GASB issues exposure drafts on pensions.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle

In June, the Governmental Accounting Standards Board (GASB) issued two exposure drafts (ED) on accounting and financial reporting for pensions. One of these EDs focuses on employers; the other on pension plans. This article highlights the key proposals in each.

PARTICIPANTS IN SOLE-EMPLOYER AND AGENT PLANS

The GASB is proposing significant changes in how employers in sole-employer and agent multiple-employer defined benefit plans account for the cost of pension benefits.

Employer Liability (Asset). Currently, an employer reports a liability (asset) only if there is a difference between 1) the employer's actuarially determined annual required contribution (ARC) and 2) actual contributions and benefit-related payments made by the employer. The ED proposes that an employer should report a net pension liability (or asset) for the difference between:

* The present value of projected benefits earned by employees for past service (total pension liability); and

* The plan's net position (i.e., [assets + deferred outflows] - [liabilities + deferred inflows] = plan net position) as of the employer's reporting date. For example, if the present value of the employer's total pension liability was $100, and plan net position was $90, the employer would report a net pension liability of $10. Conversely, if those amounts were reversed, the employer would report a $10 net pension asset.

Discount Rate. An employer's total pension liability represents the present value of projected benefits earned for past service. Currently, discounting is based on the estimated long-term investment yield for the plan, with consideration given to the nature and mix of current and expected plan investments. Some critics of current practice have argued that the use of an investment-based discount rate is inappropriate for any portion of the total pension liability that will not, in fact, be paid out of plan assets (i.e., because the plan is underfunded). Other critics object to the use of an investment-based discount rate in any circumstances, arguing instead for the use of a risk-free rate of return (e.g., U.S. Treasuries). The GASB rejected calls to mandate the use of a risk-free rate of return for discounting. The board agreed with critics, however, that the use of an investment-based discount rate was inappropriate for benefits not expected to be paid from current or future plan net position. Accordingly, the ED calls for the use of a single blended rate that reflects...