Accounting Methodology
The Accounting Methodology topic (called GASB Accounting in the U.S. public pension mode) contains the parameters for choice of an accounting standard and, generally, also contains the parameters for input items needed for calculations under the selected standard.
The list of accounting standards depends upon the ProVal mode of operation. Once an accounting standard is selected, the Accounting Methodology dialog box changes to display the parameters for input items needed to perform calculations under the standard.
See GASB Accounting Statements 25, 27, 43 & 45 for a discussion of parameters required for calculations under GASB statement 43 (Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans), GASB statement 45 (Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions), GASB statement 25 (Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans) and GASB statement 27 (Accounting for Pensions by State and Local Government Employers).
Parameters required for calculations under all other standards, including GASB 67/68 and 74/75, are discussed below.
When the accounting method is ASC 715 or IAS 19 (current standard), a choice of Interest Method is available for selection. The interest method is used to calculate the interest cost and to roll the service cost to the end of year. These methods do not impact the calculation of the liability and they only generate different interest results when a yield curve is used for the accounting discount rate.
If the Effective discount rate method is selected, the effective discount rate is used to calculate the interest cost and to roll the service cost to end of year. The effective discount rate method was the only method ProVal used to calculate interest cost and the end of year service cost until the SEC approved the individual spot rate method in 2015 and the option was added to ProVal.
If the Individual spot rate method is selected, the interest cost and service cost are calculated as follows:
Note that when employee contributions are present, interest on the service cost is determined as interest on the total service cost (as described above) offset by the interest on the expected employee contributions (determined using the duration 0 spot rate).
Under IAS 19, the interest rate used to apply interest on all pension or retirement benefit expense components other than the present value of the obligation and the service cost, such as interest on the fair value of assets, interest on estimated contributions, and interest on expenses, is determined by taking (interest on the obligation (PBO) - interest on expected benefits) and dividing by the obligation. This implied interest cost rate is consistently applied to all liability and asset components.
Note that if you select the individual spot rate method but your accounting discount rate is either a curve of forward rates (in any year) or calendar year dependent rates, ProVal will terminate the run and issue an error message. When using the individual spot rate method, in Valuation Set and Deterministic Forecast Output, detail by active benefit is not available for the variable Service Cost. Conversely, when using the effective discount rate method, detail by active benefit is not available for the variable PBO Normal Cost.
When the accounting method is ASC 715 or IAS 19 (current standard), a choice of Benefit Payment Method is available for selection. Choose to use Expected benefit payments (these reflect the expected timing of payments) or use Annuity substitution benefit payments (these reflect the annuity payment stream underlying the lump sum). Under the effective discount rate interest method, the projected benefit payments selected will be used to calculate the effective discount rate which is then used to compute interest on the service cost and PBO. For the individual spot rate interest method, the projected benefit payments selected are directly used with the spot rate curve to compute the interest on the service cost and PBO.
When using the individual spot rate method and the measurement date is after the valuation date, you must select a Roll Forward Method. You may select liability, which rolls the liability forward in aggregate. The second option is the benefit payments method. This method rolls forward the benefit payment stream underlying the liability to the measurement date and then takes the present value of the rolled forward stream. You can find more details regarding these methods in the technical reference article Roll forward of accounting liabilities.
If required under the accounting standard, enter the value, as of the Measurement Date, of the Prepaid (Accrued) Benefit Cost, or Net Amount Recognized under ASC 715. An accrued benefit cost (a liability) is entered as a negative value; a prepaid benefit cost (an asset) is entered as a positive value. Note that under ASC 715, this net amount recognized plus the AOCI is the funded status. This value is calculated and therefore not required as an input under
IAS 19,
GASB 67/68 and 74/75,
IAS 19 (2008) if the Gain/Loss Recognition parameter (discussed below) is set to either the Recognize in SORIE account option or the Immediately in Profit and Loss option, and
ASC 715 if the Gain/Loss amortizations parameter (discussed below) is set to Immediate recognition.
For the GASB 67/68 and 74/75 accounting standards, if you are running a forecast, enter the value, as of the Measurement Date, of the Balance Sheet Liability. Note that if you are running a GASB 67/68/74/75 end of year event in a valuation set, ProVal will calculate the Balance Sheet Liability and the amount entered will be ignored. The Balance Sheet Liability entered should be the Total Pension Liability (i.e., the liability under the Entry Age Normal cost method determined in accordance with the GASB 67/68 and 74/75 requirements) minus the Fair Value of Assets and minus the Net of Deferred Outflows of Resources and Deferred Inflows of Resources. Enter a positive number if it is a liability or a negative number if it is an asset.
You may specify an Additional current year expense for the current fiscal (tax) year (or, in a forecast, the baseline year), i.e., the year beginning on the Measurement Date. To derive the total accounting expense for the year, ProVal adds this expense amount to the expense determined under the selected accounting standard. This amount may represent a settlement / curtailment or a mid-year, or other, adjustment not always handled directly by ProVal.
For accounting standards other than GASB 67/68 and 74/75, the parameter labeled Interest Cost rate equals Discount Rate plus (under CICA 3462, the parameter labeled Finance cost rate equals Discount Rate plus) is basically a “fudge factor”. Enter the rate that, when added to the discount rate entered under the Valuation Assumptions command, equals the desired rate for computing the interest cost component of pension cost (U.S. qualified mode), of pension expense (universal and Canadian registered modes) and of benefit expense (OPEB mode). Enter the rate as a decimal number, for example, enter +0.02 to get a 9% interest cost rate when the discount rate is 7%. This discount rate adjustment might be used, for example, in a forecast if calendar year-dependent discount rates are being replaced with a single weighted-average discount rate. It might also be used, again in the case of calendar year-dependent discount rates, if the accounting methodology is to use something other than the current year discount rate for determining interest cost. The Interest Cost rate equals Discount Rate plus parameter is not available under the individual spot rate interest method.
If the accounting standard is CICA 3461 or CICA 3462, enter the Rate for expected future service accruals. This is the rate by which service cost will be divided to determine the present value of expected future service accruals that will be used to develop the maximum balance sheet asset. Typically this rate is the same as the expected return on assets, possibly reduced by the assumed salary inflation rate. Enter the rate as a decimal number, e.g., 0.05 for a 5% discount rate.
If the accounting standard is CICA 3461, CICA 3462, IAS 19 or IAS 19 (2008), enter the Percent of Surplus potentially withdrawable, that is, the percent of any plan fund surplus potentially available for use or withdrawal by the plan sponsor (CICA 3461 or CICA 3462) or the percent of surplus which is available as an economic benefit to the plan sponsor (IAS 19 and IAS 19 (2008)). This value is used to determine the maximum balance sheet asset. For example, for a potential 50% of surplus withdrawal or use as an economic benefit, enter 50. Under the IAS standards, the percent of surplus potentially withdrawable will be multiplied by the total surplus amount in order to determine the maximum balance sheet asset. Under the CICA standards, the percent of surplus potentially withdrawable will be multiplied by the excess of the surplus amount over the present value of expected future service accruals. The maximum balance sheet asset will be based on the sum of this withdrawable surplus and the present value of expected future service accruals.
If the accounting standard is CICA 3461 or CICA 3462, enter the prior year Valuation Allowance, that is, the amount by which the accrued benefit asset has been reduced in order not to exceed the maximum balance sheet asset. Enter zero if the accrued benefit asset has not been so reduced.
Under IAS 19 or IAS 19 (2008), if the Percent of Surplus potentially withdrawable is not entered as 0% or 100%, enter the Effect of asset ceiling. This is the amount by which the balance sheet asset is reduced at the beginning of the initial valuation year (year beginning on the Measurement Date) so that the asset ceiling is not exceeded. If the Percent of Surplus potentially withdrawable is set to either 0% or 100%, ProVal will not reference the amount input for the Effect of asset ceiling parameter and instead will use its own calculation for this amount. Otherwise, this value will be applicable for the beginning of the initial valuation year and the amount entered for the Percent of Surplus potentially withdrawable parameter will be used, in a forecast, for the asset ceiling calculation for all future valuation years.
For an accounting standard selection other than IAS 19 or CICA 3462, the remaining parameters discussed below will define prior service cost and gain/loss bases and treatment (deferred outflows and inflows of resources for GASB 67/68); this includes IAS 19 (2008). For the IAS 19 and CICA 3462 selections (only), prior service costs are always recognized immediately and gains or losses are always recognized as other comprehensive income and not in the expense. Therefore, for the “IAS 19” accounting standard selection, the remaining parameters discussed below do not apply.
For accounting standards other than GASB 67/68 and 74/75, the list of previously entered Amortization Bases, if any, is shown in the schedule, along with the Remaining Period and Outstanding Balance (unamortized amount) of each base as of the Schedule Date, which should be the same as the Measurement Date. Otherwise a warning will be generated and bases will not be adjusted for the Schedule Date you entered. Include the amount to be amortized during the current year (year beginning on the Measurement Date) in the Outstanding Balance and include the current year in the Remaining Period. ProVal will show the Total outstanding balance of all bases. Click the name of a base to edit it or click the New button to add a base.
For the GASB 67/68 and 74/75 accounting standards, the list of previously entered Deferred Outflows & Inflows, if any, is shown in the schedule, along with the Remaining Period and the current outstanding balance of each Deferred Outflow/(Inflow) base as of the Schedule Date, which should be the same as the Measurement Date. Otherwise a warning will be generated and deferred outflows and inflows will not be adjusted for the Schedule Date you entered. Include the amount to be recognized during the current year (year beginning on the Measurement Date) in the outstanding balance and include the current year in the Remaining Period. ProVal will show the Net Deferred Outflows (the sum of all listed outflows and inflows), i.e., the sum of outstanding balances of all bases. Click the name of a base to edit it or click the New button to add a base. ProVal will calculate the current year asset gain/loss and the current year liability gain/loss at the end of the year in accordance with GASB Implementation Guide 2015-1 question 5.142.6. Since the current year asset and liability gains/losses are not determinable until the end of the period, the GASB expense for the current year must be calculated using either a 1 year forecast or in a Valuation Set with a GASB Gain or Loss (End of year) event. See GASB Accounting Statements 67, 68, 74 &75 for more details.
In the Accounting Amortization Bases dialog box (in which you edit, erase or add a base), called the Deferred Outflow or (Inflow) dialog box under GASB 67/68 and 74/75, you must complete the parameters for the Type of base, the Outstanding balance and Remaining period.
For GASB 67/68 and 74/75, choose the type of base as Liability (gain) or loss (a difference between expected and actual liability experience), Asset (gain) or loss (a difference between expected and actual investment return experience), Assumption change or Plan change. A liability loss is accounted for as a deferred outflow and a liability (gain) is accounted for as a deferred (inflow). Similarly, an asset loss is accounted for as a deferred outflow and an asset (gain) is accounted for as a deferred (inflow).
For all other accounting standards, choose Transition Obligation / (Asset) or Prior Service Cost as the base. Note that, generally, negative plan amendments will offset existing prior service cost bases but not the transition obligation base.
Optionally, you may enter the Date established, the Initial amount (as of the date the base was established) and the initial Amortization period (Recognition period under GASB 67/68 and 74/75). The Amortization type (Recognition type under GASB 67/68 and 74/75) may be either a fixed amount or variable. If you specify the amortization (recognition) type as fixed amount, a text field becomes accessible for entry of the annual amortization (recognition) amount. ProVal will calculate the amortization (recognition) amount directly. The value you specify is used only to generate a warning, by way of a footnote in Valuation Set Exhibits, if ProVal’s value differs from the entered value by more than the selected degree of rounding (entered under the Benefits and Rounding topic). If you specify the amortization (recognition) type as variable, that is, the amortization (recognition) amount varies by calendar year (such as for recognition as a level percent of payroll under GASB 67/68 and 74/75), complete the amortization table spreadsheet accessed by clicking the Edit Table button. Note that ProVal makes no change to these amounts (even with rounding selected), other than what may be necessary to have the amounts add up to the current Outstanding balance of this base (if ProVal does change any of the amounts you entered, a warning message will be generated). ProVal will ignore years prior to the Schedule Date to determine whether the amortization payments add up to the specified outstanding balance. The last payment amount specified should be zero; if it is omitted, ProVal will presume an additional, $0, final payment.
If the accounting standard selection is FAS 87 (2006), FAS 106 (2006), ASC 715 or CICA 3461, the Amortizations button is accessible; click it to access parameters to define the methodology for amortizing gains and losses and new prior service costs, that is, prior service costs not already listed among the Amortization Bases. These parameters are discussed in a separate (following) section of this article.
If the accounting standard is IAS 19 (2008), complete the parameters of the Gains/Losses and Prior Service Cost section of this dialog box, which define the methodology that will be used for Gain/Loss Recognition and Prior Service Cost amortization. These parameters are discussed in a separate (following) section of this article.
If the accounting standard selection is GASB 67/68 or 74/75, there is an additional parameter pertaining to new net deferred outflows/inflows, discussed in a separate (following) section of this article. Also, note that ProVal will not determine the discount rate directly but you can derive this rate using ProVal output, taking either of the approaches discussed in the “Discount rate” section of the GASB article in What’s New for ProVal Version 3.05 .
Amortizations under FAS 87 (2006), FAS 106 (2006), ASC 715 and CICA 3461
The Amortizations dialog box contains parameters for defining the methodology for amortizing gains and losses and new prior service costs, that is, prior service costs not already listed among the Amortization Bases in the Accounting Methodology dialog box.
Select the Amortization basis, which indicates whether gain, loss and prior service cost base amortization periods should be based on the average expected Future service of active participants, the average Life expectancy of inactive participants or the average Life expectancy of all participants (whether active or inactive).
Under ASC 715, if reflect curtailment for plan amendments is selected on the Forecast Analysis screen, and Future service is selected, this parameter will automatically change to Life expectancy of all participants (whether active or inactive) beginning in the curtailment year.
In OPEB mode, if the amortization basis is Future service, the Average future service to full eligibility includes parameter becomes accessible. ProVal uses this parameter if the selected attribution method for either PUC (funding) or APBO (accounting) is linear proration to full eligibility. Specify whether the average future service to full eligibility should include only those participants not yet fully eligible or all active participants.
Choose the method to determine the Denominator used in average, either “Headcount expected to receive benefits” or “Average headcount during the year”. The “Average headcount during the year” option reflects the decrements expected to occur during the year beginning on the valuation date and is the only way ProVal calculated the denominator in versions prior to 3.01. For details, see the Technical Reference articles on expected future service, active life expectancy and inactive life expectancy.
In the text field of the Round amortization periods to… decimals parameter, enter the number of decimal places to use to round the amortization period (average expected future service or average life expectancy) of current and future (1) experience gains and losses and (2) prior service costs, as well as the amortization period of any currently existing transition obligation / asset. Note that if an amortization amount has been entered (although optional) for a current year prior service cost or transition obligation / asset, ProVal will “honor” this amount, that is, ProVal will use this value as is, rather than re-compute it using an amortization period rounded to the number of decimals entered.
Regardless of the Amortization basis (i.e., whether it is future service, inactive life expectancy or total life expectancy), select whether Prior Service Cost amortizations should be Level payments over average… or Declining payments over future…. The total caption for these parameter choices is dynamic and will reflect your choice of amortization basis. (Thus amortization will be over the appropriate service of active participants or the appropriate life expectancy for inactive, or inactive plus active, participants.)
If the Level payments over average… option is selected, you may specify a maximum number of years for the amortization period, by checking the but not longer than box and entering the desired number of years in the text field that becomes accessible.
The Declining payments over… option will, in each future year, re-amortize (the outstanding balance of) your prior service cost base over the remaining total expected future service of the active population or the remaining total life expectancy of either the inactive or total population, depending on whether the Future service option or one of the Life expectancy options has been selected for the Amortization basis parameter.
The Gain/Loss corridor parameter is inaccessible if the Immediate recognition option is selected for the Gain/Loss amortizations parameter. Otherwise, specify the corridor value, which will be used for either “spread” option selected under the Gain/Loss amortizations parameter (see the discussion below).
If the Future service option has been selected for the Amortization basis parameter, select whether Gain/Loss amortizations (i.e., the cumulative unrecognized gain/loss amounts that are subject to amortization) should be Spread over average future service, Spread over a fixed number of years or whether Immediate recognition applies. Similarly, if one of the Life expectancy options has been selected for the Amortization basis parameter, select whether Gain/Loss amortizations should be Spread over average life expectancy, Spread over a fixed number of years or whether Immediate recognition applies.
If either “spread” option is selected for the Gain/Loss amortizations parameter, ProVal will amortize the cumulative unrecognized gain/loss. ProVal will subject to amortization the gain/loss in excess of the fraction specified (as the value of the Gain/Loss corridor parameter) of the greater of the market-related asset value and the projected benefit obligation (in OPEB mode, the accumulated postretirement benefit obligation). Note that gain/loss amortization based on the CICA or ASC 10% corridor and average future service or average life expectancy (depending on whether the Future service option or one of the Life expectancy options has been selected for the Amortization basis parameter) will be applied automatically to determine a minimum amortization amount, equal to the amount that would have been amortized had 0.10 (representing a 10% corridor) been entered as the Gain/Loss corridor parameter value.
If Immediate Recognition is selected, the current year's entire gain or loss will be recognized in profit and loss. No portions will be deferred and, as a result, the Gain/Loss corridor parameter will not apply.
Additional parameters for expense under ASC 715 and IAS 19
Select the Add'l Params... button to access additional options for itemizing the interest on service cost and the administrative expenses in the components of the expense calculation. The interest on service cost may be included in either service cost or interest cost. The administrative expenses may be included in either service cost, expected return on assets, or gain/loss (the gain/loss option is only available for ASC 715). Note that the selection of an alternative option will move the interest or administrative expenses into a different component, but will not affect the total expense calculation.
Gains/Losses and Prior Service Cost under IAS 19 (2008)
The Gains/Losses and Prior Service Cost section of the Accounting Methodology dialog box defines the methodology that will be used for Gain/Loss Recognition (including amortization) and new Prior Service Cost amortization, that is, prior service costs not already listed, in this dialog box, among the Amortization Bases.
Three options are available for Gain/Loss Recognition:
If the Amortize in Profit and Loss option is selected, the cumulative unrecognized gain/loss will be amortized through profit and loss and the Parameters button, to access the IAS 19 (2008) Gain/Loss Amortization dialog box, becomes accessible. The parameters of the IAS 19 (2008) Gain/Loss Amortization dialog box specify the details of the amortization methodology:
The Gain/Loss corridor specifies a fraction (e.g., 0.1) such that only the cumulative unrecognized gain/loss in excess of this fraction of the greater of the market value of assets and the projected benefit obligation (in OPEB mode, the accumulated postretirement benefit obligation) is subject to amortization. Note that gain/loss amortization based on a 10% corridor and average future service or average life expectancy (depending on whether the Future service option or one of the Life expectancy options has been selected for the next, Spread over average, parameter) will be applied automatically, to determine a minimum amortization amount, equal to the amount that would have been amortized had 0.10 (representing a 10% corridor) been entered as the Gain/Loss corridor parameter value.
The Spread over average option indicates that the cumulative unrecognized gain/loss subject to amortization (based on the fraction entered for the Gain/Loss corridor parameter) will be spread over either the average expected Future service of active participants or the average Life expectancy of either the inactive participants only or all participants (both active and inactive).
The last option indicates that the cumulative unrecognized gain/loss subject to amortization (based on the fraction entered for the Gain/Loss corridor parameter) will be Spread over the specified fixed number of years, rather than over average expected future service or average life expectancy.
If the Recognize in SORIE account option is selected, the current year's entire gain or loss will be recognized in the statement of recognized income and expense (SORIE) outside of profit and loss. No portions will be deferred.
If the Immediately in Profit and Loss option is selected, the current year's entire gain or loss will be recognized in profit and loss. No portions will be deferred.
For Prior Service Cost amortization, enter the number of Average years until vesting for benefits not yet vested. This value will be the amortization period for new prior service cost bases. IAS 19 (2008) allows only non-vested benefits to be amortized and requires them to be amortized over the average period to vesting. Vested benefits will be recognized immediately.
Gains/Losses and Plan Changes under GASB 67/68 and 74/75
Under GASB 67/68 and 74/75, check the Recognize new net deferred outflows using a x% increase rate box and enter the applicable percentage, if you wish to recognize new bases as a percent of payroll. Leave this box unchecked for straight line recognition.
Note that under GASB 67/68 and 74/75, plan changes are recognized immediately, assumption changes and liability gains and losses are recognized over the average expected remaining service life of all current and prior employees (i.e., including zero future service for inactive plan members) and asset gains and losses are recognized over 5 years. See the Expected Service Lives (under GASB 68 or 75) section of the Expected future service Technical Reference article for details of the average expected remaining service lives calculation. To override the calculated value, check the Override average expected service lives checkbox and enter the desired number of years. The default is to round average expected service lives to four decimal places, but an alternative value may be entered.