GASB proposes accrual of postretirement healthcare and similar benefits: The GASB believes other postemployment retirement benefits are a form of employee compensation and thus should be accrued as expense.

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

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,

*...