January 2011 | accounting today 17
Lessons for GASB 45 valuations
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
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
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
email@example.com or at (860)
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-
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
COSO has engaged Big Four firm
pwC to work under its leadership in developing the updated framework.
The initiative is expected to culminate
in an updated framework in 2012, the
20th anniversary of the initial framework.