Accounting Today - January 2011

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January 2011 | accounting today 17

Lessons for GASB 45 valuations
assurancenews

BY joanne fontana

It’s been over three years since the adoption of GaSB Statement 45, the accounting standard requiring government entities to report their liability for retiree other-than-pension post-employment benefits. the goal of the new standard was to awaken government employers to the magnitude of the liability for those benefits — largely retiree health benefits — and to make them aware of how those liabilities should be managed now, so employers can make good on their promises for the future. Questions remains on OPEB, particularly for smaller governments

The Governmental Accounting Standards Board recognized that smaller government entities would need a more manageable, less costly process for complying with GASB 45, and created the Alternative Measurement Method, or AMM, for that segment. The AMM valuation allows qualifying employers (i.e., those with fewer than 100 OPEB plan members) to use a standardized process and average assumptions appropriate for smaller groups to simplify the calculations.

By now, even the smallest government entities should have completed or be in the process of completing their first OPEB valuation under GASB 45, many using the AMM. Having seen hundreds of those valuations, what lessons have we learned about GASB 45 and the AMM?

First, we have seen that many employers
are still trying to figure out the basics of GASB
45 and its impact on their individual govern-
ment entities. From both the AMM users and
entities pursuing a traditional valuation, con-
fusion around key components of GASB 45 is
still prevalent:
Must the annual required contribution
actually be funded? (The answer is no; GASB
45 requires reporting of the ARC and actu-
arial liability, not funding.)

What types of post-employment benefits
count as OPEB? (Retiree medical and dental
insurance clearly count; other benefits aren’t
so obvious and a professional should be con-
sulted to get the right answer.)

times drastically so. For example, employers may use different criteria, such as years of service and/or attained age at retirement, for eligibility to receive OPEB; the expected age at which benefits will be paid out for each retiree will differ depending on those criteria.

AMM users must beware of services claiming to apply GASB’s methodology but not modifying the simple spreadsheet approach to account for the myriad differences between each employer’s plan structure and the sample plan. To ensure appropriate results, an expert is needed who has an in-depth understanding of GASB 45 and the AMM in order to customize the AMM’s approach to the specific requirements of an OPEB plan and to comply with the standard.

On a related note, we’ve learned that, while smaller government employers may have fewer OPEB plan members, their OPEB plans are by no means simple. In fact, we’ve seen significant variation in how employers using the AMM handle contribution methods and levels toward retiree health premiums, eligibility requirements for OPEB, and the structures of the OPEB plans themselves. Some states provide funding toward retiree premiums in addition to those provided by the employer, which must be accounted for in the valuation. Others use age-banded rating for their OPEB premiums. Still others are required to use community-rated premiums.

All of these variations have implications on how to correctly calculate the OPEB liability, whether using the AMM or a traditional valuation. None are directly addressed in the GASB standard, but are nonetheless expected to be properly considered by the individual completing the valuation. So, again, it is imperative, even when using the AMM, to have someone who understands these complexi-ties and can expand the basic AMM approach to appropriately calculate the liability.

FASB, GASB STANDARDS
UNDER REVIEW

The Financial Accounting Foundation said that it would conduct post-imple-mentation reviews of financial accounting and reporting standards issued by the two boards it oversees, the Financial Accounting Standards Board and the Governmental Accounting Standards Board.

The new FAF process is designed to be independent of the standard-setting process of FASB and GASB. The FAF review staff will study significant accounting standards to assess whether the intended financial reporting objectives underlying those standards are being met.

The review staff will be drawn from experienced FASB and GASB staff to promote a collaborative review process aimed at improving standard-setting. The review staff will test the initial review process by selecting one FASB and one GASB standard. The FASB test is expected to be completed by mid-year 2011.

Joanne Fontana, FSA, MAAA, is a consulting actuary in the Hartford, Conn., office of Milliman, a global consultancy. Reach her at joanne.fontana@milliman.com or at (860) 687-2110.

DON’T BLINDLY FOLLOW It is tempting to just take the simple case example in the GASB handbook and use those calculations across all employers eligible for the AMM. But without consideration of the nuances of each particular employer group, incorrect results will be generated, some-

COMPLICATED SUBSIDIES

One of the biggest sources of misunderstanding surrounding the GASB 45 liability is the concept of the “implicit rate subsidy.” GASB 45 requires that the premiums used to project the liability reflect the true cost of the population receiving the benefits — the retirees.

See GASB 45 on 20
COSO TO UPDATE FRAMEWORK

The Committee of Sponsoring Organizations of the Treadway Commission has initiated a project to review and update the COSO Internal Control Integrated Framework, to make the existing framework and related evaluation tools more relevant in the increasingly complex business environment so that organizations worldwide can better design, implement and assess internal control.

Enhancements to the framework are not intended to alter the core principles first developed in 1992, but rather to facilitate more robust discussion of internal control. Certain concepts and guidance will be refined to reflect the evolution of the operating environment, and changed expectations of regulators and other stakeholders. In addition, enhancements are expected to consider more than financial reporting and to consider ways to enrich the guidance on operations and compliance objectives.