GASB proposes to modify guidance on ARC adjustment for pensions and OPEB.(Annual Required Contribution)(other postemployment benefit)

In mid-July, the Governmental Accounting Standards Board (GASB) invited comment on a draft technical bulletin, Determining the Annual Required Contribution Adjustment for Postemployment Benefits. The draft technical bulletin proposes to modify how an employer calculates pension expense or other postemployment benefit (OPEB) expense in situations where the employer has previously contributed less (or more) than the employer's annual required contribution (ARC). If approved, the changes proposed in the draft technical bulletin will first have to be implemented for the fiscal year ending December 31, 2009 (with earlier implementation encouraged).

BACKGROUND

For employers that participate in a single-employer or agent multiple-employer pension/OPEB plan, the ARC is the normal measure of pension/OPEB cost. Thus, an employer whose ARC for in the current period was $7,500 would normally report that same amount as pension/OPEB expense in the financial statements. If the employer were for some reason to contribute less (or more) than that amount (e.g., $2,500), the difference would be reported as a liability (asset):

 
                      CR        DR 
 
Pension/OPEB 
  expense           $7,500 
 
Cash                          $2,500 
 
Net pension/OPEB 
  obligation                  $5,000 
 
(To report pension/OPEB expense 
and related employer contribution) 

In the case of a contribution deficiency, the actuary must increase the amount of the ARC in subsequent periods to recover the missing contribution (as well as related interest). Since the missing contribution (but not the related interest) would already have been recognized as expense when the deficiency occurred, it cannot be recognized as expense yet again, in some later period. Thus, once a funding deficiency has occurred, the ARC must be adjusted before it can serve as the measure of pension/OPEB expense. That is, there must be an ARC adjustment to remove any portion of the ARC that reflects the recovery of prior contribution deficiencies.

GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, and GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, presumed that it would be impractical for employers to obtain the actual amount of the actuarial adjustment. Therefore, those two standards provided a formula for estimating the amount of the actuarial adjustment. That formula involved the following steps:

* Estimate the total increase in the ARC (i.e., both the recovery of the missing contribution and related interest) by dividing the liability for ...