The Federal Accounting Standards Advisory Board (FASAB) issued Statement of Federal Financial Accounting Standards (SFFAS) no. 37, which requires additional discussion and analysis of social insurance programs, enhances the statement of social insurance, and creates a new financial statement presenting the causes of change in the net present value of the 75-year open group social insurance measure. The new statement, however, does not change the liability and expense recognition and measurement required by SFFAS no. 17, Accounting for Social Insurance.
The objective of the reporting required by SFFAS no. 37, Social Insurance: Additional Requirements for Management’s Discussion and Analysis and Basic Financial Statements , is to present information that will significantly improve readers’ understanding of the status and results of operations of the government’s social insurance programs. The requirements go into effect in fiscal year 2011.
For federal financial reporting, social insurance comprises five programs—Social Security, Medicare, Railroad Retirement, Black Lung, and Unemployment Insurance. Two of those programs—Social Security and Medicare—are of special significance because of the high rate of participation among citizens, the fiscal challenges related to the programs, and the challenges associated with incorporating estimates of future cash flows of this magnitude in financial statements, according to FASAB’s summary of the new standard.
FASAB’s summary said a key difference of opinion among board members is in regard to the timing of the recognition of expense and liability for social insurance programs. Some members believe that an expense is incurred and a liability arises for social insurance programs during the working lives of participants, and that some portion of the benefits accumulated at the balance sheet date should be recognized as a liability. Other members agree with SFFAS no. 17 that an expense is incurred and a liability arises for social insurance programs when the participants have met all eligibility requirements and the amount is “due and payable.”
The new standard is a compromise. It provides enhanced reporting but does not resolve the two strongly held views regarding when the obligating event occurs for social insurance programs and, thus, when the liability and expense definitions are met within those programs. Therefore, the liability and expense recognition and measurement required in SFFAS no. 17 is unchanged.
SFFAS no. 17 requires certain information about social insurance programs, and SFFAS no. 37 requires the following:
- Critical information about costs, assets and liabilities, social insurance commitments, budget flows, and the long-term fiscal projections together in one section in management’s discussion and analysis (MD&A).
- A table or other singular presentation of key measures in MD&A.
- A new summary section for the statement of social insurance.
- A new basic financial statement to present the reasons for changes during the reporting period in the open group measure reported on the statement of social insurance.
Although FASAB’s summary said opinions continue to differ regarding when the obligating event occurs for social insurance programs, and thus the question of when the liability and expense occur within those programs continues to be discussed, the new statement fulfills the desire of all members to present other information that will significantly improve readers’ understanding of the status and results of the government’s social insurance programs.