather than with the periods (often many years later) when benefits are paid or provided. However, in current practice, most OPEB plans are financed on a pay-as-you-go basis, and financial statements generally do not report the financial effects of OPEB until the promised benefits are paid. As a result, current financial reporting generally fails to:
· Recognize the cost of benefits in periods when the related services are received by the employer · Provide information about the actuarial accrued liabilities for promised benefits associated with past services and whether and to what extent those benefits have been funded · Provide information useful in assessing potential demands on the employer’s future cash flows.
This Statement improves the relevance and usefulness of financial reporting by (a) requiring systematic, accrual-basis measurement and recognition of OPEB cost (expense) over a period that approximates employees’ years of service and (b) providing information about actuarial accrued liabilities associated with OPEB and whether and to what extent progress is being made in funding the plan.
Summary of Standards
Measurement (the Parameters)
Employers that participate in single-employer or agent multiple-employer defined benefit OPEB plans (sole and agent employers) are required to measure and disclose an amount for annual OPEB cost on the accrual basis of accounting. Annual OPEB cost is equal to the employer’s annual required contribution to the plan (ARC), with certain adjustments if the employer has a net OPEB obligation for past under- or over contributions.
The ARC is defined as the employer’s required contributions for the year, calculated in accordance with certain parameters, and includes (a) the normal cost for the year and (b) a component for amortization of the total unfunded actuarial accrued liabilities (or funding excess) of the plan over a period not to exceed thirty years. The parameters include requirements for the frequency and timing of actuarial valuations as well as for the actuarial methods and assumptions that are acceptable for financial reporting. If the methods and assumptions used in determining a plan’s funding requirements meet the parameters, the same methods and assumptions are required for financial reporting by both a plan and its participating employer(s). However, if a plan’s method of financing does not meet the parameters (for example, the plan is financed on a pay-as-you-go basis), the parameters nevertheless apply for financial reporting purposes.
For financial reporting purposes, an actuarial valuation is required at least biennially for OPEB plans with a total membership (including employees in active service, terminated employees who have accumulated benefits but are not yet receiving them, and retired employees and beneficiaries currently receiving benefits) of 200 or more, or at least triennially for plans with a total membership of fewer than 200. The projection of benefits should include all benefits covered by the current substantive plan (the plan as understood by the employer and plan members) at the time of each valuation and should take into consideration the pattern of sharing of benefit costs between the employer and plan members to that point, as well as certain legal or contractual caps on benefits to be provided. The parameters require that the selection of actuarial assumptions, including the healthcare cost trend rate for post employment healthcare plans, be guided by applicable actuarial standards.
Alternative Measurement Method
A sole employer in a plan with fewer than one hundred total plan members (including employees in active service, terminated employees who have accumulated benefits but are not yet receiving them and retirees and beneficiaries currently receiving benefits) has the option to apply a simplified alternative measurement method instead of obtaining actuarial valuations. The option also is available to an agent employer with fewer than one hundred plan members, in circumstances in which the employer’s use of the alternative measurement method would not conflict with a requirement that the agent multiple-employer plan obtain an actuarial valuation for plan reporting purposes. Those circumstances are:
· The plan issues a financial report prepared in conformity with the requirements of Statement 43 but is not required to obtain an actuarial valuation because (a) the plan has fewer than one hundred total plan members (all employers) and is eligible to use the alternative measurement method, or (b) the plan is not administered as a qualifying trust, or equivalent arrangement, for which Statement 43 requires the presentation of actuarial information.
· The plan does not issue a financial report prepared in conformity with the requirements of Statement 43.
This alternative method includes the same broad measurement steps as an actuarial valuation (projecting future cash outlays for benefits, discounting projected benefits to present value, and allocating the present value of benefits to periods using an actuarial cost method). However, it permits simplification of certain assumptions to make the method potentially usable by nonspecialists.
Net OPEB Obligation—Measurement
An employer’s net OPEB obligation is defined as the cumulative difference between annual OPEB cost and the employer’s contributions to a plan, including the OPEB liability or asset at transition, if any. (Because retroactive application of the measurement requirements of this Statement is not required, for most employers the OPEB liability at the beginning of the transition year will be zero.) An employer with a net OPEB obligation is required to measure annual OPEB cost equal to (a) the ARC, (b) one year’s interest on the net OPEB obligation, and (c) an adjustment to the ARC to offset the effect of actuarial amortization of past under- or over contributions.
Financial Statement Recognition and Disclosure
Sole and agent employers should recognize OPEB expense in an amount equal to annual OPEB cost in government-wide financial statements and in the financial statements of proprietary funds and fiduciary funds from which OPEB contributions are made. OPEB expenditures should be recognized on a modified accrual basis in governmental fund financial statements. Net OPEB obligations, if any, including amounts associated with under- or over contributions from governmental funds, should be displayed as liabilities (or assets) in government-wide financial statements. Similarly, net OPEB obligations associated with proprietary or fiduciary funds from which contributions are made should be displayed as liabilities (or assets) in the financial statements of those funds. Employers are required to disclose descriptive information about each defined benefit OPEB plan in which they participate, including the funding policy followed. In addition, sole and agent employers are required to disclose information about contributions made in comparison to annual OPEB cost, changes in the net OPEB obligation, the funded status of each plan as of the most recent actuarial valuation date, and the nature of the actuarial valuation process and significant methods and assumptions used. Sole and agent employers also are required to present as RSI a schedule of funding progress for the most recent valuation and the two preceding valuations, accompanied by notes regarding factors that significantly affect the identification of trends in the amounts reported.
Cost-Sharing Employers
Employers participating in cost-sharing multiple-employer plans that are administered as trusts, or equivalent arrangements, in which (a) employer contributions to the plan are irrevocable, (b) plan assets are dedicated to providing benefits to retirees and their beneficiaries in accordance with the terms of the plan, and (c) plan assets are legally protected from creditors of the employers or plan administrator, should report as cost-sharing employers. Employers participating in multiple-employer plans that do not meet those criteria instead are required to apply the requirements of this Statement that are applicable to agent employers.
Cost-sharing employers are required to recognize OPEB expense/expenditures for their contractually required contributions to the plan on the accrual or modified accrual basis, as applicable. Required disclosures include identification of the way that the contractually required contribution rate is determined (for example, by statute or contract or on an actuarially determined basis). Employers participating in a cost-sharing plan are required to present as RSI schedules of funding progress and employer contributions for the plan as a whole if a plan financial report, prepared in accordance with Statement 43, is not issued and made publicly available and the plan is not included in the financial report of a public employee retirement system or another entity.
Other Guidance
Employers that participate in defined contribution OPEB plans are required to recognize OPEB expense/expenditures for their required contributions to the plan and a liability for unpaid required contributions on the accrual or modified accrual basis, as applicable.
This Statement also includes guidance for employers that finance OPEB as insured benefits (as defined by this Statement) and for special funding situations.
Effective Dates and Transition
This Statement generally provides for prospective implementation—that is, that employers set the beginning net OPEB obligation at zero as of the beginning of the initial year. Implementation is required in three phases based on a government’s total annual revenues in the first fiscal year ending after June 15, 1999. The definitions and cutoff points for that purpose are the same as those in Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. This Statement is effective for periods beginning after December 15, 2006, for phase 1 governments (those with total annual revenues of $100 million or more); after December 15, 2007, for phase 2 governments (those with total annual revenues of $10 million or more but less than $100 million); and after December 15, 2008, for phase 3 governments (those with total annual revenues of less than $10 million). Earlier implementation is encouraged. Summary of Statement No. 44: Economic Condition Reporting: The Statistical Section—an amendment of NCGA Statement 1 (Issued 5/04)
This Statement amends the portions of NCGA Statement 1, Governmental Accounting and Financial Reporting Principles that guide the preparation of the statistical section. The statistical section presents detailed information, typically in ten-year trends, that assists users in utilizing the basic financial statements, notes to basic financial statements, and required supplementary information to assess the economic condition of a government.
Three shortcomings have been identified in the statistical section since NCGA Statement 1 was issued in 1979. First, NCGA Statement 1 presented a list of fifteen required schedules with no additional explanation of the nature of the information they were to contain. As a result, some governments prepared their statistical sections differently from others, thereby diminishing the usefulness and comparability of the information. Second, the statistical section requirements were oriented to general purpose local governments. Consequently, other types of governments had little guidance on how to adapt the requirements to their circumstances, resulting in incomplete and inconsistent application of the standards and, therefore, additional loss of comparability and usefulness.
Third, the requirements for the statistical section did not encompass the new information that governments are presenting as a result of GASB Statement No. 34,
Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments.
The statistical section is a required part of a comprehensive annual financial report (CAFR), although governments are not required to prepare a statistical section if they do not present their basic financial statements within a CAFR. These circumstances are not altered by this Statement. However, this Statement does apply to any statistical section that accompanies a government’s basic financial statements. The provisions of this Statement are effective for statistical sections prepared for periods beginning after June 15, 2005.
How the Changes in This Statement Improve Financial Reporting
This Statement improves the understandability and usefulness of statistical section information by addressing the comparability problems that have developed in practice and by adding information from the new financial reporting model for state and local governments required by Statement 34. In order to clarify that the requirements are applicable to all types of state and local governmental entities that prepare a statistical section, this Statement establishes the objectives of the statistical section and the five categories of information it contains—financial trends information, revenue capacity information, debt capacity information, demographic and economic information, and operating information. The more specific requirements of this Statement should be adapted by each type of government in order to meet the overarching objectives.
The more specific requirements of this Statement explain more clearly than prior standards the types of information that should be presented in each category of statistical section information. The prior requirements are clarified and updated to better meet user needs. For example, whereas NCGA Statement 1 required a schedule of “miscellaneous statistics,” this Statement specifies that a statistical section should include ten-year trends in three types of operating information—government employment levels, operating statistics, and capital asset information. This Statement also clarifies certain features of previously required information, such as which governmental funds to include in information about trends in changes in fund balances.
This Statement adds new information that users have identified as important and eliminates certain previous requirements. For instance, a government’s statistical section should now include trend information on governmental fund balances and principal employers. On the other hand, governments are no longer required to present in their statistical sections information that users have identified as less useful, such as special assessment levies and collections, construction activity, and bank deposits. Additionally, statistical sections do not have to include a separate schedule of debt service ratios; the most useful information from that schedule will be presented with the changes in fund balances information. The most significant new information added to the statistical section is the government-wide, accrual-based information required by Statement 34. The statistical section will include ten-year trend information about net assets and changes in net assets. The debt information presented in the statistical section will also be more comprehensive due to the inclusion of information from the government-wide financial statements and notes.
Finally, this Statement further improves the understandability and usefulness of statistical section information by requiring governments to augment their schedules with notes regarding sources, methodologies, and assumptions, and to provide narrative explanations of (a) the objectives of statistical section information, (b) unfamiliar concepts, (c) relationships between information in the statistical section and elsewhere in the financial report, and (d) atypical trends and anomalous data that users would not otherwise understand.
