By Kevin Peters
In 2012, the Governmental Accounting Standards Board (GASB) issued two new pension standards: GASB Statement No. 67, Financial Reporting for Pension Plans (effective for fiscal years ending on or after June 30, 2014) and GASB Statement No. 68, Accounting and Reporting for Pensions (effective for fiscal years ending on or after June 30, 2015).
As you might expect, these new standards will change the way pension liabilities are reported. In issuing these standards, the GASB believes there will be a substantial improvement in transparency, consistency and comparability of pension information reported.
There are two basic types of pension plans: defined benefit and defined contribution pensions.
Defined benefit, as the term may imply, specifies the benefits to be provided to the employees after the end of employment.
Defined contribution plans stipulate the contributions to an active employee’s account each year. The benefits the retired employee will receive will depend on contributions and earnings on investments.
An agent multiple-employer plan is one in which the assets of the participating governments are pooled for investments but separate accounts are maintained for each employer. Each participating employer’s share of the pooled assets is available to pay pension benefits of only its retirees.
When total pension liability exceeds the pension plan’s net assets available to pay benefits, the result is a net pension liability. Under the new GASB standards, governments will now be required to report that amount on their accrual based statements. The standards will require cost-sharing governments to report a net pension liability, pension expense and pension related deferred inflows and outflows based upon their allocated share of the total governments in the plan.
Part of the GASB’s reasoning in issuing these standards appears to be transparency and comparability. The pension liability would be reported as other long-term liabilities and obligations and thus the entity’s financial statements will better portray the overall picture of the governmental entity.
There are also additional disclosures required.
Stay tuned to the BCS Blog for more on these new standards. For additional reading, both the GFOA and GASB have articles and plain language guides posted on their websites.
Sources: GASB: New Pension Statements to Bring about Major Improvements in Financial Reporting, June 2012, Q&A Governments in Agent Multiple-Employer Defined Benefit Pension Plans, December 2013 and Q&A Background on the GASB’s New Pension Standards, November 2013.