The University of Tennessee, Knoxville

Tennessee County Municipal Advisory Service

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Summary of GASB Statement No. 45

Reference Number: MTAS-744
Tennessee Code Annotated
Reviewed Date: November 16, 2017
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NOTE:  New standards have been issued that when fully implemented will have a significant impact on GASB 45.

GASB Statement No. 74, "Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans " was issued in June of 2015. GASB's stated objective is to "improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability." It is effective for fiscal years beginning after June 15, 2016 but earlier implementation is encouraged. It amends and/or supersedes a number of previously issued GASB Statements.

GASB Statement No. 75, "Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions" was issued in June of 2015. GASB's stated objective is to "improve the decision-usefulness of information in employer and governmental nonemployer contributing entity financial reports and will enhance its value for assessing accountability and interperiod equity by requiring recognition of the entire OPEB liability and a more comprehensive measure of OPEB expense. Decision-usefulness and accountability also will be enhanced through new note disclosures and required supplementary information." It is effective for fiscal years beginning after June 15, 2017 but earlier implementation is encouraged. It amends and/or supersedes a number of previously issued GASB Statements.

The new statements are similar to GASB 67 and 68, which govern accounting for pension benefits. Following is a brief summary:

  • Unfunded OPEB liabilities will be recognized on the face of an agency's financial statements
  • A 20-year Municipal Bond rate is used to discount unfunded benefit payments and the long-term rate of return on plan investments is used to discount benefits projected to be paid by plan assets --- this will increase reported liabilities for agencies not pre-funding OPEB benefits
  • Use of the Entry Age actuarial cost method is required
  • Extensive note disclosures and required supplementary information must be presented
  • These are accounting standards and do not require that OPEB benefits be funded

A summary of GASB 45 follows as it is still in effect until the new standards are implemented:

When OPEBs are a portion of the total compensation earned by employees for services provided, employers that participate in single-employer or agent multiple-employer defined benefit OPEB plans must measure and disclose the annual OPEB cost. Because the OPEB compensation is earned but not paid out within the period, this liability must be measured and disclosed by using the accrual basis of accounting. For each year OPEBs are being earned, an amount will be added to the growing liability of the retirement plan. The annual OPEB cost equals the employer’s annual required contribution (ARC) adjusted by any amount that the employer has under- or over-contributed to the retirement liability.

Annual required contribution (ARC) is the amount of liability calculated to represent the value of OPEBs earned by the employees in one year. The parameters by which the ARC is calculated include:

  • The normal costs for the year;
  • A component for amortization of the total unfunded actuarial accrued liabilities (or funded excess);
  • Requirements for the frequency and timing of actuarial valuations; and
  • Acceptable actuarial methods and assumptions.

State and local governments are required to have actuarial valuations. The timing of these valuations depends on the total number of participants in the plan. The definition of participants includes:

  • Employees in active service;
  • Former employees not receiving benefits; and
  • Retired employees and beneficiaries currently receiving benefits.

For plans with 200 or more participants, biennial actuarial valuations are required. For plans with fewer than 200 participants, triennial actuarial valuations are required.

Projection of benefits should include all the benefits covered by the plan with consideration of the method by which the costs of the benefits are shared between the employer and the employee. The actuarial assumptions must be guided by applicable actuarial standards, including a healthcare cost trend rate for postemployment healthcare plans. The aim of the actuarial valuation is to project future cash outlays required for the level of benefits promised, discount projected benefits to their present value, and allocate the present value of benefits to periods using an actuarial cost method.

Alternate Measurement Method
A sole employer with a plan of fewer than 100 total plan members has the option of using a simplified alternate measurement method for determining ARC instead of obtaining actuarial valuations. This method includes the same measurement steps as an actuarial valuation; however, it permits simplification of certain assumptions in order for the nonspecialist to determine the employer’s ARC.

Net OPEB Obligation—Measurement
The cumulative difference between the annual OPEB cost and what the employer contributes to the plan is defined as the net OPEB obligation. This obligation is modified somewhat by the amount the employer may have contributed to the plan in excess of the annual required contribution, including the OPEB liability or assets actuarially determined at the year of transition. If an employer has a net OPEB obligation, then the measure of the OPEB cost must equal (a) the ARC, (b) one year’s interest on the net OPEB obligation, and (c) an adjustment to the ARC to offset the effect of actuarial obligation of past under- or over-contributions. The statement generally provides for prospective implementation so that the employer’s net OPEB obligation as of the beginning of the initial year is set to zero.

Financial Statement Recognition and Disclosure
Once the cost of an employer’s OPEB plan has been determined, the expense associated with the ARC, as well as net OPEB obligations, including under- or over-contributions to the retirement plan’s liability or asset, must be recorded in the financial statements.

OPEB expense will be recognized in an amount equal to the annual OPEB cost in the government-wide statements and in the financial statements of proprietary and fiduciary funds.

Governmental funds with an OPEB liability should recognize expenditures related to OPEB on the governmental fund financial statements on the modified accrual basis.

Net OPEB obligations, including under- and over-contributions, should be recognized as liabilities (or assets) on government-wide statements and on the financial statements of proprietary and fiduciary funds.

In addition to the cost information shown on the financial statements, employers are required to disclose descriptive information about each defined benefit OPEB plan in which they participate, including the funding policy followed. Sole and agent employers must provide descriptive language regarding their actuarial valuation process and assumptions for determining the actuarial amount for ARC, their annual funding policy, and the related impact on the net OPEB obligation. Schedules and notes must be provided as required supplementary information (RSI) that denotes trends in funding progress for the most recent and two previous valuations.