Pension Accounting and Financial Reporting

1. Pension Accounting and Financial Reporting GASB Invitation to Comment The views expressed in this presentation are those of Mr. Bean. Official positions of the GASB are determined only after extensive due process and deliberation.

2. Project Overview • Project objectives • Evaluate the effectiveness of current postemployment benefits reporting standards, with the focus of this phase on pensions • Consider need for modification to better meet the financial reporting objectives of accountability and decision usefulness, including extent to which interperiod equity has been achieved

3. ITC Overview • Issued March 31, 2009 • Plain-language supplement issued with the ITC • Comments were requested by July 31, 2009 • Internet comment form, email, traditional mail • Still not too late • Can still download free of charge at www.gasb.org • Public hearing on August 26, 2009

4. What is an ITC? • Developed with assistance of task force • Meredith Williams • Keith Brainard • Addresses several key questions raised during research phase of project • Staff document; however, topics included and arguments presented were deliberated by the Board

5. Chapter 1: Introduction • Project objectives and scope • Initial focus on pensions, consider OPEB at later stage • Project background • Standards developments • OPEB Statements • Conceptual framework • ITC objective and structure • Objectives of financial reporting • Accountability, decision usefulness, interperiod equity

6. Chapter 1: Key Points • Definition of a liability: Present obligation to sacrifice resources that the government has little or no discretion to avoid • Interperiod equity: • Attributes costs of the services to the period in which those services were provided and • attributes revenues provided by taxpayers and other revenue providers to the appropriate period • for the purpose of assessing whether those revenues were sufficient to finance the costs of providing services during that period.

7. Chapter 2: The Focus of Accounting and Financial Reporting • What defined benefit pension processes, transactions, or other events should financial reporting focus on (report information about)? • The process by which an employer incurs an obligation to employees? • The process by which an employer finances its projected future cash outflows? • Both processes?

8. Chapter 3: Recognizing Liabilities and Expenses • Concepts related to • Liabilities and flows of resources • Criteria for recognition in basic financial statements • Three alternative approaches to recognition by sole and agent employers • Each approach considers • What pension liability should be reported? • How should pension costs be attributed to periods?

9. Chapter 3: Recognizing Liabilities and Expenses (cont.) • What pension liability should be reported? • Is the obligation that meets the conceptual definition of a liability of the employer • A measure of the difference between the annual contributions necessary to maintain acceptable progress toward full funding and the contributions actually made? • A measure of the employer’s unfunded accrued benefit obligation associated with services received from employees to date? • Something else?

10. Chapter 3: Recognizing Liabilities and Expenses (cont.) • How should pension costs be attributed to periods? • In resource flows statements prepared with a flow of economic resources measurement focus and accrual basis of accounting, should employers • Recognize the effects of various pension-related transactions or other events immediately upon occurrence? • Amortize the effects of some or all transactions or other events (other than normal cost) over future periods?

11. Chapter 4: Measuring Pension Obligations • Alternative approaches to measurement of pension obligations • Future changes affecting benefits • Automatic and ad hoc COLAs • Projected future salary increases • Projected future service credits • Discount rate • Estimated long-term investment yield for the plan • Risk-free rate of return (or a yield curve of risk-free rates of return) • Employer’s borrowing rate • Interest rate on high-quality municipal bonds

12. Chapter 5: Actuarial Methods • Number of actuarial cost methods that should be permitted • Manner in which various methods allocate the present value of projected pension benefits among past, present, and future periods

13. Chapter 5: Actuarial Methods (cont.) • Amortization of the unfunded accrued benefit obligation • Whether/within what limits should some components of pension cost be recognized as expense in future periods? • Should different maximum amortization periods apply to different components of pension cost? • Should a single amortization basis (open or closed) be required? • Should maximum amortization periods vary depending on the amortization basis and methods chosen (if options are permitted)?

14. Chapter 5: Actuarial Methods (cont.) • Actuarial value of plan assets • Should determination include methods that allocate effects of fair-value changes over more than one year? • If so, what constraints, if any, should be placed on the use? • Should the funded status of the benefits that reflects the fair value of plan assets at the measurement date be disclosed?

15. Chapter 6: Cost-Sharing Plans • Is relationship between cost-sharing employer and plan different enough from the relationship of a sole or agent employer to its plan to warrant different liability/expense recognition? • Three views: • Current requirements appropriate • Current measurement/recognition requirements appropriate; additional disclosures needed • Measure and recognize in a manner similar to sole and agent employers

16. Chapter 7: Reporting by Pension Plans • What should a plan report as its liability in regard to pension benefits? • Benefits currently due and payable • Accrued benefit obligation • Should a presentation of changes in the unfunded accrued benefit obligation be a required part of general purpose financial reporting? • If yes, in reports of the employer, the plan, or both? • If yes, as a basic financial statement, in notes, or as RSI?

17. Feedback to Date

18. Project Timetable • October—Analysis of responses (including public hearing testimony) to be discussed by the Board • First full Board meeting after public hearing • November—Preliminary deliberations to begin • December 2—Task force meeting in New York • January-December 2010—Board deliberations • December 2010—Next due process document scheduled to be released • Preliminary views • Exposure draft • When will a final standard be issued?

19. Questions? Telephone—(203) 847-0700 Web site—www.gasb.org