Change in covered payroll: many have been surprised to discover that covered payroll was, in fact, affected by the latest pension guidance from the GASB.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle - Governmental Accounting Standards Board - Report

It is common knowledge that accounting and financial reporting for pension plans and participating employers will change dramatically as a result of recent pronouncements from the Governmental Accounting Standards Board (GASB). All the same, it had appeared that covered payroll, an important element of note disclosure and required supplementary information (RSI) under existing pension guidance, would remain unaffected. Recently however, many have been surprised to discover that covered payroll was, in fact, affected by the latest pension guidance from the GASB. This article will examine how the meaning of covered payroll has changed.

BACKGROUND

There is normally a difference between the present value of pension benefits earned by employees and the assets accumulated in a trust or equivalent arrangement to pay those benefits. Under previous authoritative standards this amount was known as the unfunded actuarial accrued liability (UAAL) or unfunded actuarial liability (UAL); under the GASB's new pension pronouncements, it will be referred to as the net pension liability (NPL). A point of reference is needed for evaluating the significance of the NPL for a given employer. Accordingly, previous authoritative pension standards required, and new authoritative pension standards will continue to require, that this amount be compared to payroll for employees covered by the plan (covered payroll), either as part of note disclosure, as part of RSI, or both.

An example of the current note disclosure for employers can be found on page 61 of the illustrative comprehensive annual financial report that appears as Appendix D to the most recent edition of Governmental Accounting, Auditing, and Financial Reporting:

Funded status and funding progress. As of July 1, 2012, the most recent actuarial valuation date, the funded status of the plan was as follows:

Actuarial accrued liability (AAL) $42,267,100 Actuarial value of plan assets $37,516,400 Unfunded actuarial accrued liability (UAAL) $4,750,700 Funded ratio (actuarial value of plan assets/AAL) 88.76% Covered payroll (annual payroll of active employees covered by the plan) $10,396,800 UAAL as a percentage of covered payroll 45.69% CHANGE IN DEFINITION

While the new GASB standards will still require that an employer's net pension liability (NPL) be compared to covered payroll, the definition of the latter term has changed significantly. GASB Statement No. 25, Financial Reporting for Defined Benefit Pension...