Governmental Accounting Standards Series

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1 NO. 266-A MAY 2007 Governmental Accounting Standards Series Statement No. 50 of the Governmental Accounting Standards Board Pension Disclosures an amendment of GASB Statements No. 25 and No. 27 Governmental Accounting Standards Board of the Financial Accounting Foundation

2 For additional copies of this Statement and information on applicable prices and discount rates, contact: Order Department Governmental Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, CT Telephone Orders: Please ask for our Product Code No. GS50. The GASB website can be accessed at

3 Summary This Statement more closely aligns the financial reporting requirements for pensions with those for other postemployment benefits (OPEB) and, in doing so, enhances information disclosed in notes to financial statements or presented as required supplementary information (RSI) by pension plans and by employers that provide pension benefits. The reporting changes required by this Statement amend applicable note disclosure and RSI requirements 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, to conform with requirements of Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. Summary of Standards This Statement amends Statements 25 and 27 to require defined benefit pension plans and sole and agent employers present the following information related to note disclosures or RSI: Notes to financial statements should disclose the funded status of the plan as of the most recent actuarial valuation date. Defined benefit pension plans also should disclose actuarial methods and significant assumptions used in the most recent actuarial valuation in notes to financial statements instead of in notes to RSI. If the aggregate actuarial cost method is used to determine the annual required contribution of the employer (ARC), notes to financial statements should disclose the funded status of the plan, and a schedule of funding progress should be presented as RSI, using the entry age actuarial cost method. Plans and employers also should disclose that the purpose of doing so is to provide information that serves as a surrogate for the funded status and funding progress of the plan. Notes to financial statements should include a reference linking the funded status disclosure in the notes to financial statements to the required schedule of funding progress in RSI. i

4 If applicable, notes to financial statements should disclose legal or contractual maximum contribution rates. In addition, if relevant, they should disclose that the maximum contribution rates have not been explicitly taken into consideration in the projection of pension benefits for financial accounting measurement purposes. If an actuarial assumption is different for successive years, notes to financial statements should disclose the initial and ultimate rates. This Statement amends Statement 25 to require defined benefit pension plans and defined contribution plans to disclose in the notes to financial statements the methods and assumptions used to determine the fair value of investments, if the fair value is based on other than quoted market prices. This Statement amends Statement 27 to require cost-sharing employers to include, in the note disclosure of the required contribution rates of the employer(s) in dollars and the percentage of that amount contributed for the current year and each of the two preceding years, how the contractually required contribution rate is determined (for example, by statute or by contract, or on an actuarially determined basis) or that the costsharing plan is financed on a pay-as-you-go basis. This Statement also amends Statement 27 to require that, if a cost-sharing plan does not issue a publicly available stand-alone plan financial report prepared in accordance with the requirements of Statement 25, as amended, and the plan is not included in the financial report of another entity, each employer in that plan should present as RSI the schedules of funding progress and employer contributions for the plan (and notes to these schedules). Each employer also should disclose that the information presented relates to the cost-sharing plan as a whole, of which the employer is one participating employer, and should provide information helpful for understanding the scale of the information presented relative to the employer. ii

5 Effective Date and Transition This Statement is effective for periods beginning after June 15, 2007, except for requirements related to the use of the entry age actuarial cost method for the purpose of reporting a surrogate funded status and funding progress of plans that use the aggregate actuarial cost method, which are effective for periods for which the financial statements and RSI contain information resulting from actuarial valuations as of June 15, 2007, or later. Early implementation is encouraged. In the initial year of implementation, defined benefit pension plans and sole and agent employers that use the aggregate actuarial cost method to determine the ARC are required to present elements of information in the schedule of funding progress using the entry age actuarial cost method as of the most recent actuarial valuation date. In subsequent years, plans and employers should add to that schedule information as of subsequent actuarial valuation dates until the requirements of Statements 25 and 27, as amended, with regard to the minimum number of years or actuarial valuations to be included have been met. How the Changes in This Statement Will Improve Financial Reporting Statements 43 and 45, which were developed using Statements 25 and 27 as models, improved the transparency and decision usefulness of financial reporting as a result of decisions by the Board to modify, for financial reporting by OPEB plans and employers, certain requirements related to note disclosures and RSI. This Statement similarly is intended to improve the transparency and usefulness of financial reporting by pension plans and employers by amending Statements 25 and 27 to conform with the applicable note disclosure and RSI modifications adopted in the OPEB Statements. iii

6 Unless otherwise specified, pronouncements of the GASB apply to financial reports of all state and local governmental entities, including general purpose governments; public benefit corporations and authorities; public employee retirement systems; and public utilities, hospitals and other healthcare providers, and colleges and universities. Paragraph 3 discusses the applicability of this Statement. iv

7 Statement No. 50 of the Governmental Accounting Standards Board Pension Disclosures an amendment of GASB Statements No. 25 and No. 27 May 2007 Governmental Accounting Standards Board of the Financial Accounting Foundation 401 Merritt 7, PO Box 5116, Norwalk, Connecticut v

8 Copyright 2007 by Governmental Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Governmental Accounting Standards Board. vi

9 Statement No. 50 of the Governmental Accounting Standards Board Pension Disclosures an amendment of GASB Statements No. 25 and No. 27 May 2007 CONTENTS Paragraph Numbers Introduction... 1 Standards of Governmental Accounting and Financial Reporting Scope and Applicability of This Statement Amendments to Statement Notes to the Financial Statements Required Supplementary Information... 6 Amendments to Statement Notes to the Financial Statements Required Supplementary Information Effective Date and Transition Appendix A: Background Appendix B: Basis for Conclusions Appendix C: Illustrative Note Disclosures and Required Supplementary Information Appendix D: Codification Instructions vii

10 Statement No. 50 of the Governmental Accounting Standards Board Pension Disclosures an amendment of GASB Statements No. 25 and No. 27 May 2007 INTRODUCTION 1. The objective of this Statement is to amend note disclosure and required supplementary information (RSI) standards 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, to conform with applicable changes adopted in Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. This Statement is intended to improve the transparency and decision usefulness of reported information about pensions by state and local governmental plans and employers. STANDARDS OF GOVERNMENTAL ACCOUNTING AND FINANCIAL REPORTING Scope and Applicability of This Statement 2. This Statement establishes and modifies requirements related to financial reporting by pension plans and by employers that provide defined benefit and defined contribution pensions. It amends Statement 25, paragraphs 27, 32, 36, 37, 40, and 41 and footnote 24, and it supersedes footnotes 17 and 18 of that Statement. It also amends paragraphs and footnotes 10 and 17 of Statement 27. 1

11 3. The provisions in paragraphs 4 and 6 of this Statement apply to defined benefit pension plans of all state and local governments. The provisions of paragraph 5 of this Statement apply to defined contribution plans of all state and local governments. The provisions of paragraphs 7 10 of this Statement apply to all state and local governmental employers that provide or participate in defined benefit pension plans. Amendments to Statement 25 Notes to the Financial Statements 4. Defined benefit pension plans should make the following additional disclosures in notes to the financial statements: a. In the summary of significant accounting policies, the requirement of Statement 25, paragraph 32b(2), for disclosure of a brief description of how the fair value of investments is determined should include the methods and significant assumptions used to estimate the fair value of investments, if that fair value is based on other than quoted market prices. b. In the disclosure of contributions and reserves required by Statement 25, paragraph 32c, legal or contractual maximum contribution rates should be disclosed, if applicable. c. Information about the funded status of the plan as of the most recent valuation date should be disclosed, including the actuarial valuation date, the actuarial value of assets, the actuarial accrued liability, the total unfunded actuarial accrued liability, the actuarial value of assets as a percentage of the actuarial accrued liability (funded ratio), the annual covered payroll, and the ratio of the unfunded actuarial liability to annual covered payroll. 1 The information should be calculated in accordance with the parameters set forth in paragraphs 35 and 36 of Statement 25. Plans that use the aggregate actuarial cost method to calculate the annual required contribution of the employer(s) (ARC) should prepare funded status information using the entry age actuarial cost method. d. Information about actuarial methods and assumptions used in valuations on which reported information about the ARC and the funded status and funding progress of pension plans are based should be disclosed, including the following: (1) Disclosure that the required schedule of funding progress immediately following the notes to the financial statements presents multiyear trend 1 Paragraph 37 of Statement 25 requires plans to disclose the same elements of information for each of the past six consecutive fiscal years of the plan as RSI (schedule of funding progress). 2

12 information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. 2 (2) Disclosure that the projection of benefits for financial reporting purposes does not explicitly incorporate the potential effects of legal or contractual funding limitations, if applicable. (3) Identification of the actuarial methods and significant assumptions used to determine the ARC for the current year and the information required by paragraph 4c of this Statement. The disclosures should include: (a) The actuarial cost method. (b) (c) (d) The method(s) used to determine the actuarial value of assets. The assumptions with respect to the inflation rate, investment return (discount rate), projected salary increases, and postretirement benefit increases. If the economic assumptions contemplate different rates for successive years (year-based or select and ultimate rates), the rates that should be disclosed are the initial and ultimate rates. The amortization method (level dollar or level percentage of projected payroll) and the amortization period (equivalent single amortization period, for plans that use multiple periods) for the most recent actuarial valuation and whether the period is closed or open. Plans that use the aggregate actuarial cost method should disclose that because the method does not identify or separately amortize unfunded actuarial accrued liabilities, information about the plan s funded status and funding progress has been prepared using the entry age actuarial cost method for that purpose and that the information presented is intended to serve as a surrogate for the funded status and funding progress of the plan. 5. For defined contribution plans, the requirement of Statement 25, paragraph 41b, for disclosure of a brief description of how the fair value of investments is determined should include the methods and significant assumptions used to estimate the fair value of investments, if that fair value is based on other than quoted market prices. Required Supplementary Information 6. Plans that use the aggregate actuarial cost method should prepare the information presented in the schedule of funding progress using the entry age actuarial cost method and should disclose that fact and that the purpose of this disclosure is to provide information that serves as a surrogate for the funding progress of the plan. 2 The required reference to the schedule of funding progress presented as RSI does not represent or imply incorporation of the schedule of funding progress into notes to the basic financial statements. 3

13 Amendments to Statement 27 Notes to the Financial Statements 7. Employers should include the following additional disclosures about funding policy in notes to the financial statements for each defined benefit pension plan in which they participate: a. Legal or contractual maximum contribution rate(s) of the employer should be disclosed, if applicable. b. For cost-sharing employers, the requirement of Statement 27, paragraph 20b(3), for disclosure of the required contribution rates of the employer(s) in dollars and the percentage of that amount contributed for the current year and each of the two preceding years should include a description of how the required contribution rate is determined (for example, by statute or by contract, or on an actuarially determined basis) or that the plan is financed on a pay-as-you-go basis. 8. Sole and agent employers should disclose the following additional information for each plan: a. Information about the funded status of the plan as of the most recent valuation date should be disclosed, including the actuarial valuation date, the actuarial value of assets, the actuarial accrued liability, the total unfunded actuarial liability (or funding excess), the actuarial value of assets as a percentage of the actuarial accrued liability (funded ratio), the annual covered payroll, and the ratio of the unfunded actuarial liability (or funding excess) to annual covered payroll. 3 Employers that use the aggregate actuarial cost method should prepare this information using the entry age actuarial cost method for that purpose only. 4 b. Information about actuarial methods and assumptions used in valuations on which reported information about the ARC, annual pension cost, and the funded status and funding progress of pension plans is based should be disclosed, including the following: (1) Disclosure that the required schedule of funding progress immediately following the notes to the financial statements presents multiyear trend 3 Paragraph 22 of Statement 27 requires sole and agent employers to present as RSI (schedule of funding progress) the same elements of information for the most recent actuarial valuation and the two preceding valuations. 4 For sole employers that include the plan in the financial reporting entity (as a trust fund), presentation of information about the plan s funded status and funding progress as required for the plan by Statement 25, as amended by this Statement, meets the requirements of this paragraph and paragraph 22, as amended by this Statement. For agent employers, the requirements of this paragraph and paragraph 22 of Statement 27, as amended, apply to the employer s individual plan. The information should be presented even if the aggregate multiple-employer plan (all employers) is included as a pension trust fund in the employer s report and the required funded status and funding progress information is presented for the aggregate plan. 4

14 information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. 5 (2) Disclosure that the projection of benefits for financial reporting purposes does not explicitly incorporate the potential effects of legal or contractual funding limitations (as discussed in the disclosure of funding policy in paragraph 7a), if applicable. 6 (3) In the disclosure of actuarial methods and significant assumptions required by paragraph 21c of Statement 27: (a) If the assumptions used to determine the ARC for the current year and the information required by paragraph 8a of this Statement contemplate different rates for successive years (year-based or select and ultimate rates), the rates that should be disclosed are the initial and ultimate rates. (b) If the aggregate actuarial cost method is used, disclose that because the method does not identify or separately amortize unfunded actuarial liabilities, information about funded status and funding progress has been prepared using the entry age actuarial cost method for that purpose and that the information presented is intended to serve as a surrogate for the funded status and funding progress of the plan. Required Supplementary Information 9. Sole and agent employers that use the aggregate actuarial cost method to determine the ARC should prepare the information identified in paragraph 22 of Statement 27 using the entry age actuarial cost method and should disclose that fact and that the purpose of this disclosure is to provide information that serves as a surrogate for the funding progress of the plan If the cost-sharing plan in which an employer participates does not issue and make publicly available a stand-alone plan financial report prepared in accordance with the requirements of Statement 25, as amended, and the plan is not included in the financial report of a public employee retirement system or another entity, the cost-sharing 5 See footnote 2. 6 If an employer also elects to include in the annual financial report pro forma quantitative information about pension benefits (for example, pro forma calculations of the ARC, annual pension cost, or the funded status of the plan) recalculated to take into consideration a funding limitation, that information should be presented as supplementary information. 7 See footnote 4. 5

15 employer should present as RSI in its own financial report schedules of funding progress and employer contributions for the plan (and notes to these schedules), prepared in accordance with the requirements of Statement 25, as amended. The employer should disclose that the information presented relates to the cost-sharing plan as a whole, of which the employer is one participating employer, and should provide information helpful for understanding the scale of the information presented relative to the employer. EFFECTIVE DATE AND TRANSITION 11. With the exception of the requirements discussed in paragraph 12, the requirements of this Statement are effective for periods beginning after June 15, Early implementation is encouraged. 12. The requirements of paragraphs 4c, 4d, and 6 (for plans) and 8a, 8b(1), 8b(3)(b), and 9 (for sole and agent employers) of this Statement with regard to preparation of a schedule of funding progress using the entry age actuarial cost method and presentation of certain information related to the actuarial calculations by pension plans and sole and agent employers that use the aggregate actuarial cost method to determine the ARC are effective for periods for which the financial statements and RSI contain information resulting from actuarial valuations as of June 15, 2007, or later. 13. With regard to the provisions discussed in paragraph 12, in the initial year of application, pension plans and sole and agent employers that use the aggregate actuarial cost method to determine the ARC can meet the requirement of this Statement to prepare a schedule of funding progress using the entry age actuarial cost method by presenting the required elements of information as of the most recent actuarial valuation date. In 6

16 subsequent years, information should be added as of subsequent actuarial valuation dates until the requirements of Statements 25 and 27, as amended by this Statement, are met. The provisions of this Statement need not be applied to immaterial items. This Statement was issued by unanimous vote of the seven members of the Governmental Accounting Standards Board: Robert H. Attmore, Chairman Cynthia B. Green William W. Holder Edward J. Mazur Marcia L. Taylor Richard C. Tracy James M. Williams 7

17 Appendix A BACKGROUND 14. In April and June 2004, respectively, the GASB issued standards of accounting and financial reporting for postemployment benefits other than pensions (other postemployment benefits, or OPEB) in Statements 43 and 45. In developing those standards, the Board followed the same general approach taken in Statements 25 and 27 (both issued in November 1994) for pension accounting and reporting. In most cases, Statements 43 and 45 require OPEB plans and employers that provide OPEB to present note disclosures and RSI parallel to those required by Statements 25 and 27 for pension plans and employers. However, in developing the OPEB Statements, the Board concluded that disclosure and RSI requirements for OPEB should be modified at several points to improve accountability and the decision usefulness of reported financial information. 15. At its August 2006 meeting, the Board approved a limited-scope standards-setting project to consider whether pension plan and employer disclosure and RSI requirements should be amended to conform to the more recently adopted disclosure and RSI requirements of Statements 43 and 45. As a result of that project, in December 2006, the Board issued for comment an Exposure Draft of this Statement. The Board received 36 comment letters in response to its proposals in the Exposure Draft. Significant issues that were raised by respondents are discussed in the Basis for Conclusions. 16. The project that resulted in this Statement proceeded concurrently with, but within a shorter time frame than, a research project intended to review the effectiveness of 8

18 Statements 25 and 27 in meeting the financial reporting objectives that the Board set for them. In this Statement, the Board amends Statements 25 and 27 to strengthen note disclosures or RSI. Broader consideration of the effectiveness of the requirements of Statements 25 and 27 is the ongoing focus of the research project, and consideration of any other potential modifications was deferred pending the completion of that research. 9

19 Appendix B BASIS FOR CONCLUSIONS 17. This appendix summarizes factors considered significant by the Board members in reaching the conclusions in this Statement. It includes discussion of alternatives considered and the Board s reasons for accepting some and rejecting others. Individual Board members may have given greater weight to some factors than to others. Scope and Applicability 18. The scope of the pension disclosure project from which this Statement is derived was limited to considering whether Statements 25 and 27 should be amended to conform to certain disclosures and RSI presentations now required for OPEB. 19. In the OPEB project, the Board used the pension accounting and financial reporting model established in Statements 25 and 27 as a foundation for the development of standards of accounting and financial reporting for OPEB. However, in the course of developing Statements 43 and 45, the Board concluded that the pension requirements should be enhanced in certain respects for OPEB accounting and reporting purposes. The modifications made for OPEB that also have resonance for pension benefits generally relate to note disclosures and RSI, rather than to the overall approach taken to measurement, recognition, or display. 20. This Statement is intended to bring the pension and OPEB standards with regard to note disclosures and RSI into closer alignment as expeditiously as possible. In view of the previous progress made on these matters in the OPEB project and the potential benefits to financial report users of similar changes to pension reporting, the Board concluded that these issues should be addressed concurrently with, and without waiting 10

20 for completion of, a broader scope pension accounting and financial reporting research project currently in progress. The Board concluded, further, that the disclosure and RSI changes in this Statement would not necessarily limit or prejudice the matters that might be considered in the research project. 21. In response to the Exposure Draft, the Board received comment letters that included suggestions regarding issues that were not within the intended limited scope of the project. The Board notes that many of the issues raised require discussion in a broader context and, therefore, deferred discussion of those issues to the pension accounting and financial reporting research project. Disclosure of the Funded Status of a Defined Benefit Pension Plan 22. This Statement amends Statements 25 and 27 to require defined benefit pension plans and sole and agent employers, respectively, to disclose the funded status of a pension plan as of the most recent actuarial valuation date in the notes to financial statements. This requirement is in addition to requirements in Statements 25 and 27 to present a multiyear trend schedule of funding progress. Together, these requirements supersede the three alternative methods of presentation (RSI, notes to financial statements, or additional financial statement) originally permitted by footnote 18 of Statement 25 and the two alternative methods of presentation (RSI or notes to financial statements) originally permitted by footnote 17 of Statement In the Statement 25 pension plan reporting framework, multiyear trend information about funding progress including actuarial accrued liabilities, the actuarial values of plan assets, total unfunded actuarial liabilities, funded ratios, covered payrolls, and unfunded actuarial liabilities as percentages of covered payrolls generally is required to 11

21 be presented as RSI. That basic standard presentation as RSI was adopted in part as the result of consideration by the Board of concerns from the audit community regarding the auditing of note disclosures of funding progress (as well as employer contribution) information from multiple past years, as originally proposed. Statement 25 also permitted, as optional methods of communicating the information, note disclosures or an additional financial statement. Statement 27 originally included similar requirements with regard to the reporting of information about the funding progress of each defined benefit plan in which a sole or agent employer participates except that the option of presenting funding progress information by means of an additional financial statement was not available for employer reporting purposes. 24. Subsequently, in deliberating issues related to reporting by defined benefit OPEB plans and by sole and agent employers in such plans, the Board reconsidered whether RSI was an appropriate or adequate method of presentation, considering that information about the funded status of pension plans has been widely viewed as one of the most significant pieces of information reported about those plans, notwithstanding the method in which it generally has been presented. Providing information to financial report users regarding the funded status of a defined benefit plan was viewed by the Board as essential in the context of OPEB, given the low level of funding of most postemployment healthcare and other OPEB plans. After reviewing the history of the method(s) adopted in Statement 25, the Board instead required in Statements 43 and 45 that OPEB plans and sole and agent employers, respectively, report funded status/funding progress information in the following manner: 12

22 Disclose the funded status of the plan as of the most recent actuarial valuation date in the notes to the financial statements Present multiyear funding progress information as RSI Include in the notes a reference linking the two. 25. In proposing the adoption of the same method for defined benefit pension plans and employers in single-employer and agent multiple-employer pension plans, the Board observed that although pension plans generally are better funded than OPEB plans, the significance to financial report users of information about the funded status of defined benefit pension plans in the public sector has been underscored by increased attention in the last few years from taxpayer groups, analysts, and others. The Board reiterated its conclusion that information about the funded status of defined benefit pension plans has come to be widely viewed as essential financial information. The Board noted that Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements (issued in April 2005, subsequent to the issuance of Statements 43 and 45), provides that information that is considered essential to financial statement users understanding of the financial statements but that does not meet the criteria for recognition in the financial statements should be reported in notes to the financial statements. 26. In support of the proposal to require note disclosure of the most recent available funded status information, the Board also referred to a concern, originally discussed during the OPEB project, that the effect on the auditor s report of omitting a required schedule of funding progress (or RSI generally) might not sufficiently discourage the omission of information significant to financial report users. The Board noted that because RSI, by definition, is not part of the basic financial statements, the omission of funding progress information currently would not require modification of an auditor s 13

23 report on the basic financial statements. The Board s concern was that mention of omitted RSI in a subsequent paragraph of an auditor s report (based on generally accepted auditing standards), without modification of the auditor s report on the basic financial statements, might not be a compelling disincentive if an OPEB or pension plan or employer was considering either not obtaining or obtaining but not presenting the RSI. 27. The Exposure Draft proposal to conform the requirements of Statements 25 and 27 to those of Statements 43 and 45 with regard to the methods of reporting information about the funded status and funding progress of defined benefit pension plans was intended to improve financial reporting by plans and sole and agent employers by requiring a more appropriate method of reporting essential information about the current funded status of the plan. At the same time, it was intended to preserve the original benefit of presenting multiyear funding progress trend information and to help ensure that essential information would be reported and publicly available to users. 28. Some respondents to the Exposure Draft supported the proposal to change the required method of communicating information about the funded status of a pension plan as of the most recent actuarial valuation. Other respondents questioned whether note disclosure of funded status information would be consistent with the definition of, and criteria for, notes to financial statements adopted in Concepts Statement 3, or whether the benefit of the proposed change would exceed the cost, particularly the potential increase in audit costs in certain cases. 29. Respondents who questioned whether the proposal to require note disclosure of pension funded status information would be consistent with Concepts Statement 3 14

24 pointed out that the Board adopted Concepts Statement 3 subsequent to the issuance of Statements 43 and 45. Therefore, they thought that the Board should base the method of communication primarily on the respective definitions of and criteria for notes to financial statements and RSI in Concepts Statement 3, rather than on consistency with the decisions reached in Statements 43 and After considering these concerns, the Board reaffirmed its conclusion that defined benefit pension plans and sole and agent employers should disclose information about the most recently measured funded status of the plan in the notes to financial statements and that a requirement to do so is consistent with the definition of and criteria for notes to financial statements in paragraphs 35 and 36 of Concepts Statement 3. That is, paragraph 35 states that notes to financial statements are integral to financial statements and are essential to a user s understanding of financial position or inflows and outflows of resources. Paragraph 36 elaborates by stating that notes have a clear and demonstrable relationship to information in the financial statements to which they pertain and are essential to a user s understanding of those financial statements. Moreover, essential in that context means so important as to be indispensable to a user (a) with a reasonable understanding of government and public finance activities and of the fundamentals of governmental financial reporting and (b) with a willingness to study the information with reasonable diligence. 31. The Board concluded that funded status information is integrally related to and essential to such a user s understanding of financial reporting of pension plans and of sole and agent employers in the following ways: 15

25 a. For plan financial reporting, the Board concluded that plan net assets held in trust for pension benefits lacks essential context without disclosure of a measure of the actuarial accrued liabilities for which those net assets are accumulated and held in trust. 8 The Board concluded, further, that note disclosure of funded status information is consistent with the use of notes to financial statements identified in paragraph 35c of Concepts Statement 3 additional information about financial position... that does not meet the criteria for recognition. 9 b. For financial reporting by sole and agent employers, the Board concluded that information about the funded status of defined benefit pension plans in which an employer participates is essential to a user s understanding of financial position because unfunded actuarial accrued liabilities for pension benefits represent an obligation to make future sacrifices of financial resources. 32. Some respondents commented that the proposed change in method of communicating funded status information would involve increased audit cost. Of those respondents, some questioned whether the benefit of the proposed change would exceed the incremental cost. The Board s understanding, based on research of applicable auditing standards, is that the potential incremental cost would relate to the difference between auditing requirements related to (a) RSI and (b) establishing a basis for reliance on the work of a specialist the actuary. Further, the Board concluded that significant incremental cost would be unlikely, or reduced, in situations in which auditors already are required to use the work of a specialist that is, audits of sole or agent employers or audits of single-employer or agent pension plans in which the plan auditor also audits an employer in the plan. In those situations, auditors already would have a need to establish a basis for reliance on the work of the actuary because information from actuarial valuations is used in expense and liability measurements and in note disclosures of the 8 The requirement to disclose the funded status of the plan in the notes to financial statements eliminates the need for the requirement of paragraph 27 of Statement 25 that the caption net assets held in trust for pension benefits be followed by a parenthetical reference to the plan s schedule of funding progress. 9 For reasons discussed in the Basis for Conclusions to Statement 25, the Board concluded that actuarial accrued liabilities do not meet the criteria for recognition as liabilities of a pension plan. Moreover, the funded status information includes plan assets valued on a different basis (actuarial value, which should be a market-related value) than that required for financial statement purposes (including investments at fair value). 16

26 employer(s). The Board concluded, therefore, that incremental auditing costs generally would occur in plan audits in which a different auditor or auditors are responsible for opining on employer financial statements. However, even in that circumstance, the Board believes there may be opportunities to rely on the work of other auditors in order to mitigate additional costs. 33. The Board concluded, on balance, that requiring note disclosure of the most recent funded status information would result in a more appropriate method of communication of that essential information and that the benefit of the change would exceed the cost. The Board concluded, moreover, that: a. Retaining the requirement for presentation of multiyear trend information about funding progress as RSI is appropriate because information about funding progress over time is essential for placing the basic financial statements and notes to basic financial statements in an appropriate economic and historical context. b. The overlap between the note disclosure and RSI requirements with regard to the most recent funded status information is appropriate in order to communicate essential information. 34. After discussion of related respondent comments, the Board also decided to retain in this Statement a related proposal to require disclosure in notes to financial statements that the required schedule of funding progress immediately following the notes to the financial statements presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits [paragraphs 4d(1) and 8b(1)]. The Board reaffirmed that the purpose of the disclosure would be to provide an informative link from the funded status information disclosed in the notes to financial statements as of the most recent actuarial valuation date to the funding progress trend information presented as RSI. Concerns were expressed by some respondents that such a link could create confusion regarding the 17

27 status of the information presented as RSI, including auditor association with that information. To address those concerns, the Board added a footnote in the standards section clarifying that the required link to RSI does not imply incorporation of the RSI into the notes to financial statements by reference. Required Reporting of Funded Status/Funding Progress Information When the Aggregate Actuarial Cost Method Is Used to Determine the ARC 35. This Statement amends Statements 25 and 27 to require that defined benefit plans and sole and agent employers, respectively, that use the aggregate actuarial cost method to determine the ARC disclose the funded status of the plan and present multiyear funding progress trend information as RSI using the entry age actuarial cost method as a surrogate for that purpose only. 36. That requirement was adopted in Statements 43 and 45 and proposed as an amendment to Statements 25 and 27 because the aggregate actuarial cost method does not calculate an actuarial accrued liability and, for that reason, does not produce information necessary to prepare a schedule of funding progress or a note disclosure of funded status. Even so, the aggregate method has been included among the acceptable actuarial cost methods for accounting and financial reporting by pension and OPEB plans and employers, based on its strength as a funding methodology if an employer consistently contributes the ARC determined using that method. During OPEB project discussions, however, the Board viewed more critically than it had previously the significance of the method s inability to support the presentation of information about a defined benefit plan s funded status and funding progress, as discussed in paragraphs of the Basis for Conclusions to Statement 43: 18

28 Aggregate actuarial cost method The aggregate actuarial cost method cannot be used to prepare a schedule of funding progress because it does not separately determine actuarial accrued liabilities. (The total actuarial present value of projected benefits is amortized as normal cost over average remaining service life, rather than dividing the total into normal cost and actuarial accrued liabilities and separately amortizing the two amounts over, generally, different periods.) In Statement 25, the Board exempted pension plans that use the aggregate method from preparing the schedule of funding progress (but not from preparing the schedule of employer contributions), although preparation of the schedule of funding progress using another method, such as entry age, is acceptable. The Board concluded in that Statement that a requirement to use a different method would be inconsistent with the general approach of [Statement 25] to require application of the method used to determine funding requirements, when that method meets the parameters. Moreover, the Board noted that relatively few [pension] plans use the aggregate method; for example, 6 percent of 451 [pension] plans included in a survey conducted in 1993 by the Public Pension Coordinating Council reported using that method, and most are small plans. The Board is reluctant to impose additional costs on those [pension] plans (paragraph 124, footnote omitted). The Board notes, however, that when the pension standards were adopted, a large majority of pension plans had been advance-funding on an actuarially determined basis for many years. Thus, the unfunded actuarial accrued liabilities of plans using the aggregate actuarial cost method effectively were being included in funding requirement determinations, even though they were not separately calculated. In contrast, very few OPEB plans currently are advance-funded on an actuarially determined basis. It is not possible at this time to reliably estimate what proportion of OPEB plans might select the aggregate actuarial cost method (a) for funding purposes or (b) solely for financial reporting purposes if they remain unfunded. The Board concluded that if an unfunded (for example, pay-as-you-go) OPEB plan selected the aggregate actuarial cost method solely for financial reporting purposes (that is, unfunded actuarial accrued liabilities effectively were not being included in funding requirement determinations), exempting the plan from preparing a schedule of funding progress would leave users without sufficient information to assess the financial effects of the plan s method of financing. Therefore, the Board concluded that plans that elect to use the aggregate method should be required to prepare a schedule of funding progress using an acceptable actuarial cost method that separately identifies actuarial accrued liabilities. The Board believes it is unnecessary to allow a choice of methods for that limited purpose. The Board selected the entry age method as the required method because it is conceptually similar to the aggregate method. 19

29 The Board acknowledges that a requirement to use entry age for the schedule of funding progress when the aggregate method is used for other accounting information is a departure from the general approach of this Statement and the related Statement. Nevertheless, for the reasons stated above, the Board believes that funded status information based on the entry age method is more useful to users of OPEB plan financial reports than providing no information about funded status. Moreover, the potential for confusion for users due to the use of two different methods can be mitigated by disclosure of the reason the entry age method is used for the schedule of funding progress only that is, that it cannot be prepared using the aggregate method. Most respondents to the plan Exposure Draft who commented on this issue concurred with the Board s position to require disclosure of information about funded status and funding progress using the entry age method. The Board reiterates that the aggregate method is required for determining the employer s ARC when that method is used for funding; it is not acceptable under this Statement or the related Statement to use entry age or another method for determining the ARC when the aggregate method is used for funding. Similarly, when the aggregate method is used for determining the ARC, the schedule of employer contributions should be computed using that method. 37. The change adopted in Statements 43 and 45 was based on the view that the presentation of funded status and funding progress information is so basic to achievement of the financial reporting objectives of the OPEB Statements that it should be required, without regard to which actuarial cost method has been used to determine the ARC. In proposing the same change for pension reporting, the Board tentatively concluded that the same perspective applies there, as well. As discussed previously, the Board believes that funded status and funding progress information is considered essential by pension plan financial report users. Moreover, based on observations made after the implementation of Statements 25 and 27, the Board tentatively concluded that the absence of that information could be misinterpreted by financial report users. The Board also noted that it would be difficult, if not impossible, for even reasonably knowledgeable, diligent financial report users having an interest in pensions to estimate funding progress if an employer had not contributed to the plan on a consistent basis an 20

30 amount equal to the ARC determined using the aggregate actuarial cost method. The Board expressed the belief that the requirements of this Statement for reporting of funded status and funding progress information using the entry age actuarial cost method as a surrogate could avoid questions about where a defined benefit plan stands, approximately, with regard to funding. 38. In proposing the change, the Board noted that recent information confirms that relatively few pension plans use the aggregate method, and for those that do, the proposed change would involve an incremental actuarial cost to calculate the surrogate actuarial accrued liabilities and funded status of the plan using the entry age actuarial cost method for that purpose. The Exposure Draft reflected the Board s tentative conclusion that the benefit of the information to the users of those plans financial reports would exceed the incremental cost to those plans to produce the information. 39. Some respondents to the Exposure Draft agreed that current reporting for pension plans that use the aggregate actuarial cost method to determine the ARC does not provide a basis for understanding the funded status of the plan and that requiring presentation of estimated funded status information using the entry age actuarial cost method would be appropriate and useful. Some, however, questioned the tentative decision to specify use of the entry age actuarial cost method for that purpose, rather than allow a range of choices, which Statements 25 and 27 permits for other uses. Others who disagreed with the proposal questioned the benefit of requiring funded status information prepared using an actuarial cost method different from that used to manage the plan or whether the benefit would exceed the cost of preparing the information. One respondent also commented that because entry age would only approximate what the funded status using 21

31 the aggregate actuarial cost method (if knowable) would be, an unintended result could be the disclosure of funded status information that could be misused to support a level of employer contributions lower than the level determined using the aggregate method, in some circumstances. 40. After discussion of the respondents comments, the Board reaffirmed its tentative conclusions that: a. The funded status of a defined benefit pension plan is essential information. b. Because the aggregate actuarial cost method does not measure funded status, the use of a surrogate method to present the funded status of a plan is appropriate. c. Considerations underlying the Board s decision to permit the use of one of several actuarial cost methods (including aggregate) to determine the ARC do not apply to the selection of a method to serve as a surrogate for the aggregate method with regard to presentation of funded status information. 41. For plans and sole and agent employers that use the aggregate method for determining the ARC, the Board concluded that the benefit of reporting the funded status and funding progress of the plan using the entry age actuarial cost method as a surrogate exceeds the incremental cost of producing that information. However, the Board decided not to require such plans and employers to obtain that information for actuarial valuations as of dates prior to June 15, 2007, as discussed in paragraph The Board acknowledges that the aggregate actuarial cost method can be a relatively more aggressive funding method than entry age if an employer consistently makes the contributions determined on that basis. As a result, it is conceivable that a user might infer from the surrogate funded status information disclosed that an employer contribution less than the ARC determined using the aggregate actuarial cost method would be sufficient to fund the plan. As observed by one respondent, this situation arose when Statement No. 5, Disclosure of Pension Information by Public Employee 22