NO. 237-C | DECEMBER 2004
Governmental
Accounting Standards Series
GASB Technical Bulletin No. 2004-2
_____________________________________________
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 06856-5116
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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?............ 2–4
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? ......................................................................................... 5–6
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‖? ................................................................................... 7–9
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? ............................................................ 10–11
Effective Date ................................................................................................................. 12
Appendix 1: Background .......................................................................................... 13–25
Appendix 2: Codification Instructions ............................................................................26
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.
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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?
Response
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.
b.
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
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?
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Response
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.
b.
Expressly identified as the contributions required from participating cost-sharing
employers for a period of time (for example, a designated month, quarter, or year)
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‖?
Response
8.
In governmental fund financial statements, which are prepared on the modified
accrual basis of accounting, a cost-sharing employer should recognize:
a.
b.
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
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
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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 4
10. 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?
Response
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.
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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.
b.
c.
A participating employer has a June 30 fiscal year-end.
The scheduled contribution payment dates are February 15, May 15, August 15, and
November 15.
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 15.
16. As discussed in question 3, paragraph 16 of Statement 27 and paragraph 19 of
Statement 45 require employers to recognize governmental fund expenditures and
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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. . . .
17. 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.
b.
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.)
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 30.
19. 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
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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.
b.
c.
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.
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.)
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
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d.
22.
―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).
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.‖
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.
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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.
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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 2004-2
[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 CostSharing 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 2004-2, ¶1]
Question 1
[GASBTB 2004-2, ¶2] [Change cross-references.]
Response
[GASBTB 2004-2, ¶3 and ¶4] [Change cross-references.]
Question 2
[GASBTB 2004-2, ¶7] [Change cross-references.]
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Response
[GASBTB 2004-2, ¶8 and ¶9]
Question 3
[GASBTB 2004-2, ¶10] [Change cross-references.]
Response
[GASBTB 2004-2, ¶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 2004-2
[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 2004-2, ¶1]
Question 1
[GASBTB 2004-2, ¶2] [Change cross-references.]
Response
[GASBTB 2004-2, ¶3 and ¶4] [Change cross-references.]
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Question 2
[GASBTB 2004-2, ¶5]
Response
[GASBTB 2004-2, ¶6] [Change cross-references.]
Question 3
[GASBTB 2004-2, ¶7] [Change cross-references.]
Response
[GASBTB 2004-2, ¶8 and ¶9]
Question 4
[GASBTB 2004-2, ¶10] [Change cross-references.]
Response
[GASBTB 2004-2, ¶11] [Change cross-references.]
***
PENSION ACTIVITIES—EMPLOYER REPORTING
SECTION P20
Sources: [Add the following:] GASB Technical Bulletin 2004-2
[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 2004-2, ¶1]
Question 1
[GASBTB 2004-2, ¶2] [Change cross-references.]
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Response
[GASBTB 2004-2, ¶3 and ¶4] [Change cross-references.]
Question 2
[GASBTB 2004-2, ¶5]
Response
[GASBTB 2004-2, ¶6] [Change cross-references.]
Question 3
[GASBTB 2004-2, ¶7] [Change cross-references.]
Response
[GASBTB 2004-2, ¶8 and ¶9]
Question 4
[GASBTB 2004-2, ¶10] [Change cross-references.]
Response
[GASBTB 2004-2, ¶11] [Change cross-references.]
***
[Note: For employer reporting of postemployment benefits other than pensions, Technical
Bulletin 2004-2 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 2004-2
[Insert paragraph .601 as follows, omitting references to Statement 27 and to pensions:]
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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 2004-2,
¶1]
Question 1
[GASBTB 2004-2, ¶2] [Change cross-references.]
Response
[GASBTB 2004-2, ¶3 and ¶4] [Change cross-references.]
Question 2
[GASBTB 2004-2, ¶5]
Response
[GASBTB 2004-2, ¶6] [Change cross-references.]
Question 3
[GASBTB 2004-2, ¶7] [Change cross-references.]
Response
[GASBTB 2004-2, ¶8 and ¶9]
Question 4
[GASBTB 2004-2, ¶10] [Change cross-references.]
Response
[GASBTB 2004-2, ¶11] [Change cross-references.]
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