US - State governments would be forced to report a net pension liability in their financial statements under new accounting proposals put forward by the Governmental Accounting Standards Board (GASB).
GASB has issued two Exposure Drafts proposing improvements to financial reporting of pensions by state and local governments in a bid to improve how the costs and obligations of public pensions are calculated and reported.
The first Exposure Draft, entitled Accounting and Financial Reporting for Pensions (Pension Exposure Draft), focuses on reporting by governments that provide pensions to their employees. The second, Financial Reporting for Pension Plans (Pension Plan Exposure Draft), addresses the reporting by the pension plans that administer those benefits.
The Pensions Exposure Draft recommends governments be required to report in their statement of financial position a net pension liability - the difference between the total pension liability and net assets (primarily investments reported at fair value) set aside in a qualified trust to pay benefits to current employees, retirees, and their beneficiaries.
It also proposes significant changes to how a government would calculate its total pension liability and pension expense.
• Immediate recognition of more components of pension expense than is currently required, including the effect on the pension liability of changes in benefit terms, rather than deferral and amortisation over as many as 30 years, which is common for funding purposes.
• Use of a discount rate that applies both the expected long-term rate of return on pension plan investments for which plan assets are expected to be available to make projected benefit payments and the interest rate on a tax-exempt 30-year AA-or-higher rated municipal bond index to projected benefit payments for which plan assets are not expected to be available for long-term investment in a qualified trust.
• A single actuarial cost allocation method-"entry age normal"-rather than the current choice among six actuarial cost methods. Requiring governments participating in cost-sharing multiple employer pension plans to record a liability equal to their proportionate share of any net pension liability for the cost-sharing plan as a whole.
• Requiring governments in all types of covered pension plans to present more extensive note disclosures and required supplementary information.
"Users of state and local government financial reports have told the GASB that current standards do not provide enough information to adequately understand the cost and the liability for benefits promised to active and retired employees," said GASB chairman Robert Attmore.
"The proposals contained in these Exposure Drafts are the result of years of research and extensive deliberations by the Board to address these issues and make financial reporting of pensions more transparent, comparable and useful to citizens, legislators, and bond analysts.
"It is important to note that these proposals relate to accounting and financial reporting, not to how governments approach the funding of their pension plans. Pension funding is a policy decision made by government officials."
The deadline for submitting written comments is September 30, 2011.
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