GASB Proposal: Pension Underfunding Reported as Liability

June 17, 2010 (PLANSPONSOR.com) – Governments would have to report as a liability on their accrual-based financial statements the unfunded portion of their pension plan under a new proposal.

That was contained in a statement of preliminary views about changes to government pension accounting released this week by the Governmental Accounting Standards Board (GASB), a rule-making body. GASB said the document summarizes its current thinking on pension accounting recognition and measurement issues facing public employers as it prepares to formalize the issues into new accounting mandates.

According to the document, the GASB believes that:

• Pension benefits are a form of compensation promised by governments to their employees in exchange for work performed.
• The pension plan is primarily responsible for the pension obligation to the extent that assets have been accumulated in the plan (by government and employee contributions and investment earnings) to finance the pension benefits; the government is secondarily responsible for this funded portion the obligation.
• The government is primarily responsible for the remaining unfunded portion of the obligation.
• The unfunded portion of the pension would be reported as a net pension liability in the financial statements of the government. GASB said it believes the unfunded portion meets the criteria for being reported on financial statements because the liability is “measurable with sufficient reliability.”

Neither the total obligation for pensions nor the unfunded portion is reported currently  as a liability on those financial statements, GASB pointed out in the new document.