After implementing the new financial reporting model prescribed in Statement 34 by the Government Accounting Standards Board (GASB), many municipalities and school districts thought they were home-free in terms of financial statement changes. However, one area not addressed at the time of GASB Statement 34 implementation was the issue of reporting certain employment benefits other than pensions. In 2004, the GASB issued Statement 45 Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, requiring that these benefits be reported on an accrual basis. For some local governments, this new accrual-reporting requirement may have a profound impact on the bottom line of their government-wide financial statements. The following is an overview of Statement 45, explaining what it attempts to accomplish and what it will entail to comply.
GASB
GASB Statement 45 and Its Impact on Your Financial Statements
By Barbara Reid
financial accounting and reporting for state and local governments. Recognizing that financial reporting is necessary to fulfill government’s duty to be publicly accountable and to make informed economic, social and political decisions, the GASB’s mission is to issue statements that improve the value of government financial reports based on the needs of the users of these reports. These users include citizens, administrators, legislative and oversight bodies, investors, creditors, underwriters and analysts. It is the GASB’s responsibility to establish financial and accounting standards by issuing statements and other pronouncements that establish “generally accepted accounting principles,” otherwise known as GAAP, for all state and local governments. When an independent CPA performs a financial audit of a municipality or school district, a letter is issued stating whether, in the auditor’s opinion, the financial statements are presented in conformance with generally accepted accounting principles as promulgated by the GASB. If the financial statements are in conformance with GAAP, then an unqualified, or clean opinion is issued. If the financial statements depart from GAAP, then the auditor must issue either a qualified or an adverse opinion letter. A qualified opinion is typically issued when there is only one aspect of the financial statements that is contrary to GAAP. An adverse opinion is issued when there is a significant
departure, resulting in the financial statements not being fairly presented in accordance with GAAP. So it’s the GASB that is responsible for establishing the generally accepted accounting principles for states and local governments upon which the independent auditor opines.
For some local governments, this new accrual reporting requirement may have a profound impact on the bottom line of their governmentwide financial statements.
Why was Statement 45 necessary? According to the GASB, Statement 45 was issued to provide more complete, reliable and decision-useful financial reporting regarding the costs and financial obligations that governments incur when they provide post-employment benefits other than pensions as part of the compensation for services rendered by their employees. The most common of these other post-employment benefits, referred to as OPEB, is health insurance coverage. OPEB may also include such things as dental, vision, or life insurance benefits. In some jurisdictions, post-employment benefits such as health insurance coverage is provided not only to the retiree, but also to the retiree’s spouse. In any case, these post-employment benefits represent a significant financial commitment for local governments. How was OPEB accounting and financial reporting done prior to Statement 45? Prior to Statement 45, governments typically followed a “pay-as-you-go”
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New Hampshire Town and City • April 2006
Before discussing Statement 45, it may be helpful to understand who the GASB is, and why local governments must comply with GASB statements. The GASB was organized in 1984 to establish uniform standards of
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GASB Statement 45, continued from page 25
accounting approach in which the cost of retirees’ healthcare and other postemployment benefits were not reported until after employees retired. The GASB does not consider this to be a comprehensive approach since it fails to account for the costs and obligations incurred as the government receives employee services each year for which they have promised future retirement benefit payments in exchange. What does Statement 45 accomplish? The GASB considers an accrualaccounting approach, where the costs of post-employment benefits are recognized in the financial statements when they are earned regardless of when they are paid, to be a more comprehensive approach. The GASB views these benefits as part of the compensation that employees earn each year, even though these benefits are not received until after employment has ended. It is their expectation that Statement 45 will foster improved accountability and a better foundation for informed policy decisions about the level and types of benefits provided and the potential methods of financing those benefits. According to the GASB, Statement 45 also: • Results in reporting the estimated cost of these retirement benefits as an expense each year during the years that employees are providing services to the government in exchange for those benefits. • Provides more accurate information about the total cost of government services. • Clarifies whether the amount a government has paid or contributed for OPEB during the year has covered its annual OPEB cost. In other words, it will
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highlight whether the costs of retirement benefits are being deferred, placing cash flow demands on taxpayers in the future. • Provides better information to financial report users about unfunded OPEB liabilities. It should be noted that Statement 45 does not require governments to fund other post-employment benefits but rather establishes the accounting and financial reporting requirements regarding these benefits. The objective of Statement 45 is to more accurately reflect the financial effects of OPEB transactions. When and how a government actually finances these benefits is a separate policy decision to be made by local officials. What needs to be done in order to comply with Statement 45? First, municipalities and school districts are encouraged to assess their particular OPEB situation sooner rather than later. Since there is wide disparity in the scope of benefits provided (one district may offer lifetime healthcare benefits while another offers little or no coverage), the work and cost entailed with implementation, as well as the impact on the financial statements, will vary widely. It’s recommended to begin discussions now with your auditor even though implementation of Statement 45 will not occur for several years. Second, in accordance with Statement 45, OPEB liabilities should be determined by actuarial valuations occurring at least every two years for plans that administer OPEB for 200 or more members (both active employees and retirees) or at least every three years for plans with fewer than 200. Statement 45 allows certain small plans (those with fewer than 100 members)
to use an alternative measurement method described in Statements 43 and 45, rather than hiring an actuary. Since actuarial services may be costly, depending upon the complexity of the data being analyzed, municipalities and school districts should begin to identify the estimated cost for those services and budget accordingly. Finally, there are several resources available to assist in understanding and complying with the requirements of Statement 45. In addition to the statement itself, the GASB has issued an implementation guide, a “plainlanguage” summary, and a questionand-answer fact sheet, each available at www.gasb.org. Additionally, the Government Finance Officers Association has prepared a checklist for use by local governments planning to issue a Request-for-Proposal for OPEB actuarial valuation services. This checklist is available at www.gfoa.org. What is the implementation schedule for Statement 45? Similar to GASB Statement 34, Statement 45 is implemented in three phases based on a government’s total annual revenues for the fiscal year ending June 30, 1999 or December 30, 1999: • Phase 1: governments with total annual revenues of $100 million or more—periods beginning after December 15, 2006. • Phase 2: governments with total annual revenues of $10 million or more, but less than $100 million— periods beginning after December 15, 2007. • Phase 3: governments with total annual revenues of less than $10 million—periods beginning after December 15, 2008.
New Hampshire Town and City • April 2006
[Note: This article is based in part upon the GASB Statement 45 Fact Sheet.] Barbara Reid is a Government Finance Advisor for New Hampshire Local Government Center. For more information on this and other financial topics of interest to local officials, she can be reached at 800.852.3358, ext. 145 or by e-mail at breid@nhlgc.org. Send ads via e-mail to Janice Seaver at: jseaver@nhlgc.org or by fax to 603.224.5406. The LGC publishes job ads at no cost to its members. Nonmembers should request a quote. Submissions or ads are required by the first Monday of the month preceding publication to guarantee placement in Town & City.
New Hampshire Town and City • April 2006
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