Governmental Accounting Standards Series

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1 NO. 237-C DECEMBER 2004 Governmental Accounting Standards Series GASB Technical Bulletin No Title: Recognition of Pension and Other Postemployment Benefit Expenditures/Expense and Liabilities by Cost-Sharing Employers References: GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions GOVERNMENTAL ACCOUNTING STANDARDS BOARD OF THE FINANCIAL ACCOUNTING FOUNDATION 401 MERRITT 7, PO BOX 5116, NORWALK, CONNECTICUT

2 Contents Paragraph Numbers Introduction... 1 Question 1: To what does the term contractually required contributions refer in paragraph 19 of Statement 27 and in paragraph 23 of Statement 45? Question 2: For purposes of expenditure/expense recognition, are employers contractually required contributions to cost-sharing pension and OPEB plans attributable to the periods of time for which the contributions are assessed? Question 3: How should employers apply the requirements of paragraph 16 of Statement 27 and paragraph 19 of Statement 45 to recognize governmental fund expenditures and liabilities on the modified accrual basis of accounting for pension or OPEB contributions to cost-sharing plans equal to the amount contributed to the plan or expected to be liquidated with expendable available financial resources? Question 4: How should employers apply the requirements of paragraph 17 of Statement 27 and paragraphs 20 and 21 of Statement 45 to recognize expense and related liabilities on the accrual basis of accounting for pension or OPEB contributions to cost-sharing plans? Effective Date Appendix 1: Background Appendix 2: Codification Instructions Introduction 1. The application to cost-sharing employers of the requirement expressed in paragraph 16 of Statement 27 for modified accrual recognition of pension expenditures and liabilities has been the subject of diverse interpretations and numerous inquiries. The circumstances that prompted questions about modified accrual accounting involve payment schedules for contractually required contributions by employers to a cost-sharing defined benefit pension plan in which a payment scheduled after the end of an employer s financial reporting period includes contributions for one or more months of that reporting period. Questions also arose in regard to the application of accrual basis requirements in similar circumstances. This Technical Bulletin clarifies the requirements of Statement 27 and Statement 45 for recognition of pension and other postemployment benefit (OPEB) expenditures/expense and liabilities by cost-sharing employers. 2

3 Question 1 2. To what does the term contractually required contributions refer in paragraph 19 of Statement 27 and in paragraph 23 of Statement 45? 3. The term refers to the contributions assessed by a cost-sharing pension or OPEB plan to the participating employers, however determined, for the periods to which the contractual requirement relates. It originally was used in Statement 27, and also is used in Statement 45, to emphasize the difference between the accounting measurement requirements for: a. Sole and agent employers based on the annual required contribution of the employer (ARC), an amount calculated in accordance with GASB parameters that includes the normal cost for the period and an additional amount to amortize unfunded actuarial liabilities for past services b. Cost-sharing employers based on the amounts assessed to employers by the plan pursuant to the funding policy for the plan, however determined. 4. The measurement requirements for cost-sharing employers reflect the nature of the responsibilities of cost-sharing employers with regard to the funding of defined pension or OPEB benefits. In a cost-sharing plan, the participating employers pool their benefit obligations and assets. In addition to administrative responsibilities related to the assessment and collection of contributions, the investment of plan assets, and the payment of benefits and plan expenses when due, the plan assumes from the individual employers the responsibility to fund the benefits promised to the covered employees and retirees collectively. In exchange, the individual cost-sharing employers incur liabilities to the plan for the contractually required contributions assessed to them by the plan as their share of the aggregate funding requirements for specified periods. Question 2 5. For purposes of expenditure/expense recognition, are employers contractually required contributions to cost-sharing pension and OPEB plans attributable to the periods of time for which the contributions are assessed? 3

4 6. Yes. Contractually required contributions from employers to cost-sharing pension and OPEB plans are attributable to the periods of time for which the contributions are assessed by the plan. Contractually required contributions characteristically are: a. Expressly identified as the contributions required from participating cost-sharing employers for a period of time (for example, a designated month, quarter, or year) b. Expressed as a percentage of the payroll(s) for active plan members for that period. Accordingly, Statements 27 and 45 reflect the understanding that pension and OPEB contributions to cost-sharing plans are related to the designated payrolls, and the pay periods, for which contributions are calculated or required by the agreements pertaining to the plan. Question 3 7. How should employers apply the requirements of paragraph 16 of Statement 27 and paragraph 19 of Statement 45 to recognize governmental fund expenditures and liabilities on the modified accrual basis of accounting for pension or OPEB contributions to costsharing plans equal to the amount contributed to the plan or expected to be liquidated with expendable available financial resources? 8. In governmental fund financial statements, which are prepared on the modified accrual basis of accounting, a cost-sharing employer should recognize: a. Pension or OPEB expenditures equal to the sum of (1) amounts contributed (paid) during the financial reporting period as contractually required contributions for pay periods within that period and (2) any additional unpaid contractually required contributions for one or more pay periods within that period b. A fund liability for the unpaid contractually required contributions (that is, the unpaid contributions assessed for one or more pay periods within the financial reporting period). 9. For example, assume that at year-end an employer has paid the contractually required contributions of $700,000 due to a cost-sharing pension or OPEB plan for the first six months (July through December) of the employer s fiscal year ended June 30, 20X1. The contractually required contributions of $800,000 due to the plan for the second six months (January through June) of the fiscal year will be included in a payment that is 4

5 scheduled on a date subsequent to year-end. The employer should recognize a pension or OPEB expenditure of $1,500,000 and a liability of $800,000 in governmental fund financial statements for the year ended June 30, 20X1. Question How should employers apply the requirements of paragraph 17 of Statement 27 and paragraphs 20 and 21 of Statement 45 to recognize expense and related liabilities on the accrual basis of accounting for pension or OPEB contributions to cost-sharing plans? 11. Expense and the associated liabilities are measured based on the contractually required contributions of the employer to the cost-sharing plan. Employers should recognize the contractually required contributions for the financial reporting period and a liability for any of those contributions that remain unpaid at the end of the period. In the context of the illustrative facts in paragraph 9, the employer should recognize pension or OPEB expense of $1,500,000 and a liability of $800,000. Effective Date 12. As it relates to pension transactions, this Technical Bulletin is effective for financial statements for periods ending after December 15, 2004; earlier application is encouraged. As it relates to OPEB transactions, the provisions of this Technical Bulletin should be applied simultaneously with the requirements of Statement 45. The Governmental Accounting Standards Board has authorized its staff to prepare GASB Technical Bulletins to provide timely guidance on certain financial accounting and reporting problems, in accordance with the procedures described in Technical Bulletin No. 84-1, Purpose and Scope of GASB Technical Bulletins and Procedures for Issuance. The provisions of Technical Bulletins need not be applied to immaterial items. The GASB has reviewed this Technical Bulletin, and a majority of its members do not object to its issuance. 5

6 Appendix 1 BACKGROUND 13. In the interest of a common understanding and comparable application of the requirements of Statements 27 and 45 related to the recognition of pension and OPEB expenditures/expense and liabilities by cost-sharing employers, and of transparent financial reporting, the Board authorized staff to issue this Technical Bulletin to provide timely guidance. 14. In response to technical inquiries that suggested the need for clarification of pension expenditure and liability recognition by cost-sharing employers, consideration also was given to sole and agent employers and to other postemployment benefits (OPEB). The scope of the Exposure Draft of this Technical Bulletin was broadened to include discussion of the modified accrual recognition requirements for both categories of employers and both categories of postemployment benefits as well as discussion of accrual recognition requirements in the same combinations of circumstances. As discussed in paragraph 25, the scope of the Technical Bulletin was subsequently returned more closely to the subject of the original inquiries and covers the application of the recognition requirements of Statements 27 and 45 to cost-sharing employers only. 15. To illustrate the circumstances that have been the primary subject of recognition questions, assume that a cost-sharing defined benefit pension plan (or OPEB plan, such as a postemployment healthcare plan) has established a contribution payment schedule under which employers are required to make contractually required contributions on a quarterly basis. Assume also that: a. A participating employer has a June 30 fiscal year-end. b. The scheduled contribution payment dates are February 15, May 15, August 15, and November 15. c. Each payment comprises contributions assessed for the preceding quarter. For example, the payment scheduled for August 15 includes the contributions assessed for the months of April, May, and June preceding the scheduled payment date. In terms of this illustration, the point clarified in this Technical Bulletin relates to the appropriate accounting for the contributions scheduled for payment on August As discussed in question 3, paragraph 16 of Statement 27 and paragraph 19 of Statement 45 require employers to recognize governmental fund expenditures and 6

7 liabilities for pension or OPEB contributions, respectively, equal to the amount contributed to the plan or expected to be liquidated with expendable available financial resources. Statement 27 provides no additional discussion regarding that requirement, except for the following statement in paragraph 177 (Basis for Conclusions), in the context of discussion of a separate issue (the Board s decision not to require allocation of the unfunded actuarial accrued liability of a cost-sharing plan to the employers):... Therefore, this Statement requires cost-sharing employers to recognize pension expenditures/expense equal to their contractually required contributions and a liability to the plan for contributions due and unpaid The preceding statement, which applies both to modified accrual and accrual recognition ( expenditures/expense ) by cost-sharing employers, has been interpreted in various ways, contributing to a substantial risk of diverse accounting practices and reduced usefulness of reported financial information. Some interpretations previously formed the basis for a conclusion by some financial statement preparers and auditors that expenditure recognition by cost-sharing employers should be based on the date on which payment of contractually required contributions is scheduled. For example: a. Some have inferred from the term contractually required contributions that such contributions should be viewed as essentially amounts scheduled on contractually required payment dates. (Some who view the transactions in that way would argue for accrual as well as modified accrual recognition based on payment dates.) b. Others have interpreted the word due in paragraph 177 as referring to the scheduled payment date (often by analogy with the interpretation of modified accrual requirements pertaining to the recognition of debt service on general obligation bonds), leading them to conclude that a liability should not be recognized prior to that date. 18. Referring to the illustration in paragraph 15, the accounting outcome of these interpretations would be to defer recognition of contractually required contributions assessed for the months of April through June until the following fiscal year, in which payment is scheduled on August 15; that is, the employer would not recognize those contributions as an expenditure and governmental fund liability in financial statements for the year ended June Still others previously have believed that the application of the phrase expected to be liquidated with expendable available financial resources in paragraph 16 of Statement 27 should be based on, for example, an employer s decision whether or not to budget an 7

8 unpaid contractually required contribution, or the availability of sufficient current financial resources, or the time interval between an employer s fiscal year-end and the payment due date in each case generally resulting in limited, if any, governmental fund liability recognition. 20. Other financial statement preparers and auditors have believed (consistent with the guidance in this Technical Bulletin) that the employer in the example should recognize the contractually required contributions for the months of April through June as expenditures and a liability in governmental fund financial statements prepared for the year ended June 30 (and as expense and a liability in the government-wide financial statements). They suggested various bases for their conclusion. 21. The framework of existing requirements regarding modified accrual recognition of governmental fund liabilities and expenditures may be summarized as follows: a. NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, paragraph 70, requires that a government accrue a governmental fund liability and expenditure for most expenditures in the period in which the government incurs the liability. b. NCGA Statement 1, paragraphs 43 and 44, requires that unmatured long-term indebtedness (the portion of general long-term indebtedness that is not yet due for payment) be reported as general long-term liabilities of the government, rather than as governmental fund liabilities. Long-term indebtedness, in that context, includes not only formal debt issues such as bonds, but also other forms of general long-term indebtedness, including capital leases, compensated absences, claims and judgments, pensions, special termination benefits, landfill closure and postclosure obligations, and other commitments that are not current liabilities properly recorded in governmental funds. (The inclusion of pensions in this list, from NCGA Statement 1, was made primarily in reference to sole and agent employers and makes clear that a sole or agent employer would not report as a fund liability or expenditure portions of pension liabilities that are to be amortized through the payment of actuarially determined funding requirements in future years.) c. In GASB Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements, the Board interpreted that the matured liabilities that should be recognized as governmental fund liabilities include the following: (1) Liabilities that normally are due and payable in full when incurred. (2) The matured portion of general long-term indebtedness. (3) Debt service on formal debt issues when due, with optional additional accrual if a government has provided financial resources to a debt service fund for payment of liabilities that will mature early in the following year. (4) Compensated absences, claims and judgments, special termination benefits, and landfill closure and postclosure care costs, to the extent the liabilities are 8

9 normally expected to be liquidated with expendable available financial resources. Governments are normally expected to liquidate these specific types of liabilities with expendable available financial resources to the extent the liabilities mature each period. Based on examples given in Interpretation 6, the determination of when a portion of a particular liability has matured, and should be recognized as a fund liability, depends on the nature of the liability. In some cases (compensated absences and landfill closure and postclosure care), liabilities are deemed to mature upon the occurrence of triggering events (termination of employment or the receipt of goods or services). d. GASB Statements 27 and 45 also require recognition of employer contributions to defined benefit pension and OPEB plans, respectively, to the extent the liabilities are expected to be liquidated with expendable available financial resources. 22. The guidance in this Technical Bulletin regarding the way in which liabilities for contractually required contributions to a cost-sharing pension or OPEB plan should be deemed to mature for accounting purposes reflects the particular nature of a cost-sharing plan and of the contributions assessed to cost-sharing employers. Unlike sole and agent employers, which are solely responsible for funding their own promised pension benefits or OPEB but generally retain some flexibility with regard to the timing and amounts of contributions to the plan, cost-sharing employers pool both their benefit obligations and their assets contributed to a plan for the payment of those obligations. A cost-sharing plan assumes the responsibilities (provides the services) of administration and funding of benefits, on a collective basis. In exchange, the participating cost-sharing employers incur liabilities for contractually required contributions that generally are stated as a percentage of covered payroll for specified periods and that all employers are required to pay. 23. This Technical Bulletin reflects the view that contractually required contributions to a cost-sharing pension or OPEB plan for a period are mature upon receipt of the services that is, the assumption of responsibility for administration of the plan and for the funding of benefits provided to the employers by the plan for that period. It follows that, in normal circumstances, the contractually required contributions assessed for the employer s financial reporting period should be reported as expenditures and, to the extent unpaid, governmental fund liabilities. Because there is no portion of the contractually required contributions assessed for the financial reporting period that is unmatured, in normal circumstances there will be no difference required between expenditures recognized on the modified accrual basis and expense recognized on the accrual basis for contractually required contributions to cost-sharing plans. 9

10 24. There is a possible set of circumstances, outside the normal situation discussed in the preceding paragraph, for which the preceding guidance would be modified based on the application of the modified accrual basis of accounting. That is, a cost-sharing employer might reach a formal agreement with the plan for deferred payout of a portion of the employer s unpaid contractually required contributions over a multiple-year period, with a specified extended payment schedule with interest on the unpaid balance. In such circumstances, the employer should account for that portion of the contractually required contribution as having been converted to pension- or OPEB-related debt, as discussed in Statements 27 and 45, respectively. 25. The Exposure Draft of this Technical Bulletin was published on the GASB website for a public comment period of one month. Comment letters were received from twenty organizations and individuals. The comment letters received, staff s analysis of issues raised, and a ballot draft of this Technical Bulletin were discussed with the Board. After review and analysis of issues raised by respondents and reconsideration of the original decision to broaden the scope to address recognition by sole and agent employers as well as cost-sharing employers, the scope of the final Technical Bulletin was modified to focus only on the questions related to recognition by cost-sharing employers. After discussion of the issues raised by respondents to the Exposure Draft, the Board authorized staff to issue this Technical Bulletin. 10

11 Appendix 2 CODIFICATION INSTRUCTIONS 26. Unless otherwise noted, the sections that follow update the June 30, 2004, Codification of Governmental Accounting and Financial Reporting Standards for the effects of this Technical Bulletin. Only the paragraph number is listed if the paragraph will be cited in full in the Codification. * * * REPORTING LIABILITIES SECTION 1500 [Note: Until Statement 45 is effective, omit references to that Statement, to Section P50, and to OPEB.] Sources: [Add the following:] GASB Technical Bulletin [Insert new paragraph.601, including headings, as follows, and renumber subsequent paragraphs:] TECHNICAL BULLETINS EFFECTIVE AFTER MARCH 15, 1992 Recognition of Pension and Other Postemployment Benefit Liabilities for Cost- Sharing Plans.601 This paragraph clarifies the requirements of Sections P20 and P50 for the recognition of pension and other postemployment benefit (OPEB) liabilities by costsharing employers. [GASBTB , 1] Question 1 [GASBTB , 2] [Change cross-references.] [GASBTB , 3 and 4] [Change cross-references.] Question 2 [GASBTB , 7] [Change cross-references.] 11

12 [GASBTB , 8 and 9] Question 3 [GASBTB , 10] [Change cross-references.] [GASBTB , 11] [Change cross-references.] * * * BASIS OF ACCOUNTING SECTION 1600 [Note: Until Statement 45 is effective, omit references to that Statement, to Section P50, and to OPEB.] Sources: [Add the following:] GASB Technical Bulletin [Insert new paragraph.601, including headings, as follows, and renumber subsequent paragraph:] TECHNICAL BULLETINS EFFECTIVE AFTER MARCH 15, 1992 Recognition of Pension and Other Postemployment Benefit Expenditures/Expense and Liabilities for Cost-Sharing Plans.601 This paragraph clarifies the requirements of Section P20 and Section P50, Postemployment Benefits Other Than Pension Benefits Employer Reporting, for recognition of pension and other postemployment benefit (OPEB) expenditures/expense and liabilities by cost-sharing employers. [GASBTB , 1] Question 1 [GASBTB , 2] [Change cross-references.] [GASBTB , 3 and 4] [Change cross-references.] 12

13 Question 2 [GASBTB , 5] [GASBTB , 6] [Change cross-references.] Question 3 [GASBTB , 7] [Change cross-references.] [GASBTB , 8 and 9] Question 4 [GASBTB , 10] [Change cross-references.] [GASBTB , 11] [Change cross-references.] * * * PENSION ACTIVITIES EMPLOYER REPORTING SECTION P20 Sources: [Add the following:] GASB Technical Bulletin [Insert paragraph.601 as follows, omitting references to Statement 45 and to OPEB:] TECHNICAL BULLETINS EFFECTIVE AFTER MARCH 15, 1992 Recognition of Pension Expenditures/Expense and Liabilities for Cost-Sharing Plans.601 This paragraph clarifies the requirements of this section for recognition of pension expenditures/expense and liabilities by cost-sharing employers. [GASBTB , 1] Question 1 [GASBTB , 2] [Change cross-references.] 13

14 [GASBTB , 3 and 4] [Change cross-references.] Question 2 [GASBTB , 5] [GASBTB , 6] [Change cross-references.] Question 3 [GASBTB , 7] [Change cross-references.] [GASBTB , 8 and 9] Question 4 [GASBTB , 10] [Change cross-references.] [GASBTB , 11] [Change cross-references.] * * * [Note: For employer reporting of postemployment benefits other than pensions, Technical Bulletin is effective when Statement 45 is implemented. Accordingly, the following changes are in addition to those indicated in the Codification instructions to Statement 45:] POSTEMPLOYMENT BENEFITS OTHER THAN PENSION BENEFITS EMPLOYER REPORTING SECTION P50 Sources: [Add the following:] GASB Technical Bulletin [Insert paragraph.601 as follows, omitting references to Statement 27 and to pensions:] 14

15 TECHNICAL BULLETINS EFFECTIVE AFTER MARCH 15, 1992 Recognition of OPEB Expenditures/Expense and Liabilities for Cost-Sharing Plans.601 This paragraph clarifies the requirements of this section for employer recognition of OPEB expenditures/expense and liabilities by cost-sharing employers. [GASBTB , 1] Question 1 [GASBTB , 2] [Change cross-references.] [GASBTB , 3 and 4] [Change cross-references.] Question 2 [GASBTB , 5] [GASBTB , 6] [Change cross-references.] Question 3 [GASBTB , 7] [Change cross-references.] [GASBTB , 8 and 9] Question 4 [GASBTB , 10] [Change cross-references.] [GASBTB , 11] [Change cross-references.] 15

16 For additional copies of this Technical Bulletin 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. GTB04-2. The GASB website can be accessed at Copyright 2004 by Financial Accounting Foundation. All rights reserved. Content copyrighted by Financial Accounting Foundation may not 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 Financial Accounting Foundation. 16