200407071st Response of Staff to Avista.pdf

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 1895
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
HECEfVED
iL_
i!J
..~-
ZOUli JUL - 7 Prl 3: 27
It \'i IE ~lJ diJ ~lM/~ SIGN
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLI CA TI 0 N
OF A VISTA CORPORATION FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC AND
NATURAL GAS SERVICE TO ELECTRIC
AND NATURAL GAS CUSTOMERS IN THE
STATE OF IDAHO.
CASE NOS. A VU-O4-
A VU -O4-
COMMISSION STAFF
RESPONSE TO THE
FIRST PRODUCTION REQUEST
OF A VISTA CORPORATION
The Staff of the Idaho Public Utilities Commission, by and through its attorney of record
Scott Woodbury, Deputy Attorney General, hereby responds to Avista Corporation s (Avista;
Company) First Request for Production to the Idaho Public Utilities Commission Staff filed June 28
2004.
Regarding Avista s Production Request Nos. 2 through 9 , Staff regrets that owing to
unforeseen circumstances it is unable to provide responses to the Company at this time. The
referenced Production Requests pertain to the filed testimony of Staffs Cost of Capital witness Terri
Carlock. Ms. Carlock was in an unfortunate accident on Saturday, July 3, and sustained a severely
fractured ankle (spiral fracture, tom ligaments and tendons, and bone chips). She is undergoing
surgery this morning, July 7, and will be on pain medications through the remainder of the week.
Ms. Carlock is expected to be flat on her back with her foot above her heart for 2 weeks after surgery.
STAFF RESPONSE TO THE FIRST
PRODUCTION REQUEST OF A VISTA WLY 7 2004
Because of the severity of the break and the recovery time, it is anticipated that Ms. Carlock will be
out of the office for up to 5 weeks. Staffwill supply supplemental responses on a best efforts basis.
Request No.1: Please provide all supporting documentation for the statement "There has
been growing concern among accounting professionals regarding the use of F AS 87 and the potential
for manipulation of financial statements." Please also include all information you have regarding the
Financial Accounting Standards Board review of this item on any current or future agendas.
(English, D. (Di) page 6, line 7-12).
Response No.1: The statement was made because of professional knowledge gained while
working in the pension industry and attending numerous conferences and workshops on the topic.
The concern was present in 1985 when the Financial Accounting Standards Board issued SF AS 87 by
a 4 - 3 vote, instigating efforts to require a super-majority of the Board (5-2) to issue any new
statements. The Governmental Accounting Standards Board spumed SF AS 87 and issued its own
Exposure Draft
, "
Accounting for Pension by State and Local Government Employers " because the
GASB disagreed with the use of Net Periodic Pension Cost as the pension expense.
Recent pension problems from the market collapse of2001 - 2002 coupled with concerns of the
Enron and WorldCom bankruptcies have reignited many of the initial concerns. In March 2003 the
ASB voted to take a closer look at pension accounting by adding it to its formal agenda of items to
revIew.
Attached are copies of several articles, which discuss the super-majority vote, concerns with
SFAS 87 and the FASB agenda to review SFAS 87. In addition, the CPA Journal and Plan Sponsor
News frequently contain articles on the topic. (See Attachment A).
Request No.2: Please provide a complete copy of the source documents for the 3.5 - 3.
percent dividend yield cited on page 12, In. 11 of Ms. Carlock'testimony.
Request No.3: Please provide a copy of the analysis of historical and projected growth
indicators, including copies of all source documents, cited on p. 13 , Ins. 4-9 of Ms. Carlock'
testimony.
STAFF RESPONSE TO THE FIRST
PRODUCTION REQUEST OF A VISTA JULY 7, 2004
Request No.4: Please provide a copy of the analysis of historical and projected growth
indicators, including copies of all source documents, cited on p. 13, Ins. 4-9 of Ms. Carlock'
testimony.
Request No.5: Please provide a copy of all source documents and calculations used to
determine the 4.36 percent dividend yield and 5% growth rate cited on p. 12, Ins. 16-18 of Ms.
Carlock's testimony.
Request No.6: Please provide a copy of all materials, other than those already provided in
response to Question No., that Ms. Carlock relied on in determining the 60/0 - 6.5% growth rate
range cited on p. 13 , In. 4 of her testimony.
Request No.7: Please provide copies of all underlying analyses , including copies of all
source documents supporting the 10.0% - 11.0% cost of equity under Ms. Carlock's comparable
earnings approach, as cited on p. 9, Ins. 1-4 of her testimony.
Request No.8: With respect to the 10.0% - 11.0% cost of equity under Ms. Carlock'
comparable earnings approach cited on p. 9, Ins. 1-, please describe the basis for the earned returns
that Ms. Carlock used to determine this range, including 1) the time period(s) examined, and 2) a list
of all firms and/or industries that formed the basis of her calculations.
Request No.9: Please provide copies of all analyses and documents prepared and/or relied
on by Ms. Carlock in the "review of the market data and comparables, average risk characteristics
for Avista" cited on p. 14, Ins. 22-23.
STAFF RESPONSE TO THE FIRST
PRODUCTION REQUEST OF A VISTA JULY 7, 2004
Dated at Boise, Idaho, this J'A day of July 2004.
Scott Woodbury
Deputy Attorney General
Technical Staff: Donn English
T em Carlock
i:umisc:prodreq/response/avueO4.1 avugO4.1sw staff response 1 to av
STAFF RESPONSE TO THE FIRST
PRODUCTION REQUEST OF A VISTA JULY 7, 2004
Pension Accounting on F ASB Radar Screen (PLANSPONSOR.com)http://www.pIansponsor.com/pi typel 0 -print/O, 1482 OO.htmI?RE...
Pension Accounting on FASB Radar Screen
December 6,2002 (PLANSPONSOR.com) - The Financial Accounting Standards Board (FASB)
said it is considering a meeting later this month in response to complaints about current
pension fund accounting standards, according to a Dow Jones report.
The current rule governing pension accounting standards, FAS No 87, has come under
fire for some its language regarding "smoothing." Smoothing allows companies to take
certain assets and obligations off balance sheets and amortize them as income or
expenses over time. Additionally, companies may be allowed to report the expected
return on assets , instead of actual losses and gains.
FASB issued a memo to the Financial Accounting Standards Advisory Council
(FASAC) saying, "the Board has received many (other) communications from
constituents expressing their dismay with pension accounting.
Included in this memo, was part of a letter received by the FASB from US
Representative Robert Matsui (D-California), in which he states the current rules
create the potential for overstatement of corporate earnings and create incentives to
corporations to overinvest pension plan assets in stock.
Matsui pointed to the ability for companies to use expect returns on assets; saying it
appears companies are using historically high rates of return , even when considering
the recent downturn of equity and bond markets. "I can think of no other circumstance
in which corporations report earnings to shareholders based on returns that they hope
to realize in the future " Matsui wrote.
Eric Hazard
editors(gJplansponsor. com
Copyright (g 1989-2004 Asset International, Inc. All rights reserved. No reproduction without prior authorization.
1 of 1
Attachment A
Case No. A VU-04-
A VU-04-
D. English, Staff
07/07/04 Page 1 of 25
7/7/2004 11: 11 AM
News Articles (PLANSPONSOR.com) - Finance Pros Say Pension...http://www.pIansponsor.com/pi typeiO/?RECORD ID=19549
News Features I People I Products I Rules/Regs I Markets I HRiBenefits I Finance I NewsDash I Opinion I Events
Finance Pros Say Pension Rules Need Change
February 14, 2003 (PLANSPONSOR.com) - Pension accounting rules should be
overhauled, and companies should be required to disclose their pension finances
more frequently.
That is what a group of investment bankers, corporate credit rating
analysts, and money managers told the Financial Accounting Standards
Board (FASB) in a recent meeting, according to a report in Dow Jones.
The panel contends current pension reporting regulations give companies
enough leeway to distort their true financial portraits. This, in turn, can
end up misleading investors and financial firms.
After receiving an abundance of complaints about the current rules, FASB
has been considering whether to add pension accounting to its formal
agenda of items for review (See Pension Accounting on FASB Radar Screen).
The current step in such a consideration by the rulemaking board was to
convene a meeting of various financial firms to advise it on a number of
accounting concerns. Pension reform was the topic of a session at the
first meeting of the group.
Hurricane Force
Pension rules have been much discussed in recent months as a
controversy continues to brew with each new company report of pension
underfunding. (See America s Pension Crisis). These underfundings then
require extra company pension contributions, which may have an impact
on corporate earnings.
Particularly controversial is the practice of "smoothing" (See Smooth
Move). Smoothing allows companies to take certain assets and
obligations off their balance sheets and amortize them as income or
expenses over time. Additionally, companies may be allowed to report
their expected return on assets, instead of actual losses and gains.
, under the current FASB rules, a corporation can have a pension fund
in deficit today, but continue showing positive numbers on the balance
sheet.
Additionally, some critics of the current "smoothing" rules say the
regulations need to be amended to require a more frequent report of
corporate pension finances. The current rules only require plan sponsors
to disclose details of their pension assets and liabilities once a year.
Eric Hazard
ed itorsCBiplansponsor. com
NEWS
~ FASB Contemplates Pushing
Back Option Expensing Date
Finance - (Jun 30, 2004)
~ CSFB: Options Should Be
Reported As A Liability
Finance - (Jun 29, 2004)
~ IESOC: Option Expensing
Unwise
Finance - (Jun 29. 2004)
~ CEO Group Hits FASB for More
Options Expensing Testing
Finance - (Jun 24, 2004)
~ FASB Options Expensing Limit
Bill Gets Committee OK
RulesiRegs - (Jun 15 2004)
MAGAZINE
Expensing Proposition
The Bottom line - (May 2004)
Tell Tales
Rules!Regs - (May 2004)
Let It All Hang Out
The Bottom line - (April 2004)
~ Glass Houses
iMHO - (February 2004)
~ The British Are Coming with
Their Pension Liabilities!
Volc-e - (February 2004)
~ FASB Reviewing Pension
Regulations
Global Accounting Rules Could
be Ahead
Copyright CSJ 1989-2004 Asset International, Inc. All rights reserved. No reproduction without prior authorization.
~~!~~;~!~JI!tt~~!.
1 of 1
Attachment A
Case No. A VU-04-
A VU -04-
D. English, Staff
07/07/04 Page 2 of
7/7/2004 11: 13 AM
News Articles (PLANSPONSOR.com) - FASB Agrees To Look At...http://www.pIansponsor.com/pi typel0/?RECORD ID=19853
IntroclucliW
iVtetlifu Retirement Income Solutions
Irn~omath$t'5 .~uat(:Hlt&t\d lot life
News Features I People I Products I Rules/Regs I Markets I HR/Benefits I Finance I NewsDash I Opinion I Events
FASB Agrees To look At Pension Accounting
March 12, 2003 (PLANSPONSORcom) - The Financial Accounting Standards
Board (FASB) has agreed to take a closer look at pension accounting by voting
today to add it to its formal agenda of items for review.
The accounting rulemaker said the agenda addition, in response to a
plethora of complaints received recently about current pension
accounting standards, will focus specifically on how to enhance
companies' disclosure of their pension finances to address growing
concern by investors and others.
Smoothing' Over
Pension rules have attracted attention in recent months with a maelstrom
of pension underfunding problems (See America s Pension Crisis).
The current rule governing pension accounting standards, FAS No 87
has come under fire for its language regarding "smoothing." (See
Smooth Move) Smoothing allows companies to take certain assets and
obligations off balance sheets and amortize them as income or expenses
over time. Additionally, companies may be allowed to report their
expected return on assets, instead of actual losses and gains.
Critics of FAS No 87 argue the rule should be amended to require more
frequent pension finance reporting from companies. Currently,
companies are only required to report those figures annually (See
Finance Pros Say Pension Rules Need Change).
Eric Hazard
ed itorsrtP pIa nsponsor. com
NEWS
D FASB Contemplates Pushing
Back Option Expensing Date
Finance - (Jun 30, 2004)
$~ CSFB: Options Should Be
Reported As A Liability
Finance - (Jun 29, 2004)
~ IESOC: Option Expensing
Unwise
Finance - (Jun 29, 2004)
~ CEO Group Hits FASB for More
Options Expensing Testing
Finance - (Jun 24, 2004)
~ FASB Options Expensing Limit
Bill Gets Committee OK
RulesiRegs - (Jun 15, 2004)
MAGAZINE
Expensing Proposition
The Bottom Line - (May 2004)
.~ Tell Tales
RulesiRegs - (May 2004)
Let It All Hang Out
The Bottom Une - (April 2004)
~ Glass Houses
IMHO - (February 2004)
~ The British Are Coming with
Their Pension Liabilities!
VoiC$ - (February 2004)
Copyright CID 1989-2004 Asset International, Inc. All rights reserved. No reproduction without prior authorization.
:if~I~~!IIJJfI.
IlfItr~ucil19
MetUfaRetirement Inc:omeSolutions
tncome. that'$gutlf$nteed for!lf$
1 of 1
Attachment A
Case No. A VU-04-
A VU -04-
D. English, Staff
07/07/04 Page 3 of
7/7/2004 11: 14 AM
Government Affairs - F ASB Proposed Replacement http://www.aspa.org/archivepages/gac/2003/ll 0403- fasb.htm
October 24 2003
ASPA Comments on the FASB Proposed
Replacement for SFAS 132
T A & I Director
File Reference No.1 025-200
Financial Accounting Standards Board
401 Merritt 7
O. Box 5116
Norwalk, CT 06856-5116
Subject: FASB Exposure Draft
Download as a pdf file (128KB)
Dear T A & I Director:
The American Society of Pension Actuaries is pleased to submit our comments
on the FASB Proposed Replacement for SFAS 132.
In many respects, ASPA supports the objectives reflected in the exposure draft.
However, ASPA believes that other, more fundamental, changes are far more
important than the disclosure changes presented.
ASPA is a national organization of approximately 5 000 members who provide
actuarial , administrative, consulting, legal , and other professional services for
qualified and other retirement plans.
We would be happy to discuss our position with you further.
Sincerely,
Brian Graff
Executive Director
FASB Proposed Replacement for SFAS 132
Comments by the American Society of Pension Actuaries Standards Committee
A. Summary.
In many respects, ASPA supports the objectives reflected in the exposure draft.
However, ASPA believes that other, more fundamental, changes are far more
important than the disclosure changes presented in the exposure draft.
ASPA believes that now is not the time to implement disclosure changes. Work
on the fundamental changes should occur first.
Then , a standard making the fundamental changes as well as the disclosure
changes should be exposed in a single document.
Implementation of this package of changes should occur with sufficient
lead-time for system revision and the education of practitioners.
Section C responds, issue by issue, to the questions on which the Board sought
observations.
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7/6/2004 3 :06 PM
Section B highlights our reasons for concluding that implementation of the
disclosure changes should be postponed and packaged with changes that are
more fundamental.
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Government Affairs - F ASB Proposed Replacement http://www.aspa.orglarchivepages/gac/2003/110403-fasb.htm
Representatives of ASPA would be happy to review, with the Board, any aspect
of these comments.
B. Key Issues for ASPA.
1. Change is needed.
(a) FASB clearly recognizes this. In describing the reasons for issuing the
proposals contained in the draft, the Board states that there have been
concerns expressed by users of financial statements about their need for more
information about pension plan assets, obligations, cash flows, and net benefit
cost" We agree that change is needed.
(b) However, we believe the Board may be misinterpreting a concern that is
really a concern over fundamental calculation techniques. There may be a
feeling that changing the rules on disclosure can significantly lessen this
concern. We do not believe this lessening of concern will result
2. The necessary changes go much further than changes in methods of
disclosing current-rule calculated results.
(a) The missing ingredient is transparency.
(i) Under current calculation methodology, it is difficult for the reader
to examine pension reports and reach conclusions as to the status
of the pension promise and the ongoing obligation assumed by the
reporting entity.
(ii) The more sophisticated reader feels compelled to perform
supplementary calculations that will permit a clearer picture of the
promise and the ongoing obligation.
(iii) The less sophisticated reader simply obtains an incorrect
picture.
(b) We are not discussing, here, the details of our reasons for suggesting the
changes that would bring about this needed transparency. However, we list the
most important of those changes we believe should be required.
(i) Elimination of smoothing.
. Gains and losses should be realized as they occur.
. The impact of asset growth on periodic pension costs should reflect actual
current return, marked to market, realized by the asset portfolio. With one
exception , the use of an "expected return on plan assets " and the use of
any asset measurement basis other than fair value should be avoided.
We discuss, below, a distinction between pension cost components of
results from operations on one hand, and the balance of pension costs on
the other. Solely for this distinction, asset smoothing and the use of an
expected return on plan assets should continue to playa role.
. Hence , return on assets carried into results from operations should be
based on smoothing and the use of an expected return on plan assets.
The difference between the amount thus carried into results from
operations and actual return on assets should be carried into other
comprehensive income.
(ii) Redefinition of the pension obligation.
Attachment A
Case No. A VU-04-
A VU -04-
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Government Affairs - F ASB Proposed Replacement http://www.aspa.org/archivepages/gac/2003/11 0403 - fasb.htm
. The ABO should replace the PBO as the basic measure of the entity
pension obligation.
. The impact of a pay increase should be deemed accrued in the year in
which the pay increase occurs.
. Rules regarding cash-balance and similar account-based plans should
receive attention in particular. One approach worth active consideration
would be a rule for these plans that the ABO is always equal to the sum of
the individual notional accounts.
(iii) Identification of those elements that are and are not components
of results from operations.
. The elimination of smoothing will lead to a degree of volatility that some
observers will view with concern.
. This concern will be lessened considerably by a clear distinction between
those cost elements to be viewed as components of results from
operations and those elements to be treated as occurring "below the line.
. The amount that should be viewed as results from operations should
include the increase in the ABO minus a return on assets. The return on
assets should be based (as at present) on a reasonable approach to
asset smoothing and a reasonable expectation for return on plan assets.
. The balance of the pension cost should be viewed as a component of
other comprehensive income. This balance would include all gain and loss
adjustments as well as the costs resulting from significant plan
amendments.
3. It is misleading to say that the exposure draft only changes methods of
disclosing current-rule calculated results.
(a) We have heard the statement made that the exposure draft only describes
new ways of disclosing current-rule calculation results.
(i) The inference is that there is not an extensive burden associated
with conversion to the disclosure rules outlined in the exposure
draft.
(ii) We do not believe this inference is correct. In at least two areas
discussed immediately below, the burden of making the changes
necessary to satisfy the new rules will be heavy.
(b) In the first of these two areas, it is proposed that the PBO be reported
separately as to disbursements in each of the first five years, with aggregation
for all later years. See exposure draft issue 3.
(i) This new requirement, coupled with the requirement that the
discount rate must reflect the duration of liabilities being discounted
can lead to a serious elevation of calculation complexity.
. Arguably, it will be necessary to use a different discount rate for each of
the six breakdowns. The duration of liabilities is different for each
breakdown.
. Then , it will be necessary to find a single rate, applicable to the entire
PBO, which produces the same result as the sum of the individually
calculated breakdowns.
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(ii) The burden of preparing these breakdowns is magnified by the
nature of many existing computer systems. In many of these
systems, the job of undoing existing procedures and replacing them
with new ones will escalate the conversion problem considerably.
(c) In the second of these two areas, the exposure draft would have us analyze
assets, class by class, and calculate a duration for each class.
(i) The job of compliance is so time-consuming that pension
actuaries spend little time on any other aspect of actuarial science.
. There is nothing in compliance work that requires calculation of duration
by asset class.
. Calculating the duration of an interest-paying debt obligation is not a trivial
exercise.
. Consequently, many actuaries will need to devote time to additional
professional self-education if portfolio analysis involving the measurement
of durations becomes required.
4. It makes far more sense to address other needed changes and do the whole
job at once.
(a) As already noted , compliance with the proposed new standard would not be
a minor effort.
(b) As already noted , major additional changes in accounting standards seem
both desirable and inevitable.
(c) For these reasons, we urge the Board to
(i) Postpone implementation of any new disclosure requirements
until these major additional changes are ready for implementation
and
(ii) At that point, implement a major change with ample lead time for
. System revision, and
. The education of practitioners in the new requirements.
C. Responses on FASB Issues 1-11.
1. Issue 1: Descriptive disclosures for each asset category.
(a) With some reservation, we support the proposal in the exposure draft.
(i) Further class breakdowns should be required to the extent they
reveal class-by-class differences in risk taking and expected return.
(ii) Disclosure of the extent of asset-liability mismatch is very useful.
(iii) However, we note that the notion of duration for an equity
investment has little value. At present, many portfolios are invested
in equities to a much greater extent than in debt obligations.
(iv) We note, too, that in many plans the benefit of the requirement
will be marginal compared to the cost. These are plans where
investment policy is so fluid that recording investment policy at any
particular point serves no useful purpose.
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. This fluid (or, sometimes, non-existent) investment policy is more
commonly a characteristic of plans sponsored by non-public entities. We
discuss, later, ways to reduce the compliance burden on such plans. An
exemption from asset category disclosure requirements might be one
such way.
We do not mean to imply that we endorse these fluid or non-existent
policies. We most emphatically do not endorse them. However, to the
extent a problem exists, we are not certain that fixing it comes under the
purview of SFAS 87 88, or 106.
2. Issue 2: Disclosure of ABO.
(a) We support the proposal in the exposure draft.
(b) As already noted, we believe ABO should replace PBO as the basic building
block in pension obligation disclosures.
3. Issue 3: Cash flow projections.
(a) We support the basic concept, but point out that the information gained will
be relatively costly to provide - especially for smaller plans.
(b) The balance of this section s discussion of issue 3 refers to problems other
than implementation timing and conversion costs.
(c) Respecting Disbursements-
(i) As already noted, useful disbursement projections could require a
major change in approach to discount rates and computer
methodology.
(ii) Furthermore, the only realistic approach to a benefit
disbursement projection would involve open group methodology,
including examination of the impact of accruals occurring after thecurrent year.
(d) Respecting Contributions
(i) There appears to be no purpose served in requiring a projection
of contributions on one basis and a projection of disbursements on
a different one. For example, if open group methodology is to be
required in projecting disbursements, it should be required, as well
in projecting contributions.
(ii) At present, mandatory funding rules produce results that are
extraordinarily erratic. Even just projecting contributions for one year
can be very difficult.
(iii) Under current law, a distinction between required and
discretionary contributions is only marginally useful. The distinction
also presents a difficult definitional problem. Often, an entity will
make a small additional contribution in year-1 in order to avoid a
much larger additional contribution requirement in year-2. Is the
additional contribution in year-1 voluntary or mandatory? Does it
matter to the reader of the accounting statement? This distinction
should not be required.
(iv) It should not be required that non-cash contributions be
identified separately. The approach to issue 1 is the place to
address the impact of having the trust hold special assets (such as
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stock in the entity or a subsidiary).
(e) A Possible Compromise
(i) It could be useful to require a simple projection of disbursements
expected in the year following the year of the report.
. In the vast majority of cases, an analyst equipped with this projection
would be able to make rough estimates respecting later years.
. In the small minority of cases where significant disbursement fluctuation
can be predicted , the sponsor could be required to so indicate, with a
description of the expected fluctuation.
(ii) We would urge that there be no analogous requirement
regarding expected contributions.
4. Issue 4: Required format for disclosure of key assumptions.
(a) We support the proposal in the exposure draft.
(b) Actually, the illustrations in Appendix B to SFAS 132 could be interpreted as
requiring that this approach be used under current rules.
5. Issue 5: Special rules for non-public entities.
(a) In principle, the proposal set forth in the exposure draft has merit.
(b) However, consider two key differences between non-public entities and
public entities:
(i) The non-public entities are characteristically smaller, making
relative costs of any disclosure more burdensome.
(ii) There are two important components of the audience for
financial reports of non-public entities. One includes officers of
institutions lending money to the non-public entity. The other
includes officers of venture capital organizations investing in the
same entity. Other than an entity s owner-entrepreneurs, these two
important components are arguably the only components.
(iii) Loan and venture capital officers often have two attributes in
common:
. They are usually able to demand further information from their clients
should they deem further information necessary.
. They are typically disinclined to review any material prepared under SFAS
, SFAS 88 or SF AS 1 06 unless and until they perceive financial
problems. To state it differently, the typical SFAS 132 report travels direct
from the reader s mail box to the file cabinet.
(iv) Accordingly, we urge the Board to take especial care in not
burdening these smaller non-public entities with new routine
reporting requirements that may be only marginally useful.
(v) Going even further, we urge the Board to seek ways to reduce
the burden already imposed on these entities.
. One approach would be to permit these entities to make use of Current
Liability (as defined in Section 412 of the Internal Revenue Code.
Current Liability involves a calculation currently required by government
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rules. With consent of the sponsor s auditor, this quantity could be
substituted for both the ABO and the PBO. The substitution generally
would mean a significant reduction in fees to the sponsor.
. Admittedly, the concepts underlying Current Liability, ABO and PBO are
each quite different. However, the loan or venture capital officer is often
more concerned with issues related to Current Liability than those related
to either the ABO or the PBO.
. As we state later, we would like to see the law changed by replacing
Current Liability with a statement of true termination solvency liability.
6. Issue 6: Disclosure of sensitivity to differences in key assumptions.
(a) We subscribe to the idea of continuing to require sensitivity analyses relative
to health care cost trend rates.
(b) For the reason that makes sensitivity analyses in health care cost trend rates
useful, we suggest attention to the impact of inflation on both discount rates and
pay increase rates.
(i) By requiring an analysis of the tandem movement of these two
rates, the Board would avoid the possibility of misinterpretation
respecting the movement of one rate without movement of theother.
(ii) As already noted , we believe the basic building block should be
ABO and not PBO. If this change were made, the impact of pay
increases would be irrelevant.
7. Issue 7: Disclosure of measurement dates.
(a) It is not burdensome to disclose the measurement date. We suggest that
disclosure of this date be required.
(b) A disclosed measurement date would let readers draw their own conclusions
regarding possible economic events that have occurred after that date.
(c) Respecting the balance of issue 7, we support the Board's conclusions.
(d) We do urge the Board to define the word "significant" both for the purposes
of issue 7 and for the purposes of issue 10.
8. Issue 8: Disclosure of reconciliation of beginning and ending balances of
assets and PBO.
(a) We support the proposal in the exposure draft.
(b) This reconciliation is a useful error-checking device for the preparer of the
report. However, it serves no useful purpose for the reader of the report.
9. Issue 9: Disclosure requirements considered but rejected.
(a) For the most part, we support the Board's decision not to require the items of
disclosure listed under Issue 9.
(b) We see three possible exceptions:
(i) Item d. refers to a termination solvency test. This is an important
item not currently included in any routine periodic report required by
either the Board or the governmental regulators.
We are mindful that requiring this test will increase compliance costs.
8 of 10
Attachment A
Case No. A VU-04-
A VU -04-
D. English, Staff
07/07/04 Page 10 of
7/6/2004 3 :06 PM
Government Affairs - F ASB Proposed Replacement http://www.aspa.org/archivepages/gac/2003/ll 0403 - fasb.htm
Until the law requires it, we would not advocate that it be required under
an accounting standard.
. Nevertheless, we urge that the accounting profession and the pension
actuarial profession join hands in lobbying to replace "Current Liability" as
defined in Section 412 of the Internal Revenue Code with a true
termination solvency liability calculation.
(ii) If we understand item e., it discusses the possibility of requiring
separate pension cost components for each operational sub-group
of the entity.
If pension costs are not uniform across all sub-groups, separate
identification of the cost component in each sub-group could be useful to
an analysis of the operating success of each sub-group.
We believe item e. should remain on the agenda for future discussion.
. In any event, as already noted, we would like to see a distinction between
those pension costs that are included in operating results and those costs
that are included in other comprehensive income. We would certainly not
require a breakdown of other comprehensive income by sub-groups.
(iii) Item j. involves a description of participation in multiemployer
plans. This participation often exposes the entity to very sizeable
contingent withdrawal liabilities. We believe item j should also
remain on the agenda.
10. Issue 10: Requirements for interim statements.
(a) We support the proposal in the exposure draft.
(b) As already noted , we do urge that the Board provide guidance in the
definition of "significantly different"
11. Issue 11: Effective dates and Transition rules.
(a) As already noted, we believe that requiring implementation of these changes
for years ending after December 15, 2003 is unrealistic.
(b) As already noted, our strong preference would be to hold off on these
changes until it becomes possible to propose more basic changes in pension
accounting standards.
(c) Short of this, we suggest that the Board postpone the effective date of these
disclosure changes by at least two years. We suggest this postponement for two
reasons:
(i) The more obvious reason is the requirement to redesign systems
and forms and to reeducate practitioners.
(ii) A less obvious reason is to avoid duplication of fees.
. In many cases, much of the work for 2003 has been completed. Material
has simply been set aside pending insertion of final results. If a change
applied to 2003, much of this material would have to be drastically
revised, with a resultant additional fee.
. In many of these cases, a considerable amount of work has already been
performed for 2004. This, too, would have to be revised. Again, there
would be additional fees.
9 of 10
Attachment A
Case No. A VU-04-
A VU -04-
D. English, Staff
07/07/04 Page 11 of
7/6/2004 3 :06 PM
Government Affairs - F ASB Proposed Replacement http://www.aspa.org/archivepages/gac/2003/ll 0403- fasb.htm
Respectfully submitted:
American Society of Pension Actuaries Standards Committee
Lawrence Deutsch, Co-chair
Edward E. Burrows, Co-chair
Return to ASPA Government
Affairs
Visit the ASPA web
page
Home I Login I Help I Provisions for use of material
Code of conduct I Disciplinary procedures I Contact ASPA
(f) ASPA 1999-2004. All rights reserved.
ASPA is a non-profit professional society. The materials contained herein are
intended for instruction only and are not a substitute for professional advice.
Attachment A
Case No. A VU-04-
A VU -04-
D. English, Staff
07/07/04 Page 12 of
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2 of6
Oct 1991
Where would we be with it? (Financial
Accounting Standards Board's supermajority
voting rule)
by Edwards, Randal K.
Abstract- The potential effects of the super-majority rule for voting of the
Financial Accounting Services Board are examined in terms of the present
state of accounting standards as embodied in the generally accepted
accounting principles (GAAP). The super-majority rule requires a 5-2 vote
(about 710/0) as compared to the original 4-3 vote (about 570/0) for adopting
rules for inclusion in the Statement of Financial Accounting Standards
(SF AS). A historical perspective of majority qualifications based on the 4-
vote illustrates the GAAP's present state in terms of specific SFAS rules
such as the error adjustments of prior period financial statements
capitalization of interests accumulated during asset construction
preparation of financial reports for defined benefit pension plans, debt
extinguishment, cash flow statements, inflation-adjusted accounting, and
foreign exchange translation.
The preceeding article presented the immediate background and the discussions
surrounding the change to a supermajority for FASB voting. This article examines
the history of majority requirements by the prior authoritative boards and what the
state of GAAP would be had the supermajority always been in place.
History of Majority Requirements
The FASB's original requirement was a simple majority of 4-3 (approximately
57%). In contrast, the two predecessor boards, the Committee on Accounting
Procedure and the Accounting Principles Board (APB), required a two-thirds
majority (67%). The supermajority vote of 5-2 (approximately 71010) is the closest
the FASB can come to a two-thirds vote and thus would then be more consistent
with its predecessors.
Even though the APB had a two-thirds majority requirement, there were still a
number of opinions that passed with quite a few dissenters. Also, the demise of the
APB is often attributed to the failure to build a consensus among users and others.
Perhaps the FASB could have avoided some of the criticism it has received if the
supermajority had always been in place.
Prior Statements
-"""""""
I.j
......
-.::t ~-.::t
Figure 1 of the preceeding article summarizes the FASB statements that passed ~ 0 I S+--i
with a 4-3 or 4-2 vote. A review of the topics identifies several major items and 6 ~ ~ controversial issues, such as pensions, foreign currency, inflation accounting, and ~
~ ~ ~
cash flows. Table 1 in this article summarizes present and previous GAAP for 5
. ~
selected statements , which are examined in the following sections. Obviously, it is ~ i1 ~
(1) ~rC/) ~,t:: ro '~ u
7/6/20043:03 PM
Where would we be with it? (Financial Accounting Standards Board'...http://www.nysscpa.org/cpajournal/oid/I1583341.htm
impossible to determine what the present status of GAAP would be if the
supermajority has always been in place. At a minimum , it is probably safe to
assume that many, if not all , of the contested statements would not be in their
present form.
Table: FIGURE
SFASs ENACTED BY A 4-3 VOTE
Statement
NumberDatelssued
166/77PriorPeriodAdjustments
1912/77FinancialAccountingandReportingbyOil
and Gas Prod u ci ng Com pan i es
3410/79CapitalizationofinterestCost
353/80Acco u nti ngand Reporti ng byDefi ned
BenefitPensionPlans
4111/80FinanciaIReportingandChangingPrices;
SpecializedAssets-ncomeProduci ngReal
Estate
5212/81 ForeignCurrencyTranslation
541/82FinanciaIReportingandChangingPrices;
InvestmentCompanies
584/82Capital izationofl nterestCosti n
Fi nancialStatements Thatl ncl ude
nvestmentsAcco u ntedfo rbythe Eq u ity
Method
626/82Capitalizationofl nterestCostin
Situationsl nvolvingCertain Tax-Exempt
Bo rrowi ngsand Certai n G iftsand Grants
6911/82DisclosuresaboutOilandGasProducing
Activities
7112/82AccountingfortheEffectsofCertain
Attachment A
Case No. A VU-04-
A VU -04-
D. English, Staff
07/07/04 Page 14 of
7/6/20043:03 PM3 of6
Where would we be with it? (Financial Accounting Standards Board'...http://www.nysscpa.orglcpajournal/oId!115 83 341.htm
TypesofRegulation
7611/83ExtinguishmentofDebt
7812/83ClassificationsofObligationsthatare
CallablebytheCreditor
8712/85Employers Accounti ngforPensions
8912/86FinanciaiReportingandChangingPrices
9012/86RegulatedEnterprises-Accountingfor
Aband 0 mentsand Di sa II owan cesforP I a nt
Costs
9511/87StatementofCashFIows
986/88Accounti ngforLeases: Sales-Leaseback
Transactions I nvolving Real Estate; Sales
TypeLeasesofRealEstate; Definition
oftheLease Term; Initial Di rectCosts
ofDi rectFi nanci ng Leases
999/88 Defe rra ofth e Effective D ateof
Not-for -ProfitOrganizations
--- ,........(
\.r),........( I o::::t ~o::::t I CJ \.r)~ I
~........~........
~~~b5
+-' ................ ~ p..
P""""" ...s::::r.n
;..:::"'"
...s:::: Ol)~C,) 0 r---ro r.n ~ct:: ro . r:::~ U Q c
Recog nitionofDepreciation by
Prior Period Adjustments
SFAS 16 limits prior period adjustments to the "correction of an error in the
financial statements of a prior period" (the other type of prior period adjustment
was eliminated by SFAS 96). The three dissenters to SFAS 16 believed that there
were other items that should be recorded as prior period adjustments. SFAS 16
requires that those items be reported on the income statement, possibly increasing
the volatility of earnings. Also, except for errors , all items that clarify uncertainties
recorded earlier or in some way relate to prior years are included in the current
income statement.
Capitalization of Interest Cost
SFAS 34'requires that interest incurred during construction of assets be capitalized
during the "capitalization period." The three dissenters believed that interest should
be an expense of the current period and should not be attributed to a product as
are materials, labor, and overhead. Because there was no prior authoritative
statement, if the FASB had been unable to garner five positive votes, capitalization
of interest would not be required. With that scenario, some would believe that no
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requirements for interest capitalization would contribute to a lack of comparability
and consistency. Others might argue that the lack of guidelines would allow
companies to follow the true economic substance of a situation.
Accounting and Reporting for
Defined Benefit Pension Plans
SFAS 35 establishes guidelines for annual financial statements of defined benefit
pension plans (but not accounting and reporting by the employer). The dissenters
believed that too much information was provided, actuarial information was not
reliable enough to be included in the statements, and comparability between plans
would be reduced. An acceptable alternative might have required less detail and/or
moved information from the financial statements to the footnotes.
Foreign Currency Translation
SFAS 52 defines the functional currency, requires the current rate method of
statement translation except when the functional currency is the U.S. dollar, and
prescribes accounting for foreign currency transactions. The previous statement
SFAS 8 , required the temporal method of translation. Current rate translation
adjustments in SFAS 52 are a component of stockholders' equity but temporal
adjustments are recorded in the income statement.
The dissenters to SFAS 52 suggested , among other things, that the best approach
would have "essentially retained Statement 8's translation method" and
recognized all gains and losses in net income... but allowed for a separate and
distinct presentation of those gains and losses within the income statement."
Because many in the accounting public were not pleased with SFAS 8, a new
statement was probably inevitable. However, the requirements would undoubtedly
be different if the supermajority had been in place.
Extinguishment of Debt
The primary change that SFAS 76 makes in the requirements of APBO 26 , the
prior authoritative support, is to include legal forgiveness and in substance
defeasance as extinguishment of debt. The dissenters did not believe that in
substance defeasance, where the "debtor is not legally released from being the
primary obligor under the debt obligation " should be extinguishment of debt and
thus reported as an extraordinary item on the income statement.
Employers Accounting for
Pensions
SFAS 87 establishes specific guidelines for computing net periodic pension cost
which is the amount recorded as pension expense. If the current company
~ ~
contribution to the plan does not equal the expense, an asset or liability is createc ~ 0 for the over- or underfunding. Also, an additional liability is recorded if the I i:::1
accumulated benefit obligation at year-end exceeds the fair value of plan assets. ~ ~ s: ~
The additional liability is offset by a debit to an intangible asset, which cannot 15
~ ~ ..
d' ~exceed the unamortized (unrecognized) prior service cost. Any excess is debited S 0
~ ~
to an equity account. -5 ~ gf ~ro (IJ ~oro . r::::The dissenters to SFAS 87 disagreed with various specific computations and ~ u ~ 0
assumptions. Two of the dissenters also did not believe the intangible asset should
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be recorded. Obviously, accounting for pensions is complicated; at minimum, it is
safe to assume that present requirements would be different with a supermajority
vote.
Inflation Accounting
In 1979, the FASB initiated a five-year inflation accounting experiment. Large
companies were required to present certain inflation- adjusted information as
supplemental disclosures. Five years later, SFAS 82 eliminated some of the
requirements. Finally, in 1986, during a period of relatively low inflation, SFAS 89
changed the required disclosures to "encouraged.
The dissenters to SFAS 89 believed that inflation accounting should not be "written
off as lost cause." They were concerned that inflation accounting should be
reconsidered , especially when there was not a "crisis atmosphere." This seems to
be an especially prophetic statement , given the recent oil price increases , federal
and state budget problems, and renewed concern about inflation.
Statement of Cash Flows
SFAS 95 replaced the statement of changes in financial position with the
statement of cash flows. The new statement is consistent with one of the three
objectives of financial reporting set forth in the FASB's Conceptual Framework.
The dissenters to SFAS 95 objected primarily to how certain items are classified
on the statement of cash flows. For example, interest revenue, dividend revenue
and interest expense are classified as flows from operating activities and not in the
categories to which they are related (i. e., interest revenue is earned on an
investment, not from operations). Although the supermajority vote would probably
not have prevented the statement of cash flows from being required, a
compromise satisfactory to at least one dissenter would have changed the nature
of the statement.
Would More Compromise Have
Been Helpful?
Eighteen of the FASB's statements have passed with only four affirmative votes.
As the above review illustrates, some of the statements have related to major
topics. Requiring the FASB to reach more consensus among the seven members
would have undoubtedly led to more compromise, possibly substantially reducing
criticism which the Board has received.
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6 of6
Attachment A
Case No. A VU-04-
A VU -04-
D. English, Staff
07/07/04 Page 17 of
7/6/20043:03 PM
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10f8
Welcome to Luca!globe
The CPA Journal Online
May 1990
GASB and FASB views of pensions: the two
contrasted. (Governmental Accounting
Standards Board, Financial Accounting
Standards Board)
by Schleier, George
Abstract- The Governmental Accounting Standards Board (GASB)
Exposure Draft (ED) issued in January 1990 covering pension accounting
for state and local governmental employers contains some differences and
similarities to Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Statement (SFAS) No 87, which also covers pensions.
One area where the standards differ is the extent that plan funding should
affect the annual pension expense: FASB SFAS 87 confirms using
accrual-basis pension accounting, but does not accept funding calculations
as measures of pension expense, while the GASB ED states that the
accrual-basis recognition does not assume the expense measurement has
to differ from the funding measurement. In addition, the ED and SFAS 87
are similar in the area of delayed recognition of certain factors that affectpension expense.
In January 1990, the GASB issued an Exposure Draft (ED), "Accounting for
Pensions by State and Local Governmental Employers " which differs in some
significant respects from the FASB's Statement No. 87
, "
Employers' Accounting for
Pensions" (see Exhibit 1). (The GASB's document is not yet final and could
possibly change based on comments received during the exposure process.
Although the two standards are aimed at different groups, many prepares
auditors, and users of financial reports will have to be familiar with both. Some will
question why there should be two sets of accounting rules for employers who
participate in defined benefit plans. (The two documents contain almost identical
provisions for employers participating in defined contribution plans.) An
understanding of the rationale for the FASB's and GASB's conclusions helps to
explain the technical differences between their standards.
-.............
1II....... I I ~ 4-1~ 0
".;
I d CXJ1t-;
.......~.......
.s a.)
.......~~(/)
o.c
1:: ~ ~ ..c:
" ~
(1)U'J
.,...;
..c: Z bh~(1) s:: r---ro U'J
-+-' -......
-+-' ro . r---Anyone who follows the two Boards is aware that differences of opinion between ~ Q 0
them are not uncommon. So it should not be surprising that on a topic as complex
as pensions there would be disagreement on some issues. Although individuals
would argue the theoretical and practical merits of each document differently, one
Differences Are Not New
7/1/2004 1 :57 PM
GASB and FASB views of pensions: the two contrasted. (Governmen...http://www.luca.com/cpajournal/oid/08526770.htm
can probably best approach the documents by recognizing that each Board's goal
is to develop standards that will provide the most useful information reasonably
possible to users of the financial statements. Both Boards follow extensive due
process procedures, sometimes producing different responses on similar issues.
The two Boards' constituencies and their environments are not identical , and
financial statement users in the public and private sectors are frequently looking
for different information. This , in turn, gives rise to varying reporting qbjectives and
different accounting models. Add to this the fact that discussions on pension
accounting inevitably result in a wide variety of opinions, then it can begin to be
understood why the two documents are as different as they are. Many of the
technical differences between the two standards stem from overall differences in
the two Boards' approaches to financial reporting in general , and pension reporting
in particular. In this article we briefly discuss these general differences and how
some of the provisions of SFAS 87 and the GASB ED relate to them. We also
discuss some similarities between the two Boards' conclusions.
The Two Statement Objectives
Both the FASB and the GASB view pension benefits as deferred compensation for
employee services. A fundamental objective of both the GASB ED and SFAS 87 is
to ensure that an appropriate portion of the total cost of pension benefits is
recognized as pension expense, on the accrual basis , in the periods when
employees provide services. The two documents differ in how pension expense
should be measured. The FASB adopted a single accounting approach to
measuring expense and concluded that comparability of employers' financial
statements would be enhanced if the free choice of funding methods was not
carried over to expense measurement. The GASB ED , in contrast, is based on the
view that pension accounting in government is more useful when expense
measurement and funding requirement calculations are in tandem. It is the funding
method that affects the actual flow of financial resources, and no single method is
appropriate for all plans and employers. The GASB believes that as long as the
funding method is systematic and rational a different method should not be
required for accounting purposes.
The GASB ED focuses on the operating statement and the measurement of
interperiod equity (whether current-uear revenues were sufficient to pay for
current-year services). This approach is consistsent with the objectives of
governmental financial reporting and the Board's recent proposal to adopt a flow of
financial resources measurement focus for governmental fund operating
statements. The cornerstone objective of governmental financial reporting is
accountability, including, for example, reporting how the entity has used financial
resources provided by citizens for purposes approved in a legally adopted budget.
the laws of most governments require balanced budgets. The intent of those laws
is the conceptual basis for the GASB's emphasis on the operating statement and
the Board's belief that governmental financial reporting should assist users in
assessing whether interperiod equity has been achieved.
---....... lr....... I -.::t ~-.::t I d
I ~.....
~.......~~~~ +-' ~
C':
Adoption of an operating statement orientation for pension accounting is a logical ~
~ ~~ ~
extension of these concepts, and the GASB ED addresses primarily how annual ..a Z
~ ~
pension expense should be measured. Pension liabilities or assets are not
~ ~ ~ ~
measured independently but result from the difference between expense accruals ~ l3
~ ~
and the amounts funded , similar to SFAS 87. However, in contrast to SFAS 87, the
ED does not require recognition of an additional liability.
Instead , the ED continues the GASB 5 (1986) requirement to disclose
standardized measures of the plan s funded status and funding progress for
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least a three-year period. We will compare this requirement later with the FASB'
requirement to recognize a minimum liability on the balance sheet.
The primary focus of SFAS 87 is on reporting pension expense, with the added
objective of improved reporting of the employer s financial position. The amount of
expense to be recognized, however, is not simply the change in the employer
pension obligation from one period to the next. In measuring pension expense
SFAS 87 provides for delayed recognition of many elements that change the
pension obligation from period to period. The Statement also requires balance
sheet recognition of a minimum liability that represents any unfunded pension
obligation. Because of these basic objectives--expense measurement and liability
recognition--the FASB does not characterize its Statement as having either a
strictly balance sheet or operating statement orientation. Rather, the Statement is
a compromise between the balance sheet and income statement with a view
towards improved overall financial reporting.
Accounting and Funding
An important issue addressed by both Boards--and one of the main reasons for the
differences between their standards--was the extent to which a plan s funding
methodology should influence the determination of annual pension expense.
Readers will recall that APBO 8 required accrual accounting but permitted pension
expense to be measured using one of several actuarial cost methods.
FASB Uses Single Accounting
Method
In SFAS 87, the FASB reaffirms the usefulness of accrual-basis pension
accounting but does not accept funding requirement calculations as appropriate
measures of pension expense. In the FASB's view, the plan terms are the best
indicator of how employees earn benefits, and the accumulation of benefits each
year should be the basis for measuring the economic cost of the resulting change
in the employer s pension obligation. Most funding methodologies , however, do not
calculate the employer s annual actuarially required contribution in this way (the
projected unit credit approach is the exception). Partly for this reason and partly
because different actuarial cost methods produce different measures of actuarially
required contributions, the FASB developed a methodology for measuring expense
that is independent of the way funding requirements are calculated. This
methodology must be used by all employers who participate in single-employer
plans.
The separation of expense measurement from funding measurement does not
mean that the FASB considers funding unimportant. However, the Board views the
choice of a funding methodology as a financing question that is influenced by many
factors including ERISA requirements, tax considerations, and alternative
investment opportunities--factors that are unrelated to how thepension obligation
itself is incurred. In the FASB's view, the considerable discretion an employer can
exercise in funding a plan should have no effect on determining the cost of
-----
providing benefits under the plan.
~ ~
-.::t
The Board concluded that measurement of the economic cost of pension benefits. ~ g
~ ~
not the employer s plan for funding those benefits , provides the most meaningful
~ ~ ~ ~
information to financial statement users. "E ~
~ ~
~ P.
(1)r:/.)
.,..... ~.........
00.......C,,) (1) !=: r--.s r:/.) ~ ~-+-' ro . r--~ U Q c
GASB's Accounting Follows
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Funding Requirements
Similar to the FASB, the GASB believes annual pension expense should be
recognized on the accrual basis , regardless of how, when , or whether the plan is
funded. However, in the GASB's view, accrual-basis recognition does not mean
that expense measurement has to be different from funding measurement.
The GASB's approach is similar to APBO 8: funding methodologies can be used to
measure pension expense, provided that the methodology is systematic and
rational. According to the ED, systematic and rational methodologies are those that
are consistent with the principles of accrual accounting and interperiod equity. That
, a) they set aside assets in each period when employees provide services and
earn salaries on which future pension benefits are based, and b) they are designed
so that citizens of some periods are not expected to pay more than citizens of
other periods for similar employee services. Pay-as-you-go methods and
terminal-funding (recognizing total pension expense when employees retire or
terminate) are not considered systematic and rational and should not be used for
accounting purposes.
As stated earlier, the GASB's view of pension measurement is influenced by the
significance of the public budget, which is the government's funding plan. If a
governmental entity chooses a particular funding methodology to meet its current
and future pension obligations in a manner that it believes appropriate to the
economic, social, and political circumstances of the community it represents, then
that methodology is the financial reality for that particular entity. It is the funding
methodology, not a substitute accounting determination, that affects the actual flow
of financial resources, both currently and in the future. From this perspective
pension accounting is more useful if it is not separate and distinct from pension
funding. A distinction is warranted only when the funding methodology is
incompatible with accrual accounting and the measurement of interperiod equity.
Instead of developing independent accounting measures of pension expense or
adopting the FASB's measures, the GASB examined various actuarial
methodologies that are commonly used for funding public pension plans. The
Board developed a set of "Parameters" that define characteristics of a systematic
and rational determination of an employer s actuarially required contribution , as
summarized in Exhibit 1. The Parameters reduce the number of alternatives
currently available for measuring pension expense. However, provided that the
employer s actuarially required contribution is determined according to the
Parameters, employers will not need to make a separate calculation of pension
expense; they will accrue the actuarially required contribution.
Delayed Recognition
----
........ V)........ I C'oI-+3 ~I d
........
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~~~~
"E ~ ........ ...c:a,)t/)
..... ""'"........
OJ) ----C1) s:: r---C\S t/) ~ 0
...... ----......
C\S . r---~u Q 0
Although SFAS 87 and the GASB ED differ in the ways described above, they are
similar in some important respects as well. Both standards contain the concept of
delayed recognition of certain events that impact pension expense. Delayed
recognition means that changes in the pension obligation and in the value of
assets set aside to meet the obligation are not fully recognized in pension expense
as soon as they occur; instead, they are recognized (amortized) systematically and
gradually over future accounting periods.
The concept of delayed recognition impacts the accounting treatment for the
pension obligation or asset that exists at the time of transition to the new
standards , the effects of plan amendments (e., an increase in benefits for past
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as well as future service), gains and losses due to differences between the
expected and actual plan experience, the method of valuing plan assets, and
changes in actuarial assumptions. Under the GASB proposal , delayed recognition
also applies to the effects of changing the actuarial cost method, a change that is
not possible for accounting purposes under SFAS 87.
Amortization Periods and
Methods
Although SFAS 87 and the GASB ED provide for delayed recognition of essentially
the same items, there are some differences in the required amortization periods
and methods. SFAS 87 generally requires amortization periods based on the
average remaining service life of active employees for all components. This
reflects the view that pension benefits are service related and the total cost should
be recognized, to the extent possible, before employees retire. If all or almost all of
a plan s participants are inactive, the average remaining life expectancy of the
inactive participants is to be used instead of average remaining service life.
The GASB generally agrees with that view and has adopted the same amortization
period for plan amendments affecting active employees and for actuarial gains and
losses. However, a shorter period is required for retiree plan amendments because
the average remaining life expectancy of retirees is generally shorter than the
average remaining service life of active employees. Also, the GASB ED permits a
longer (or shorter) period than average remaining service life for amortizing the
transition obligation or asset. Plans may continue their existing amortization
schedule provided that the number of years remaining in the schedule does not
exceed the 4D-year maximum permitted by APBO 8. Many public plans have been
systematically amortizing their unfunded liabilities for many years according to
existing accounting standards for governmental plans (NCGA Statement 6 or
APBO 8), and the GASB believes it would be unreasonable to require a change in
existing schedules that meet those requirements. The Board does believe
however, that amortization periods should be shorter in the future, as shown by the
3D-year maximum proposed for new plans and plans without a previously
established schedule.
Interest (Discount) Rate
Assumption
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The calculation of annual pension expense requires the use of estimates and cr
assumptions about the outcome of future events that will affect the timing and C?
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amounts of benefit payments. In practice, the general principles for selecting S; S; ~ assumptions are similar in both standards , although the provisions are worded 1:5 ~ ~ ..c:
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differently. The best estimate should be selected for each individual assumption, S 0
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with attention to consistency between similar assumptions.
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The FASB and GASB documents are also similar in that both single out the ~ u
interest (discount) rate assumption for special attention. This is because the rate at
which projected future benefits are discounted to the present has a greater effect
on pension expense than any other single assumption. (As a general rule of
thumb, a change of one-fourth of a percentage point in the discount rate changes
pension expense by about 6% to 7%.) The two standards set forth different
requirements for the discount rates, however.
Current Settlement Rates
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SFAS 87 requires use of discount rates based on current settlement rates in
determining the three required measures of the pension obligation (projected
accumulated , and vested) as well as the service and interest cost components of
net periodic pension cost. For determining the expected return on assets , the
FASB uses another rate-- the expected long-term rate of return on plan assets
based on a market- related valuation of assets. The FASB concluded that the
discount rate relates to the liability side of pension accounting and has nothing to
do with plan assets. Therefore, in their view, it would be inappropriate to require
the same rate to measure pension obligations as is used to measure investment
return on assets.
Long-term I nvestment Yield
The GASB ED , in contrast, requires use of the same expected long-term rate of
return on plan assets for obligation-related as well as asset- related computations
consistent with actuarial methodologies and GASB 5 requirements for note
disclosures of funded status and funding progress.
Because pension expense and pension obligations are highly sensitive to the
choice of an interest rate assumption , the fact that the FASB and the GASB
require different rates for discounting is a significant difference between the two
standards. Each Board's choice of discount rate is related to its overall approach to
pension accounting, as discussed earlier. The FASB's preference for settlement
rates--the rates at which the pension benefits could be effectively settled" as of
the balance sheet date--reflects a balance sheet orientation--a current point-in-time
view of the employer s obligation. In the GASB's view, however, the use of
settlement rates is not appropriate for governmental pension obligations, partly
because the Board takes a longer-term view of reported pension information
consistent with the perpetual nature of governments and their pension obligations.
Governments do not terminate; they are not bought and sold like private firms, nor
for all practical purposes is the current settlement of the obligation likely to occur.
Therefore, the GASB does not consider the use of a current settlement rate
appropriate in the public sector.
Volatility is a Concern
The GASB is also concerned about the degree of year-to-year volatility that could
occur in pension expense if projected benefits are discounted at current settlement
::::. '"-;'
rates, which are subject to frequent and sometimes large changes. The expected i ~ long-term investment rate of return, in contrast, is much more constant from year ~ Ci ~
to year, and , when a change occurs, it is usually quite small relative to changes in
~ ~ ~ ~ ~
settlement rates. The GASB believes that frequent and , possibly, wide swings in 1:: ~
~ ~ ~
pension obligations and expense that do not reflect actual changes in the plan ~ 0 -.:t
funded status or the total cost of pension benefits from a long-term perspective ~ Z gf ~impede users' abilities to assess interperiod equity and the effect of pension
;g ~ ~ ~
commitments on the employer s resources. From the GASB's perspective, the ~ u Q ~
long-term investment rate of return is more consistent with the economic reality of
governmental pension obligations than the current settlement rate.
The FASB, in contrast, rejected the view that material changes in interest rates
should be ignored solely to avoid adjusting assumed discount rates and impacting
pension expense. In their view, the current settlement rate is the best reflection of
the employer s liability and, therefore, provides the best current estimate of the
pension obligation based on current conditions. Although that obligation is one
element in the calculation of expense, the Statement provides for significant
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smoothing of changes in the obligation and of pension assets so that volatility of
expense is reduced.
Both documents provide additional guidance for selecting the discount rate
assumption. SFAS 87 refers employers to available annuity rates, including those
published by the Pension Benefit Guaranty Corporation, and rates of return
currently or expected to become available on high- quality fixed income securities.
In both cases, a range of rates is available to choose from but no additional
restrictions are imposed beyond the requirement to choose the best estimate. The
GASB, in contrast, would require employers to test the reasonableness of the rate
selected using the two guidelines described in Exhibit 1. Employers that use an
interest rate outside the guidelines would have to disclose the reason for selecting
the rate, to help users assess the reasonableness of the assumption.
Balance Sheet Recognition
Both documents require balance sheet recognition of differences between pension
expense and the amounts funded. A liability is recognized if pension expense
exceeds the amounts the employer has contributed to the plan , while an asset is
recognized if the expense is less than the employer s contributions. Differences
between pension expense and the amounts funded are common under SFAS 87
because the two amounts generally are calculated differently; therefore, assets
and liabilities will frequently result. This situation should be much less common
under the proposed GASB standard because the Board expects that the majority
of employers will calculate expense and the employer s actuarially required
contribution in the same way. Thus for most employers, assets and liabilities will
occur only when the employer fails to fully fund the actuarially required
contribution.
Reporting of Unfunded
Obligations
Although both Boards believe the plan s funded status is important information to
financial statement users, they reached different conclusions about how the
information should be reported to meet the needs of their respective
constituencies. The FASB believes that an employer with an unfunded pension
obligation has a liability and that liabilities generally should be reported on the
balance sheet.
The FASB considered two measures of the unfunded pension obligation (the
excess of the pension obligation over the fair value of plan assets) for recognition
in the employer s balance sheet: the unfunded accumulated benefit obligation
(ABO) and the unfunded projected benefit obligation (PBO). The ABO is based on
the plan terms and salaries in effect and service completed at the balance sheet
date. The PBO is also based on service through the balance sheet date but it is
measured using assumptions as to future compensation levels if the benefit
::::;
formula is based on those future levels. For plans with those benefit formulas , the .,J. PBO is a larger number than the ABO. ~ 6 I ~
The FASB concluded that a liability based on the PBG was the most theoretically :s $2 ~ 55
" ~
sound approach but for practical reasons , decided that recognizing the unfunded 5
PBO on the balance sheet would be too big change from the then prevailing .E Z
~ ~
practice. Therefore, SFAS 87 requires recognition of a minimum liability at least .s ~
~ ~
equal to the unfunded ABO. The Board believed this approach would at least limit ~ l3 0
the extent to which the delayed recognition of events affecting pension expense
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GASB and FASB views of pensions: the two contrasted. (Governmen...http://www.luca.com/cpajournal/oid/08526770.htm
would cause liabilities to be omitted from the balance sheet. Recognition of some
liability for the most underfunded plans was deemed to be more representationally
faithful than no recognition at all.
The GASB believes the ABO is not a useful measure in a governmental
environment. Most public pension plans base pension benefits on final average
salaries. Since the ABO is based on current salaries, and current settlement of the
obligation is not a realistic possibility for governmental employers, reporting the
unfunded ABO could be misleading because it understates the employer
obligation for eventual benefit payments. In the GASB's view, the unfunded PBO is
a more realistic and useful measure. But the GASB decided not to require
recognition of the unfunded PBO on the balance sheet for some of the same
conceptual and practical reasons that had previously led the FASB to a similar
conclusion.
Given the long-term, going-concern nature of governmental pensions, the GASB
believes disclosure of the trend in funded status over several years, based on the
PBO, is more useful to users of governmental financial reports than balance sheet
recognition of the unfunded ABO. The GASB decided, therefore, to continue the
GASB 5 requirement to disclose the plan s assets, PBO, and unfunded PBO , or
assets in excess of the PBO for at least the past three years. SFAS 87 requires
similar disclosures to reconcile the plan s funded status at the balance sheet date
with amounts reported in the employer s balance sheet. Although the reporting
mechanisms are different, both Boards believe the information provided helps
users assess the trend over time in funded status and funding progress, and the
likely future effect of pension obligations on the employer s resources.
Conclusion
This article presents a brief overview of the differences, and the main reasons for
them, between SFAS 87 and the GASB's proposal for pension accounting by
governmental employers. We have also discussed some similarities between the
two Board's conclusions.
One additional similarity is of interest. Both standards were influenced by practical
as well as theoretical considerations, some of which recognized the evolutionary
character of pension accounting and the need for a compromise between each
Board's conceptual framework and practical problems of measuring pension
expense, obligations , and assets. Despite the differences between the two
documents, each Board believes its pronouncement is a significant improvement
over past practice and will result in more useful information for decision makers in
the sector it serves--public or private.
Penelope S. Wardlow, PhD, GASB Academic Fellow (George Mason University)
and George C. Schleier, CPA, FASB Practice Fellow (Ernst & Young)
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(91997 New York State Society of Certified Public Accountants. LeQal Notices.
Attachment A
Case No. A VU-04-
A VU-04-
D. English, Staff
07/07/04 Page 25 of
8 of8 7/1/2004 1:57 PM
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 7TH DAY OF JULY 2004 SERVED
THE FOREGOING COMMISSION STAFF RESPONSE TO THE FIRST PRODUCTION
REQUEST OF A VISTA CORPORATION, IN CASE
NO. AVU-04-lIAVU-04-, BY MAILING A COpy THEREOF POSTAGE
PREP AID TO THE FOLLOWING:
DAVID J. MEYER
SR VP AND GENERAL COUNSEL
VISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220-3727
E-mail dmeyer~avistacorp. com
KELLY NORWOOD
VICE PRESIDENT STATE & FED. REG.
VISTA UTILITIES
PO BOX 3727
SPOKANE WA 99220-3727
E-mail Kell y.norwood~avistacorp. com
CONLEY E WARD
GIVENS PURSLEY LLP
PO BOX 2720
BOISE ID 83701-2720
E-mail cew~givenspursley.com
DENNIS E PESEAU, PH. D.
UTILITY RESOURCES INC
1500 LIBERTY ST SE, SUITE 250
SALEM OR 97302
E-mail dpeseau~excite.com
CHARLES L A COX
EVANS KEANE
111 MAIN STREET
PO BOX 659
KELLOGG ID 83837
E-mail ccox~usamedia.
BRAD M PURDY
ATTORNEY AT LAW
2019 N 17TH ST
BOISE ID 83702
E-mail bmpurdy~hotmail.com
CERTIFICATE OF SERVICE