The Government Accounting Standards Board (GASB) issued Statement 45 (GASB 45) in June 2004; this statement establishes accounting and reporting standards for post-employment benefits other than pensions, or “other post-employment benefits (OPEB),” offered by state and local governments. It requires local governments to actuarially determine their annual required contribution (ARC) to fund OPEB and to account for the unfunded amount as liabilities on annual financial statements. Government employers required to comply with GASB 45 include all states, towns, education boards, public schools, and all other government entities that offer OPEB and report under GASB. In this paper, we will provide an overview of this pronouncement and see how it will affect governmental entities.
In addition to pensions, many state and local governmental employers provide other postemployment benefits (OPEB) as part of the total compensation offered to attract and retain the services of qualified employees. OPEB includes postemployment healthcare, as well as other forms of postemployment benefits (for example, life insurance) when provided separately from a pension plan…. (GASB 45)
Accounting and reporting standards that address pension obligations have been in place for many years. However, because of the absence of authoritative accounting and reporting standards for OPEBs, these liabilities have gone unreported. GASB 45 establishes standards for the measurement, recognition, and display of OPEB expenses or expenditures and related liabilities or assets, note disclosures, and, if applicable, required supplementary information (RSI) in the financial reports of state and local governmental employers. This statement requires governmental entities to recognize the cost of OPEBs when they are earned, while employees are working rather than when they are paid, after employees retire.
Usually, government employers have reported the cost of OPEB on a “pay-as-you-go” basis. The annual amount paid for benefits has been reported as the annual expense, with no other liabilities or funding requirements reported. GASB believes that the “pay-as-you-go” method does not accurately reflect the accurate costs that governments are accumulating for the future benefits of current employees, as this method fails to recognize the cost of benefits in periods when the employer receives the related services. It also does not provide certain information about the actuarial accrued liabilities for promised benefits associated with past services or whether, and to what extent, those benefits have been funded. Furthermore, it does not provide useful information for assessing potential demands on the employer’s future cash flows (GASB 45).
From an accrual accounting perspective, the cost of OPEB, like the cost of pension benefits, generally should be associated with the periods in which the exchange occurs rather than with the periods during which benefits are paid or provided...