OPEB Expense and Deferred Inflow & Outflow of Resources
Parker Elmore, ASA, MAAA, EA, FCA | Kurtis Thompson
New accounting rules for public other postemployment benefit plans to replace GASB 45 will take effect in 2018 for most plan sponsors. To ensure a successful transition to the new standards, you will need to understand various new concepts (largely mirroring those found in GASB 67/68) and new terms. Odyssey will be providing a series of white papers on this subject which will review these topics in some detail. We continue with “GASB 75 – OPEB Expense and Deferred Inflow & Outflow of Resources” to provide a detailed explanation of how variations in plan experience from expected, plan design changes, asset returns that differ from expected and assumption changes will be reflected on your financial statement.
Under GASB 75 the Unfunded Actuarial Accrued Liability (UAAL), reported under GASB 45, is replaced by Net OPEB Liability (NOL). NOL is equal to Total OPEB Liability (TOL) minus Fiduciary Net Position (i.e. market value of plan assets). UAAL and NOL are very similar with the difference being NOL must be calculated using the Entry Age Normal (EAN) cost method while UAAL could have been calculated using one of several different actuarial cost methods as discussed in a previous white paper. The Net OPEB Obligation reported under GASB 45 will cease to exist and will be replaced on the balance sheet by NOL. With the elimination of
the Net OPEB Obligation, various “smoothing” items will no longer be used. Instead changes to the NOL will be recognized in the OPEB Expense – some components being recognized immediately and others being phased in over time, which we will discuss below.
Past Work Group Updates
- GASB 75 – Introduction & Notable Changes
- GASB 75 – Crossover Date & Why It Matters
- GASB 75 – Investment Return & Money Weighted Rate of Return
Upcoming Work Group Updates
- Calculation Of Net OPEB Expense
- Valuation, Measurement, & Reporting Dates And Their Interaction
OPEB Expense Calculation
A general layout for calculating OPEB Expense is as follows:
- + Normal Cost
- + Interest on NOL
- +/- Experience gain/loss
- +/- Employer Payments (Withdrawals) to/from OPEB Trust
- +/- Variance of Investments
- vs. Expected Net OPEB Expense
Some of these components are recognized into the OPEB Expense immediately while others are recognized over time as deferred inflows and/or outflows of resources.
Components of OPEB Expense
The plan’s normal cost representing the value of benefits being earned by active plan participants during the plan year is determined using the Entry Age Normal actuarial cost method. This amount is recognized in OPEB Expense immediately. This is done to reflect the fact that the participants are earning these benefits as part of their compensation (deferred to be paid in retirement) and, as such, should be recorded as an expense in the year that it is earned. Benefits are attributed over a period beginning when the employee begins earning benefits under the plan and ends upon their expected separation of service.
Interest expenses are also recognized immediately. The two interest expenses are Interest on the NOL for the current measurement period and interest on normal cost minus benefit payments for the current measurement period. Interest expense is calculated using the plan’s single equivalent discount rate.
Changes to plan design such as new plan options, modifications to cost-sharing and changes in eligibility are also immediately recognized into the OPEB expense.
Components of OPEB Expense Recognized Over Time
Some changes to the NOL must be recognized over a period of years as prescribed under the standards. These changes are called deferred inflows/outflows of resources and are required to be disclosed in the notes to the Financial Statement.
Changes in NOL due to differences between expected and actual earnings on investments must be recognized into the OPEB Expense over a five (5) year period that begins with the current reporting period. Experience gains/losses must be amortized into the OPEB Expense in a “systematic and rational method”. GASB specifies that this means the use of a straight line or level percent of pay based amortization method over the average remaining service lives of all active and inactive plan participants determined as of the beginning of the measurement period.
Changes in the NOL arising from actuarial assumption changes must be recognized using the same methodology used for experience gains/losses. However, assumption changes that are a result of plan design changes (see above) must be recognized immediately.
Deferred Inflows and Outflows of Resources
New disclosures will be required under these GASB standards to report the expenses that must be recognized over a period of years as discussed above. The amounts that are not recognized as expenses in the current year will be displayed in disclosures as deferred inflows and outflows of resources.
The new standard requires that deferred inflows and outflow of resources from gains/losses and assumption changes be accounted for individually each valuation. So changes arising from these sources may not be combined on a net basis but must be broken out each valuation on a “layered” basis. A new layer of expense is established every reporting period and tracked until it has been fully amortized into the OPEB Expense. However, in the notes section of the financial statement these balances should be aggregated for reporting purposes.
Conversely, deferred inflows and outflows arising from differences between expected and actual investment performance in different periods should be aggregated and reported on a net basis.
The deferred outflow of resources should also include any employer contributions made after the measurement date but before the end of the employer’s reporting period.
For cost sharing plans there are additional sources of deferred inflows and outflows. First, changes to the employer’s share of the collective NOL since the last measurement date that are not reflected in the OPEB Expense are recognized as deferred inflows or outflows of resources. Second, differences between the proportional share of cost and actual contributions not recognized in the OPEB Expense must be reported as deferred inflows or outflows.
As you can see, the OPEB Expense calculation under GASB 75 is somewhat more complicated than that under GASB 45. However, given the full recognition of the NOL on the balance sheet and the elimination of Net OPEB Obligation, most sponsors will see a reduction in their annual OPEB Expense. As noted in prior white papers, your decisions on both funding and investment policy will have the greatest impact on your OPEB Expense but you’ll need to be aware of the immediate recognition of plan design changes.