GASB Proposal: Pension Underfunding Reported as Liability

Governments would have to report as a liability on their accrual-based financial statements the unfunded portion of their pension plan under a new proposal.

That was contained in a statement of preliminary views about changes to government pension accounting released this week by the Governmental Accounting Standards Board (GASB), a rule-making body. GASB said the document summarizes its current thinking on pension accounting recognition and measurement issues facing public employers as it prepares to formalize the issues into new accounting mandates. 

According to the document, the GASB believes that:

  • Pension benefits are a form of compensation promised by governments to their employees inexchange for work performed.
  • The pension plan is primarily responsible for the pension obligation to the extent that assetshave been accumulated in the plan (by government and employee contributions andinvestment earnings) to finance the pension benefits; the government is secondarilyresponsible for this funded portion the obligation.
  • The government is primarily responsible for the remaining unfunded portion of theobligation.
  • The unfunded portion of the pension would be reported as a net pension liability in thefinancial statements of the government. GASB said it believes the unfunded portion meets the criteria for being reported on financial statements because the liability is “measurable with sufficient reliability.”

Neither the total obligation for pensions nor the unfunded portion is reported currently  as a liability on those financial statements, GASB pointed out in the new document. 

Other issues dealt with in the document include:

  • A statement that reasonable long-term expected rate of return on the plan’s investments would continue to be the basis for discounting projected benefit payments to their present value, but only to the extent that the current and expected future plan net assets will be sufficient to cover the future benefit payments. Benefit payments that are expected to occur beyond the point at which expected plan assets are projected to be exhausted would be discounted to their present values using a high-quality municipal bond index rate.
  • Assumed returns on plan investments would be incorporated into the pension expense each year. The Preliminary Views would not include differences between the assumed and actual returns in the expense calculation immediately. Rather, the annual difference between the assumed and actual investment return would accumulate in the financial statements as deferred inflows (returns above the assumed rate) or deferred outflows (returns below the assumed rate),but only to a certain extent. If the deferred outflows (or inflows) accumulate to an amount that exceeds 15% of the plan’s investments, then the excess amount would be reported as expense (or a reduction of expense) immediately.This proposal would serve to remove normal fluctuations in investment values that, over time, are expected to have no net impact on expenses. However, events that have a cumulative impact on asset values that is expected to take a relatively long period to offset (an impact that exceeds the 15% limit), such as a large increase or decline in the stock market, would beincorporated in the expense calculation immediately

GASB said it is releasing the document to spark public comment before developing more detailed proposals for changes to existing accounting and financial reporting standards. The agency said its board will begin deliberations in July on pension note disclosures and supporting information for government employers and pension plan reporting issues.

“Following considerable staff research and review of financial reports prepared under existing standards, the Board has tentatively determined that changes are needed to improve the transparency, consistency, and comparability of reported pension information,” said GASB Chairman Robert Attmore, in a GASB statement. “We urge constituents to review and provide comments on the Preliminary Views on ways to increase transparency in financial reporting; enhance the decision usefulness of reported pension information; and better assist financial statement users in assessing the impact of the policy decisions and the commitments governments have made to their employees related to pension benefits.”

The deadline for submitting written comments is September 17, 2010.

More details, and instructions for registering to participate in the hearings, will be announced in the coming weeks on the GASB Web site. 

The Preliminary Views document is available here

A GASB summary is here