What is GASB 43 And 45?
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What is GASB 43 And 45?

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A quick presentation to outline the implementation of GASB 43 & 45 for various municipal entities such as Towns, School Districts, Housing Authorities and more. Addresses Other than Pension Employee ...

A quick presentation to outline the implementation of GASB 43 & 45 for various municipal entities such as Towns, School Districts, Housing Authorities and more. Addresses Other than Pension Employee Benefits ("OPEB") offered by municipalities.

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What is GASB 43 And 45? What is GASB 43 And 45? Presentation Transcript

  • WHO, WHAT, WHEN, WHY & HOW GASB 43 & 45
  • Topics to be covered
    • Who is GASB?
    • What are GASB 43 & 45?
    • When do we have to comply with the statements?
    • Why were these statements created?
    • How do we address the issues?
    • What is to be disclosed on financial statements?
    • How do GASB 43 & 45 affect my bond rating?
  • Who is GASB?
    • GASB is the Governmental Accounting Standards Board
    • Independent, private & not-for-profit organization that establishes & improves standards of financial accounting & reporting for State & Local governmental entities
    • Governments & the accounting industry recognize GASB as the official source of generally accepted accounting principals (“GAAP”) for State & Local governments
  • What are GASB 43 & 45?
    • GASB 43 & 45 address accounting for Other than Pension Employee Benefits (“OPEB”) such as medical, dental & life insurance provided to former employees
    • GASB 43 covers financial reporting for OPEB plans
    • GASB 45 covers both financial reporting & accounting for government employers who sponsor OPEB plans
      • Most times GASB 45 will apply (unless you pre-fund the plan)
  • GASB 43
    • Employer may create an “irrevocable” trust to pre-fund OPEB benefits
    • GASB 43 requires financial reporting for the Plan including funded status, changes in assets, composition & sources of assets along with liability information (GASB 45)
  • GASB 45
    • Values OPEB liabilities on an “accrual” basis rather than the current “pay-as-you-go” basis
      • Requires use of many actuarial assumptions including, but not limited to:
        • Healthcare trend
        • Mortality (pre & post retirement)
        • Termination of employment
        • Salary increases
        • Probability of retirement by age
        • Probability of electing coverage for retiree and/or dependents
  • GASB 45
    • The OPEB plan to be valued is the “substantive” plan (i.e., the plan as understood by the employer & plan members)
  • GASB 45 – What are the Key Assumptions?
    • Healthcare trend – will be projected over 80 years
    • Mortality – reflects probability of death each year for employees, retirees & dependents
    • Termination of employment – allows the actuary to determine likelihood employee will reach eligibility for benefits
    • Retirement – the liabilities will vary based on the age at which the employee retires
    • Discount rate – if plan is funded in irrevocable trust under GASB 43, we can use a long-term rate. Else, the rate shall be based on what the entity earns on short-term cash
  • When must we comply with GASB 45?
    • GASB defined three (3) phases (used for GASB 34) & associated effective dates:
      • Phase I (total annual revenues of $100 million or more) – financial statements for periods beginning after December 15, 2006
      • Phase II (total annual revenues of $10 million or more, but less than $100 million) – financial statements for periods beginning after December 15, 2007
      • Phase III (total annual revenues of less than $10 million) – financial statements for periods beginning after December 15, 2008
  • Why was GASB 45 developed?
    • Postemployment benefits represent deferred compensation (i.e., participants elect a lower current pay in exchange for a future promised benefit)
    • Under accrual accounting, OPEB costs should be associated with the period earned, not the period paid
      • Recognize cost of benefits earned while employee provides services
      • Provides information related to past benefits earned and funding (if any)
      • Provide information related to potential future demands on employer cash flows
  • How do we comply with GASB 45?
    • First – determine if you offer employees to continue any benefits, other than pensions, beyond the COBRA period after employment ends – if so, you have an OPEB plan
    • Second – review with your auditors regarding materiality – it has likely been in your annual management letter
    • Third – if under 100 total members, you may use an alternative measurement method (have seen very few try this)
  • How do we comply with GASB 45?
    • Fourth – contract with an actuarial firm to provide an actuarial valuation of the plan (if under 200 members, every three years, else every two years)
    • Fifth – provide actuarial valuation report to your auditors to allow them to reflect in your financial statements
  • What do we value & disclose?
    • Under GASB 45, the plan sponsor (i.e., municipal entity) will disclose the following:
      • Actuarial Accrued Liability (“AAL”) – value of benefits earned to date
      • Fair Value of Plan Assets (“Assets”) – will be zero unless funded under GASB 43 in an irrevocable trust
      • Funded Status of Plan (“UAAL”) – AAL less Assets
      • Liability as % of Payroll – UAAL / Payroll
  • What do we value & disclose? (Continued)
    • Elements of the Annual Required Contribution (“ARC”)
      • Service Cost (“SC”) – value of benefits accruing during year
      • Amortization Cost (“AC”) – May be either a flat dollar or level % of pay over a period not to exceed 30 years (this amount reflects interest and is NOT a straight-line amortization)
      • Interest to end of year
  • What do we value & disclose? (Continued)
    • Disclosure of key assumptions
      • Discount Rate
      • Healthcare trend
      • Description of substantive plans
      • Description of cost-sharing arrangements
      • Rate of compensation increases
      • Plan funding policy
      • Details of Annual OPEB Cost, Amount funded & change in OPEB Obligation
      • Annual OPEB Cost, % of Payroll & Amount contributed each of last three (3) years
      • Funded status & funding progress
  • How do GASB 43 & 45 affect my bond rating?
    • All municipal entities are required to comply with GASB 43 & 45 to issue GAAP financial statements
    • Over 90% of municipal entities have OPEB plans & liabilities (including plans with implicit liability)
      • Therefore, all will face increased liabilities on financial statements
      • S&P, Moodys & Fitch have known about these plans and are unlikely to downgrade sponsors in the short run
        • Longer term, those with liabilities that are large in relation to taxing authority & payroll may suffer compared to others
  • Questions?