The Governmental Accounting Standards Board recently issued an exposure draft proposing that public sector employers be required in the future to accrue the cost of any postretirement healthcare or similar benefits they may offer to employees. In a separate exposure draft, the GASB also is proposing guidance on how accountants should prepare financial statements for related benefit plans. The questions that follow are designed to summarize briefly the key proposals being put forward by the GASB.
What specific types of benefits would be covered by the proposed new guidance? The GASB is proposing guidance for other postemployment benefits. As used by the GASB, this term is intended to encompass all types of postretirement benefits not offered through a pension plan (e.g., life insurance, disability). In addition, the term always applies to postretirement healthcare benefits, regardless of whether they are offered through a pension plan.
What is the current accounting treatment for other postemployment benefits? Most governments now recognize the cost of other postemployment benefits on a pay-as-you-go basis. Although existing accounting standards allow employers to accrue the cost of these benefits in advance of payment, few employers have chosen to do so.
What change is the GASB proposing? For the purpose of the government-wide financial statements, the GASB is proposing that employers be required to accrue the cost of other postemployment benefits as expense as benefits are earned by employees. Governmental funds, however, would continue to report an expenditure only as payments become due.
Why is change needed? The GASB believes that other postemployment benefits are, in essence, a form of employee compensation, much like pension benefits. Therefore, it believes the cost of these benefits, like the cost of pension benefits, should be accrued as expense.
What accounting is used for such benefits in the private sector? Private sector employers have been required to accrue expense for postretirement benefits other than pensions since 1993, the effective date of the Financial Accounting Standards Board's Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
How are employers supposed to measure the cost of other postemployment benefits? For most employers, the cost of other postemployment benefits would be calculated much like pension cost. An actuary would be engaged to:
* project future benefit payments,
* determine the present value of projected benefit payments, and
* use one of several acceptable actuarial cost allocation methods to assign costs to specific accounting periods.
(For employers participating in defined contribution plans or cost-sharing multiple-employer plans, the cost of other postemployment benefits would be simply the contractually required contribution.)
Would governments need to report a liability for the cost of other postemployment benefits earned prior to implementation of the proposed new standard? No. The cost of other postemployment benefits earned prior to implementation of the new standard would be treated much like the unfunded actuarial accrued liability for pension benefits. That is, the actuary would include a portion of any remaining unfunded cost from prior periods in the calculation of the employer's annual required contribution in subsequent periods (not to exceed 30 years).
What would happen if an employer failed to fully fund the annual required contribution for other postemployment benefits once the new standard was implemented? …