Going by the old saying “better late than never” the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions – An Amendment of GASB Statement No. 27, in June 2012. This statement, much like the Financial Accounting Standards Board (FASB) with FASB Statement No. 158, issued way back in September 2006, changes the way entities account for defined benefit pension plans. While FASB Statement No. 158 applies to for-profit and not-for-profit healthcare entities, GASB Statement No. 68 applies to governmental healthcare entities. Both standards require that the funded status of a defined benefit pension plan, the difference between the assets in the plan and the actuarially calculated liability due to plan participants, be reported on the employer’s balance sheet. While the FASB statement did not change the amount reported in pension expense or the calculation of the actuarially determined liability from previous standards and allowed the change in the unfunded liability not reported in pension expense to be reflected as other comprehensive income (or other changes in net assets for not-for-profit entities), the GASB decided to “one-up” the FASB by changing how both the liability and pension expense are measured. Also, the GASB statement limits the change in the liability that does not go through pension expense and requires those changes to be reflected as deferred outflows or inflows of resources on the statement of net position (under GASB Statement No. 63), not through equity as the FASB statement does.
Generally, the changes in measurement brought about by GASB Statement No. 68 will result in a higher pension obligation liability and higher pension expense. The changes in the pension obligation are due to several factors. Among them is the requirement to use two different discount rates if projected plan assets are not sufficient to fund future required payments (i.e. if the plan is underfunded). The long-term investment rate of return is used to the extent assets are available but for unfunded amounts, the tax-exempt, high quality (an average rating of AA/Aa or higher) 20 year general obligation bond index rate is to be used. Additionally, the statement requires the use of the “entry age normal” method as a level percentage of payroll as opposed to the ability to choose among six acceptable methods currently available in measuring the liability. The intent for measuring pension expense was to better align its recognition with the period in which the related benefits are earned (i.e. generally, recognition will be accelerated). Several causes of changes in the net pension liability will be factored into the calculation of pension expense immediately in the period in which the change occurs. Those are benefits earned each year, interest on the total pension liability, changes in benefit terms, projected earnings on plan investments and changes in plan net position from other than investments. The effects on the pension liability of changes in assumptions and differences between assumptions and actual experience are recognized initially as deferred inflows or outflows, and then expensed systematically and rationally over the average remaining years of employment. This period is likely to be significantly shorter than the period of up to 30 years the current guidance allows. The difference between expected earnings and actual earnings on plan investments is to be recognized as a deferred outflow or inflow and included in pension expense in a systematic and rational manner over a 5-year closed period. This is also shorter than the periods currently allowed.
GASB Statement No. 68
The new guidance also includes expanded disclosure requirements as well as additional required supplementary information (RSI). GASB Statement No. 68 is effective for periods beginning after June 15, 2014, with the financial statements being restated for all periods presented. Even though the required implementation of this statement is a few years away, governmental health care entities that have a defined benefit pension plan should be discussing GASB Statement No. 68 with their actuary and begin evaluating the effects of its adoption on their financial statements. Additionally, the GASB currently has changes in the accounting and financial reporting for other postemployment benefits (OPEB) on its project agenda. These changes are expected to be similar to those for pension plans.