Getting familiar with OPEB

Here’s how GASB’s standards for other post-employment benefits compare with previous standards.
By Brian McAllister, CPA, Ph.D.; Connie Spinelli, CPA, CGMA; and Diane Belger, CPA

Getting familiar with OPEB
Image by gaisonok/iStock

In June 2015, GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions—three years after issuing new pension standards.

GASB defines other post-employment benefits (OPEB) as benefits other than pensions that state and local governments provide their retired employees. These benefits principally involve retiree health care benefits, but they also can include life insurance, legal, disability, and other services. GASB undertook the project to change accounting for OPEB in an effort to increase the transparency about the liabilities related to these benefits that are significant for many governments.

The issuance of these new OPEB standards culminates the second of two major initiatives to improve accounting and financial reporting for post-employment benefits. The suite of new pension and OPEB standards amends existing guidance from an emphasis on the funding or financing of pension or OPEB benefits to the accounting and financial reporting of a point-in-time liability for the unfunded portion of these benefits. The new standards significantly change the treatment of post-employment benefits in state and local government financial statements (see "OPEB Accounting Tips for Preparers").

GASB believes that the existing OPEB accounting standards are inadequate for assessing the complete financial position and economic condition of a government. Statement No. 75, the focus of this article, changes how governments providing defined benefit OPEBs report long-term obligations, calculate the annual expense, and meet disclosure requirements. These changes should provide users of governmental financial statements a more comprehensive measure of the costs associated with providing OPEB and the resources needed to make good on these OPEB promises.

Statements No. 74 and No. 75 parallel the pension standards, including similar terminology, methodologies, and reporting requirements. Statement No. 74 is effective for fiscal years beginning after June 15, 2016. Statement No. 75 is effective one year later—for fiscal years beginning after June 15, 2017.

RECOGNIZING A NET OPEB LIABILITY

Under existing standards, governments are required to record an OPEB liability equal to their cumulative amount of unpaid annual required contributions. Governments with single-employer and agent multiple-employer plans—both of which by their nature have separately identifiable OPEB accounts—disclose in their financial statement notes a net OPEB liability equal to their total OPEB obligation less any OPEB assets set aside in an OPEB trust or similar arrangement (net OPEB liability). Governments participating in cost-sharing, multiple-employer plans and most plans with special funding situations do not have separately identifiable accounts and therefore are not required to record or disclose a net OPEB liability.

Statement No. 75 changes this by requiring the same OPEB reporting regardless of plan type. GASB states "the origin of defined benefit OPEB obligations is the same without regard to the plan structure used," noting its preference to base the new accounting standard on substance over form. So, governments with single-employer or agent multiple-employer plans will now be required to record a net OPEB liability on their statement of net position. Similarly, governments with cost-sharing, multiple-employer plans and plans with special funding situations are now required to record an estimate of their proportionate share of the collective net OPEB liability. The proportionate share is based on an employer's OPEB plan contributions relative to all plan contributions (see the chart "Comparison: Recording the Liability").


Comparison: Recording the liability

Existing standards

Governments with single-employer or agent multiple-employer OPEB plans are required to disclose their net OPEB liability (termed "unfunded actuarial liability") in their financial statement notes.

Governments with cost-sharing, multiple-employer OPEB plans and special-funding plan types are not required to disclose the amount of their net OPEB liability.

Statement No. 75

Governments with single-employer or agent multiple-employer OPEB plans are required to record their net OPEB liability on their statement of net position.

Governments with cost-sharing, multiple-employer OPEB and special-funding plans are required to record their proportionate share of the collective net OPEB liability on their statement of net position.

Sources: GASB; Brian McAllister, Connie Spinelli, and Diane Belger.


Although cost-sharing plans do not have separately identifiable accounts, GASB's opinion is that their proportionate share of OPEB plan liabilities and assets is calculable and therefore should be recognized as a liability. Specifically, GASB notes that "the relationship of an individual employer to the collective net OPEB liability is fundamentally linked to the amount of that employer's expected sacrifice of resources relative to the total projected sacrifice of resources."

OTHER RECOGNITION AND MEASUREMENT CHANGES

OPEB benefits typically include post-retirement health care benefits, life insurance, and disability and long-term care provided to past, current, and future employees of a government. Total OPEB liability equals the employer's share of the actuarial present value of projected benefit payments attributed to past periods of employee service. Statement No. 75 changes how governments measure their total OPEB liability by reducing the number of available actuarial cost-attribution methods (see the chart "Comparison: Measurement of Liability").


Comparison: Measurement of liability

Existing standards

Total OPEB liability (termed actuarial accrued liability, or AAL) is measured using one of six GASB-approved actuarial cost-attribution methods.

Statement No. 75

Total OPEB liability is measured using a single actuarial cost-attribution method—based on entry age.

Sources: GASB; Brian McAllister, Connie Spinelli, and Diane Belger.


Statement No. 75 removes a government's ability to "cherry-pick" an accounting-preferred actuarial cost-attribution method, or what GASB describes as "an unnecessary accounting-related (rather than relevant facts-and-circumstances-related) source of variation in financial reporting." This change is expected to enhance financial statement comparability and reduce reporting requirement complexity.

Additionally, projected benefit payments are promises to pay OPEB benefits in the future. Therefore, similar to other long-term liabilities, these projected future payments are discounted to actuarial present value (see the chart "Comparison: Discount Rates").


Comparison: Discount rates

Existing standards

The discount rate is based on the long-term investment yield on OPEB plan assets held in trust. For partially funded plans, the discount rate is based on a blended rate based on both OPEB plan assets and on other employer assets used to pay OPEB benefits.

Statement No. 75

The discount rate is based on the long-term expected rate of return if an OPEB plan holds investments in a trust specifically to pay for future benefit payments and those assets are projected to be sufficient to make the projected benefit payments; otherwise, the discount rate is based on the yield or index rate for 20-year, tax-exempt general obligation municipal bonds with an AA/Aa or higher average rating; or a combination of the two.

Sources: GASB; Brian McAllister, Connie Spinelli, and Diane Belger.


Although the two approaches for discounting are somewhat similar, the methodology in Statement No. 75 is more concise, and the AA/Aa municipal bond rate is likely to be lower than the loosely defined governmental asset rate required in the existing standards. For these reasons, a government should expect a larger total OPEB liability because the single blended rate calculated under Statement No. 75 is likely to be lower than the discount rate under existing standards.

OPEB plan assets represent only those amounts set aside in a trust or similar arrangement to pay for a government's current and future OPEB obligations. Unlike the case with pensions, however, OPEB plan assets often are not set aside specifically to fund OPEB obligations. In these situations, the OPEB plan assets cannot be used to offset a government's reported total OPEB liability (see the chart "Comparison: Measurement of Assets").


Comparison: Measurement of assets

Existing standards

OPEB plan assets (termed actuarial value of assets, or AVA) are measured using a market-based method, most likely based on estimated long-term investment returns.

Statement No. 75

OPEB plan assets (termed OPEB plan fiduciary net position and addressed in Statement No. 74) are measured at fair value, using the same valuation methods used by the OPEB plan for purposes of preparing its statement of fiduciary net position.

Sources: GASB; Brian McAllister, Connie Spinelli, and Diane Belger.


Statement No. 75 eliminates some accounting discretion by requiring the measurement of OPEB plan assets as the actual amounts available to settle the total OPEB liability rather than an estimated amount available.

Statement No. 75 replaces the funding-based approach used in the existing standards with an approach that captures OPEB costs incurred using an all-economic-resources measurement focus and the full accrual basis of accounting (see the chart "Comparison: Periodic OPEB Expense").


Comparison: Periodic OPEB expense

Existing standards

Periodic OPEB expense (termed annual OPEB cost) is based on annual required contributions (ARC) adjusted for certain items. ARC is actuarially determined with a focus on financing or paying off the unfunded actuarial liability over a number of years.

Statement No. 75

Periodic OPEB expense is based on the change in net OPEB liability, adjusted for current-period amortization of deferred outflows and inflows of resources. The OPEB expense is no longer based on employer contributions.

Sources: GASB; Brian McAllister, Connie Spinelli, and Diane Belger.


Statement No. 75 more clearly separates financial reporting from public policy objectives. Existing standards focus on reporting based on a government's contribution policy, specifically its annual required contributions. GASB believes that this funding-based approach is inadequate for financial reporting purposes, stating that the new standard's approach "better addresses the objective of assisting financial statement users to assess whether an employer's revenues have been adequate to pay for its cost of services in a given period as compared to a funding-based approach."

Deferred outflows (inflows) of resources are generally defined as a consumption (acquisition) of net assets applicable to a future reporting period. Amounts recognized in net OPEB liability, but not in OPEB expense, are initially recorded as deferred outflows (inflows) of resources on the statement of net position and, for most items, subsequently amortized onto the statement of activities. These deferred outflows (inflows) of resources result from (1) differences between expected and actual experience, (2) changes in assumptions, and (3) differences between projected and actual investment earnings for OPEB plan assets that are administered through a trust meeting certain criteria.

In addition, employer (and nonemployer) contributions subsequent to the net OPEB liability measurement date, but before the end of the reporting period, are initially recorded as deferred outflows of resources. In the subsequent period, these contributions are removed from deferred outflows of resources and reclassified to the net OPEB liability (see the chart "Comparison: Deferred Inflows and Outflows").


Comparison: Deferred inflows and outflows

Existing standards

Not applicable.

Statement No. 75

Deferred outflows (inflows) of resources from assumption changes and experience differences are amortized using a systematic and rational method over a closed period equal to the average remaining service lives of all plan participants. Deferred outflows (inflows) from investment earnings differences are amortized over a closed five-year period.

OPEB plan employer contributions subsequent to the OPEB liability measurement date, but before the end of the reporting period, are recorded as deferred outflows of resources. The deferral is reclassified into the OPEB liability at the next measurement date.

Sources: GASB; Brian McAllister, Connie Spinelli, and Diane Belger.


Interestingly, GASB requires differences from changes in benefit terms (prior service costs) to be recognized into OPEB expense immediately.

REQUIRED DISCLOSURES

In addition to the above changes, GASB significantly expanded the disclosure requirements for all OPEB plans. Governments with cost-sharing, multiple-employer plans have similar disclosures to those with single-employer and agent multiple-employer plans, except they are not required to prepare a schedule of changes in net OPEB liability. Instead, they are required to disclose information about their proportionate share of OPEB plan liabilities.

The OPEB liability, plan assets, and deferred outflows (inflows) of resources for the aggregate of all OPEB plans, regardless of the type of plan, should be disclosed in the notes to the financial statements or presented separately on the face of the financial statements. Additional note and required supplementary information (RSI) disclosure requirements are extensive and specific. The RSI should be presented for the 10 most recent fiscal years. A table listing the required disclosures is available to download here.

SMOOTH TRANSITION

The new GASB standards for OPEB will create significant accounting and reporting changes for state and local government financial statement preparers, users, and auditors. In 2017, GASB plans to issue guidance meant to more exhaustively address specific implementation issues. In the meantime, gaining an early understanding of the new requirements can help lead to a smooth transition to the new rules.


About the authors

Brian McAllister (bmcallis@uccs.edu) is an associate professor of accounting at the University of Colorado Colorado Springs. Connie Spinelli (cspinelli@bkd.com) is a director of BKD LLP's National Auditing and Accounting Department in Denver. Diane Belger (dbelger@uccs.edu) is an instructor of accounting at the University of Colorado Colorado Springs.

To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at ktysiac@aicpa.org or 919-402-2112.


AICPA resources

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