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IMPLEMENTATION GUIDE

Guide to Implementation ofGASB Statement 67 on

Financial Reporting for Pension Plans

Questions and Answers

GASB IMPLEMENTATION GUIDES

2012–2013 Comprehensive Implementation Guide: Questions and Answers (GSIG13)

Guide to Implementation of GASB Statement 3 on Deposits with Financial Institutions, Investments (includingRepurchase Agreements), and Reverse Repurchase Agreements: Questions and Answers (GQA03)

Guide to Implementation of GASB Statement 9 on Reporting Cash Flows of Proprietary and Nonexpendable TrustFunds and Governmental Entities That Use Proprietary Fund Accounting: Questions and Answers (GQA09)

Guide to Implementation of GASB Statement 10 on Accounting and Financial Reporting for Risk Financing and RelatedInsurance Issues: Questions and Answers (GQA10)

Guide to Implementation of GASB Statement 14 on the Financial Reporting Entity: Questions and Answers (GQA14)

Guide to Implementation of GASB Statements 25, 26, and 27 on Pension Reporting and Disclosure by State and LocalGovernment Plans and Employers: Questions and Answers (GQA25–27)

Guide to Implementation of GASB Statement 31 on Accounting and Financial Reporting for Certain Investments and forExternal Investment Pools: Questions and Answers (GQA31)

Guide to Implementation of GASB Statement 34 on Basic Financial Statements—and Management’s Discussion andAnalysis—for State and Local Governments: Questions and Answers (GQA34)

Guide to Implementation of GASB Statement 34 and Related Pronouncements: Questions and Answers (GQA34B)

Guide to Implementation of GASB Statement 40 on Deposit and Investment Risk Disclosures: Questions and Answers(GQA40)

Guide to Implementation of GASB Statements 43 and 45 on Other Postemployment Benefits: Questions and Answers(GQA43/45)

Guide to Implementation of GASB Statement 44 on the Statistical Section: Questions and Answers (GQA44)

Guide to Implementation of GASB Statement 53 on Accounting and Financial Reporting for Derivative Instruments:Questions and Answers (GQA53)

Guide to Implementation of GASB Statement 67 on Financial Reporting for Pension Plans: Questions and Answers(GQA67)

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Guide to Implementation ofGASB Statement 67 on

Financial Reporting for Pension Plans


Copyright © 2013 by Financial Accounting Foundation. All rights reserved. No part of this publicationmay be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic,mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial AccountingFoundation.

FOREWORD

This Implementation Guide was developed primarily to assist financial statement preparers and attestors in theimplementation and application of Statement No. 67, Financial Reporting for Pension Plans. During the developmentof the final Statement and since its approval in June 2012, many questions have been posed to the GASB staffregarding the application of Statement 67. Because staff responses to individual technical inquiries reach only a smallportion of the GASB’s constituents, the GASB uses Implementation Guides to more broadly communicate staffguidance.

Guidance in an Implementation Guide is limited to clarifying, explaining, or elaborating on an underlying standard(usually a Statement, Interpretation, or Technical Bulletin). The topics addressed may include issues raised byconstituents in due process or as a result of subsequent application of a standard, as well as issues anticipated bythe GASB staff. An Implementation Guide also may address issues related to the application of a standard to specificindustries. Generally, a GASB Statement, Interpretation, or Technical Bulletin would be more appropriate to addressnew issues or to amend existing guidance on issues previously addressed.

The GASB’s Implementation Guides are classified as category (d) in the hierarchy of generally acceptedaccounting principles, as set forth in Statement No. 55, The Hierarchy of Generally Accepted Accounting Principlesfor State and Local Governments, and as a result, practitioners may be called upon to justify departures fromguidance contained in this guide. However, the illustrative examples accompanying the text of this ImplementationGuide are nonauthoritative guidance, and references to those examples do not modify their nonauthoritative status.

This guide was prepared and published in accordance with the GASB’s Implementation Guide procedures. Theseprocedures require public announcement of the project, exposure of the proposed guide to the Board and an advisorycommittee, and approval of the final guide by the director of research and technical activities. Moreover, anImplementation Guide will not be published if a majority of Board members object to its issuance. In May 2013, theBoard cleared the material in this guide for issuance.

The publication of this guide would not have been possible without the concerted efforts of the GASB staff andthe advisory committee. Project manager Michelle L. Czerkawski served as the primary staff author in the develop-ment of this guide. She was assisted by project manager Roberta E. Reese and postgraduate technical assistantKelly I. Amos.

The application of GASB pronouncements is an ongoing process. A guiding principle in the GASB’s missionstatement addresses the need to review the effects of past decisions and to provide additional guidance whenappropriate. This Implementation Guide represents just one of the many methods that the GASB uses to fulfill thisimportant responsibility.

Norwalk, Connecticut David R. BeanJune 2013 Director of Research

and Technical Activities

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PREFACE

This Implementation Guide is intended to serve as a reference and an instructional tool. It is designed to helpreaders in applying the provisions of Statement No. 67, Financial Reporting for Pension Plans, which was approvedin June 2012.

The body of this question-and-answer book consists of questions on various aspects of Statement 67. Thequestions and answers are based on constituent responses to the Preliminary Views and the Exposure Draft that ledto the Statement, technical inquiries arising since the issuance of the Statement, Board deliberations, and insight byboth the GASB staff and the guide’s advisory committee. The questions and answers serve two purposes: (a) theyare ready references for implementers who may encounter similar questions or situations and (b) they provide a basisfor resolving issues that an implementer may apply to a question or situation not specifically addressed in thisImplementation Guide.

The appendices included in the guide are intended to supplement the questions and answers. The glossary ofterms presented in Appendix 1 is compiled from paragraph 51 of Statement 67. The Introduction, Standards, andEffective Date and Transition sections from Statement 67 are reproduced in Appendix 2. Appendix 3 presentsexpanded illustrations from Statement 67, accompanied by two additional illustrations developed for this Implemen-tation Guide. In addition, a topical index, which is intended to help readers locate questions and answers on specificmatters, is included.

In preparing this Implementation Guide, we had the support of an advisory committee whose members representdiverse interests. Their comments and suggestions contributed significantly to the development of materials that areincluded in this guide. Members of the advisory committee are:

Name Affiliation

Phillip Burkholder California State Teachers’ Retirement SystemNichole Burnap Credit SuisseGavin Cohen City of Rockville, MarylandDave DeJonge Public Employees Retirement Association of MinnesotaGreg Driscoll KPMG, LLPKarl Greve Colorado Public Employees’ Retirement AssociationGreg Griffin Georgia State Auditor’s OfficeWilliam Hallmark Cheiron, Inc.Joe Heffernan Plante & Moran, LLPLuke Huelskamp Municipal Employees Retirement System of MichiganDax Johnson State StreetDavid McDermott State of Colorado Controller’s OfficeBrian Murphy Gabriel, Roeder, Smith & CompanyMichele Nix Missouri State Employees Retirement SystemCatherine Provencher State of New Hampshire Treasurer’s OfficeMatthew Strom The Segal CompanyMarcia Van Wagner Moody’s Investors ServiceRobert Wylie South Dakota Retirement System

The members of the advisory committee do not necessarily approve of or agree with the answers given and are notresponsible for the information provided in this Implementation Guide.

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The authors would like to thank those involved in the editing and production of this guide, including GASB staffmember Ragan P. Vincent; the Financial Accounting Foundation’s Production department; and others who providedresearch assistance and support.

Michelle L. CzerkawskiRoberta E. Reese

Kelly I. Amos

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Guide to Implementation of GASB Statement 67 on Financial Reporting for PensionPlans


CONTENTS

PageNumbers

Foreword .......................................................................................................................................................... iii

Preface............................................................................................................................................................. v

QuestionNumbers


Scope and Applicability of Statement 67 .................................................................................................... 1–20

Trusts or Equivalent Arrangements ......................................................................................................... 6−7

Classifying Pensions as Defined Benefit or Defined Contribution ......................................................... 8–11

Types of Defined Benefit Pension Plans................................................................................................. 12–16

Other Postemployment Benefit Plans ..................................................................................................... 17–20

Defined Benefit Pension Plans.................................................................................................................... 21–93

Number of Pension Plans ........................................................................................................................ 21−23

Financial Statements................................................................................................................................ 24–46

Statement of Fiduciary Net Position .................................................................................................... 24–38

Assets................................................................................................................................................ 25–35

Receivables................................................................................................................................... 25−32

Investments ................................................................................................................................... 33−35

Liabilities............................................................................................................................................ 36–37

Fiduciary Net Position....................................................................................................................... 38

Statement of Changes in Fiduciary Net Position ................................................................................ 39–46

Additions ........................................................................................................................................... 40−46

Investment Income........................................................................................................................ 41−44

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QuestionNumbers

Investment Expense...................................................................................................................... 45−46

Notes to Financial Statements................................................................................................................. 47–55

Paragraph 30b...................................................................................................................................... 48–54

Investment Concentrations............................................................................................................... 48−49

Money-Weighted Rate of Return on Pension Plan Investments .................................................... 50−54

Disclosures Specific to Single-Employer and Cost-Sharing Multiple-Employer Pension Plans........ 55

Required Supplementary Information...................................................................................................... 56−76

Single-Employer and Cost-Sharing Multiple-Employer Pension Plans .............................................. 56−76

Paragraph 32a .................................................................................................................................. 59–66

Paragraph 32c .................................................................................................................................. 67−76

Measurement of the Net Pension Liability .............................................................................................. 77−92

Total Pension Liability........................................................................................................................... 77−92

Timing and Frequency of Actuarial Valuations ................................................................................ 77−79

Projection of Benefit Payments........................................................................................................ 80−84

Discount Rate ................................................................................................................................... 85−89

Comparing Projections of the Pension Plan’s Fiduciary Net Position to Projected Benefit

Payments..................................................................................................................................... 86−88

Calculating the Discount Rate...................................................................................................... 89

Attribution of the Actuarial Present Value of Projected Benefit Payments to Periods ................... 90−92

Statistical Section Information................................................................................................................. 93

Defined Contribution Pension Plans ........................................................................................................... 94

Effective Date and Transition ...................................................................................................................... 95–99

PageNumbers

Appendix 1: Glossary ...................................................................................................................................... 29

Appendix 2: Introduction, Standards, and Effective Date and Transition Sections from Statement 67....... 35

Appendix 3: Illustrations .................................................................................................................................. 49

Topical Index .................................................................................................................................................... 93

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The Governmental Accounting Standards Board has authorized its staff to prepare Implementation Guides thatprovide timely guidance on issues encountered during the implementation and application of GASB pronounce-ments. The GASB has reviewed this Implementation Guide and does not object to its issuance.

The information in this Implementation Guide need not be applied to immaterial items.

QUESTIONS AND ANSWERS

Scope and Applicability of Statement 67

1. Q—Does Statement 67 require that stand-alone financial reports be issued for defined benefit pension plans?

A—No. Statement 67 establishes standards that apply to financial reporting for defined benefit plans, includingstand-alone financial reports, when such reports, prepared in conformity with generally accepted accountingprinciples, are issued.

2. Q—A city reports a single-employer defined benefit pension plan as a pension trust fund in its basic financialstatements. The plan issues a stand-alone financial report prepared in conformity with the requirements ofStatement 67. Does the city have to apply all the requirements of Statement 67 for the pension trust fund?

A—No. Although, in general, Statement 67 applies to financial reporting of the plan in stand-alone financialstatements and in circumstances in which the plan is included as a pension trust fund of another government,for purposes of including the pension plan as a pension trust fund in the city’s financial report, footnotes 9 and11 of Statement 67 limit the applicability of the note disclosure and required supplementary information (RSI)requirements of that Statement to circumstances in which defined benefit pension plan financial statements arepresented solely in the financial report of the city. Therefore, because a stand-alone plan financial report isprepared in conformity with the requirements of Statement 67, that Statement does not require that the cityinclude the information identified in the detailed disclosure and RSI requirements of Statement 67 as part of itspresentation of the pension plan as a pension trust fund in its financial report. Paragraph 106 of StatementNo. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Gov-ernments, as amended, requires that, in this circumstance, the notes to the financial statements of the cityinclude information about how to obtain the stand-alone plan financial report. However, additional informationcan be presented in the city’s note disclosures if the information is determined to be essential to the fairpresentation of the city’s basic financial statements.

3. Q—A city offers an unfunded (“pay-as-you-go”) plan (that is, the city’s annual contributions are approximatelyequal to that year’s benefit payments) that provides supplemental defined benefit pensions to certain employeeclasses. The pensions are administered through a trust that has the characteristics identified in paragraph 3 ofStatement 67. Does Statement 67 apply to an unfunded plan?

A—Yes. Regardless of the method or timing of funding the benefits, if the supplemental pensions areadministered through a trust (or equivalent arrangement) that has the characteristics identified in paragraph 3of Statement 67, the Statement applies.

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4. Q—Would the answer to Question 3 be different if the plan were closed to new entrants?

A—No. All provisions of Statement 67 apply to closed plans, as well as to open plans, administered through atrust (or equivalent arrangement) that has the characteristics identified in paragraph 3 of that Statement.

5. Q—If a pension plan is administered through a trust that meets the criteria of paragraph 3 of Statement 67, doany of the requirements of Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and NoteDisclosures for Defined Contribution Plans, as amended, or Statement No. 50, Pension Disclosures, asamended, apply?

A—No. For pension plans within its scope, Statement 67 replaces the requirements of Statements 25 and 50,as amended.

Trusts or Equivalent Arrangements

6. Q—A pension plan’s trust agreement includes a provision for return of amounts remaining in the trust to anemployer if all obligations associated with a plan that is administered through the trust have been fulfilled.Is this provision consistent with the criterion in paragraph 3a of Statement 67 regarding the irrevocability ofcontributions?

A—Yes. As used in paragraph 3a of Statement 67, irrevocability is understood to mean that an employer nolonger has ownership or control of the assets, except for any reversionary right once all benefits have been paid.That is, for purposes of the Statement, the trust should be so constituted that assets may flow from an employerto the plan, but not from the plan to an employer—unless and until all obligations to pay benefits in accordancewith the plan terms have been satisfied by payment or by defeasance with no remaining risk regarding theamounts to be paid or the value of plan assets.

7. Q—A pension plan’s trust agreement includes a provision for the return of plan assets to an employer if thefunded status of the plan reaches a specified level, regardless of whether all obligations associated with the planthat is administered through the trust have been fulfilled. Is this provision consistent with the criterion inparagraph 3a of Statement 67 regarding the irrevocability of contributions?

A—No. A provision for the reversion of plan assets to an employer prior to the point at which all obligationsassociated with the plan have been fulfilled is not consistent with the criterion related to irrevocability ofcontributions. A plan that has such a provision is not within the scope of Statement 67 and should apply therequirements of Statements 25 and 50, as amended, as applicable.

Classifying Pensions as Defined Benefit or Defined Contribution

8. Q—The terms of a pension specify that an employer is required to contribute 7.5 percent of each plan member’sannual salary to an individual plan member account. Individual plan member accounts are credited with interestat a rate of 5 percent per year and are assessed an administrative fee based on the average balance of assetsin the account for the year. After retirement, a plan member draws down the balance of the account, with interestcontinuing to accrue at the stated interest rate. Should this pension be classified as defined benefit or as definedcontribution for purposes of applying Statement 67?

A—This pension is defined benefit for purposes of applying Statement 67. To be classified as a definedcontribution pension, paragraph 7 of Statement 67 specifies that all three of the following criteria are requiredto be met:

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a. An individual account is provided for each plan member.b. The plan terms define the amount of contributions that the employer is required to make (or credits that it

is required to provide) to an active plan member’s account for periods in which the plan member rendersservice.

c. The pension that a plan member will receive will depend only on the contributions (or credits) to the planmember’s account, actual earnings on investments of those contributions (or credits), and the effects offorfeitures of contributions (or credits) made for other plan members, as well as pension plan administrativecosts, that are allocated to the plan member’s account.

Although the pension provided in this question meets the first two of these criteria, it does not meet the thirdcriterion because the rate of interest on assets in a plan member’s account is based on a fixed rate rather thanon the actual earnings on the underlying investments made with those assets. Because the pension does notmeet all three of the criteria identified in paragraph 7 to be classified as defined contribution, it should beclassified as a defined benefit pension for purposes of applying Statement 67.

9. Q—If, instead of crediting interest to the plan members’ accounts at a specified rate of return, the benefit termsdescribed in Question 8 provide that interest on plan members’ account balances is determined based on anoutside index, how should the pension be classified for accounting and financial reporting purposes?

A—Unless the investments of each plan member’s account mirror the investments that comprise the outsideindex, the crediting of interest earnings based on a rate that is tied to the performance of an outside index doesnot represent actual earnings on investments in the plan members’ accounts, and the pension should beclassified as defined benefit for purposes of applying Statement 67.

10. Q—The terms of a pension meet the criteria in paragraphs 7a and 7b of Statement 67 to be classified as definedcontribution but provide that, upon retirement, the balance in a plan member’s individual account is convertedto an immediate life annuity paid by the pension plan. Annuity payments are calculated at the plan member’sretirement date based on mortality tables and an interest rate established by the pension plan’s administrativeboard. The total amount of payments received is not otherwise limited by the amounts in the plan member’saccount—that is, if the plan member lives longer than projected at retirement, benefit payments continue at theamount calculated at retirement until the plan member’s death. Is the pension defined contribution or definedbenefit for financial reporting purposes?

A—The pension is defined benefit. Although the amount of a plan member’s annuity payment is based on theindividual account balance at retirement, the total amount of benefits received by the plan member does notdepend only on “the contributions (or credits) to the plan member’s account, actual earnings on investments ofthose contributions (or credits), and the effects of forfeitures of contributions (or credits) made for other planmembers, as well as pension plan administrative costs, that are allocated to the plan member’s account.” Thetotal amount of benefits also depends on the number of years the plan member lives to receive benefits. Further,the amount of the payments depends upon the interest rate established by the plan, rather than on actualearnings on the investment of assets in the account. Therefore, the annuitization of the plan member’s accountbalance under the benefit terms results in a pension that does not depend solely on the factors identified inparagraph 7c of Statement 67.

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11. Q—The terms of a pension plan otherwise meet the criteria in paragraph 7 of Statement 67 to be classified asdefined contribution but provide that at or after retirement, the plan members have the option to annuitize someor all of their account balance through the purchase of an individual annuity contract with a third party. Is thisplan defined contribution for financial reporting purposes?

A—Yes. In the circumstance described in this question, the purchase of the annuity is a separate transactionbetween the plan member and the third party. Therefore, in this case, the annuitization of the plan member’saccount balance does not impact the classification of the pension as defined contribution.

Types of Defined Benefit Pension Plans

12. Q—A public employee retirement system (PERS) administers the assets, the payment of benefits, and thegeneral recordkeeping and support services for pensions provided to the employees of three employergovernments. A separate actuarial valuation is performed for separate classes of plan members (for example,general government employees versus public safety employees), and employers make contributions for eachclass at the rate for the class applied to the employer’s active-employee covered payroll for the class. Planassets legally are available to pay benefits to any plan member. What type of plan(s) is the PERS administering?

A—The classification of the plan depends on whether there is a legal segregation of assets for purposes ofproviding benefits to the different classes of plan members. In this situation, although different rates arecalculated for different classes of plan members, all plan assets legally are available to pay benefits of any planmember, regardless of their employment class. Therefore, this plan is a cost-sharing multiple-employer plan forpurposes of applying Statement 67.

13. Q—If the facts regarding the plan in Question 12 were changed, to the extent that separate actuarial valuationswere performed for separate employers based on their employees and an allocation of assets to each employer,rather than for separate classes of plan members, would the separate valuations change the classification of theplan from a cost-sharing multiple-employer plan to an agent multiple-employer plan?

A—No. The classification of the plan depends on whether assets held by the pension plan legally can be usedto pay the benefits of the employees of any employer that provides benefits through the plan. In this situation,although different contribution rates are established for different employers, all plan assets legally are availableto pay benefits pertaining to the employees of any employer. Therefore, this plan is classified as a cost-sharingmultiple-employer plan for purposes of applying Statement 67.

14. Q—A defined benefit pension plan is used to provide pensions to the employees of a state government andseveral governments that are component units of the state. No other entities provide pensions through the plan.The assets in the plan legally can be used to pay benefits to the employees of the state or any of the componentunits. Is this plan a single-employer, agent multiple-employer, or cost-sharing multiple-employer plan?

A—This plan is a single-employer plan for financial reporting purposes. Defined benefit pension plans areclassified according to the number of employers whose employees are provided with benefits through the planand whether pension obligations and pension plan assets are shared. Paragraph 8 of Statement 67 specifiesthat a primary government and its component units should be considered to be one employer for purposes ofclassifying a defined benefit pension plan as single employer or multiple employer. Therefore, the plan in thisquestion is considered to be providing benefits to the employees of only one employer and is classified as asingle-employer plan for financial reporting purposes.

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15. Q—A defined benefit pension plan is used to provide pensions to the employees of a state government, severalgovernments that are component units of the state, and governments other than the state and the componentunits. Is this plan a single-employer, agent multiple-employer, or cost-sharing multiple-employer plan?

A—The plan is a multiple-employer plan for financial reporting purposes. If (a) a separate account is maintainedfor each of the governments or (b) a separate account is maintained for the state and its component unitstogether and separate accounts are maintained for each of the other governments, such that the assets in eachof the separate accounts legally are available to pay the benefits of only the employees of the government orgovernments whose assets are maintained in the separate account, the plan would be classified as an agentmultiple-employer plan. If, instead, the pension plan assets legally can be used to pay the benefits of theemployees of any of the governments, the plan would be classified as a cost-sharing multiple-employer plan.

16. Q—A PERS administers a single trust fund through which pensions are provided to employees of localgovernments in a state. For certain employers (“nonpool employers”), the plan maintains separate assetaccounts. The assets and obligations of other employers (“pool employers”) are pooled. How should thisarrangement be classified for purposes of applying Statement 67?

A—For financial reporting purposes, if the assets of each of the nonpool employers cannot legally be used topay benefits to the employees of any other employer, (a) the portion of the trust that is being used to administerbenefits to the employees of the nonpool employers is a separate (agent multiple-employer) plan, and (b) theportion of the assets that is available to pay the benefits of the employees of pool employers is a cost-sharingmultiple-employer plan. If, however, the assets in the trust may legally be used to pay benefits to the employeesof any of the employers (pooled or nonpooled), the trust should be reported as one cost-sharing multiple-employer plan.

Other Postemployment Benefit Plans

17. Q—Does Statement 67 apply to postemployment healthcare benefits that are provided through a trust that alsois used to provide defined benefit pensions?

A—No. Consistent with prior pension and other postemployment benefit (OPEB) Statements, Statement 67distinguishes between pensions and OPEB. This includes the classification of postemployment healthcarebenefits as OPEB, regardless of the manner in which those benefits are provided. As a result, a trust that is usedto administer both pensions and postemployment healthcare benefits is subject to the requirements of bothStatement 67 and Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than PensionPlans, as amended, including the requirement for separate reporting of each pension and OPEB plan.Therefore, in the context of this question, the postemployment healthcare plan should be reported separatelyfrom the pension plan. In such cases, the requirement for separate reporting of the two plans addresses thepotential distortion that could occur in the reported contributions to and plan net position of each of the plansas a result of commingled reporting. (For example, this could occur when a single stream of employercontributions is provided for both pension benefits and postemployment healthcare benefits.) In this way,separate reporting of the two plans helps financial statement readers assess information applicable to eachplan.

18. Q—Is separate financial reporting required for (a) a defined benefit pension plan and (b) a postemploymenthealthcare plan administered by the pension plan?

A—Yes. The pension and postemployment healthcare plans are required to be reported as two plans, not one,and separate reporting of those plans is required. Paragraph 6 of Statement 67 and paragraph 6a of State-ment 43 are consistent in classifying as pension benefits retirement income and all other benefits provided

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through a defined benefit pension plan, except postemployment healthcare benefits, which are classified asOPEB for financial reporting purposes. Paragraph 6 of Statement 67 states, “For financial reporting purposes,assets accumulated and managed for the payment of postemployment healthcare benefits should be accountedfor and reported as part of an OPEB plan.”

The complement to that paragraph is paragraph 6a of Statement 43, which includes as OPEB plans—to whichthe requirements of that Statement are applicable—plans that provide “[p]ostemployment healthcare benefits,either separately or through a defined benefit pension plan.” In regard to the latter arrangement, Statements 43and 67 are consistent in viewing the postemployment healthcare benefits and related assets as an OPEB planadministered by, but not the same as or part of, the pension plan.

19. Q—How should a postemployment healthcare plan administered by a defined benefit pension plan be reported?

A—A postemployment healthcare plan administered by a defined benefit pension plan should be accounted foras a separate OPEB plan in accordance with the requirements of Statement 43. Statement 34, as amended,provides additional guidance regarding financial reporting of the defined benefit pension plan and the post-employment healthcare plan (a) in stand-alone plan reports (for example, when the plans are included in thereport of a PERS that administers them; paragraphs 139−141, as amended) and (b) when the plans are includedas pension and other employee benefit trust funds in the report of the employer or sponsor of the plans (para-graph 106, as amended).

Stand-alone reports. A PERS that issues a financial report of the plans that it administers, including the pensionplan and the postemployment healthcare plan, should present combining fiduciary fund financial statements(including notes) for all plans administered, accompanied by required schedules for each plan as applicable. Therequirement to present combining financial statements should be met by one of the following methods:

a. Presenting a separate column for each plan on the statement of fiduciary net position and the statement ofchanges in fiduciary net position

b. Presenting additional combining statements for those plans as part of the basic financial statements, inorder to break out information aggregated on the original statements.

Plans reported as trust funds by the employer or sponsor. Fiduciary fund financial statements are required toinclude a separate column for each fiduciary fund type, including pension and other employee benefit trust fundsas one of those fund types. If separate financial reports of the individual pension and postemploymenthealthcare plans prepared in conformity with generally accepted accounting principles (GAAP) have beenissued, the notes to the financial statements should include information about how to obtain those reports. Inthat case, separate plan financial statements (including notes) for those plans are not required to be presentedin the employer’s or sponsor’s report. (However, additional information can be presented in the employer’s orsponsor’s note disclosures if the information is determined to be essential to the fair presentation of theemployer’s or sponsor’s basic financial statements.) If separate GAAP-basis plan reports have not been issued,separate financial statements (including notes) for individual pension and postemployment healthcare plansshould be presented in the notes to the financial statements and should be accompanied by required schedulesof each plan, as applicable. (See paragraph 106 of Statement 34, as amended.)

20. Q—A state-administered cost-sharing defined benefit pension plan collects from employers and remits to aseparate state agency contributions of $75 per plan member per month for postemployment healthcare benefits,which the other state agency administers. The cash collected for postemployment healthcare benefits is creditedto a liability account in the pension trust fund, which is liquidated when money is remitted to the state agencythat administers the postemployment healthcare plan. Should the pension plan instead follow the requirementsof Statement 43, as amended, for an OPEB plan that is administered as a trust?

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A—No. In collecting and remitting contributions to the agency administering the postemployment healthcareplan, the pension plan’s role in this case is that of an agent (cash conduit). Reporting the cash flow through aliability account in the pension trust fund is an appropriate way of reporting the plan’s involvement. (Agency fundreporting also would fit the circumstances.) The plan reporting requirements of Statement 43, as amended,would apply to reporting by the state agency that administers the postemployment healthcare plan.

Defined Benefit Pension Plans

Number of Pension Plans

21. Q—A single-employer defined benefit plan is used to provide pensions to two classes of plan members—general and public safety. Does Statement 67 require separate financial statements (including notes) and RSIfor each class of plan members?

A—If, on an ongoing basis, all assets are available for the payment of pension benefits to either class of planmembers, even if the benefits differ by class, there is only one plan for financial reporting purposes, andStatement 67 requires only one set of financial statements (including notes) and RSI. If, on an ongoing basis,a portion of the assets are legally restricted for the payment of benefits to one of the two membership classes,then there are two separate plans for financial reporting purposes and Statement 67 requires separate financialstatements (including notes) and RSI for each plan—even if the assets are pooled for investment purposes.

22. Q—If, within a single trust, a portion of the assets are legally segregated to pay the defined benefit pensions ofa particular class of the employees of all local governments within a state (for example, elected officials) and aportion is legally segregated to pay the defined benefit pensions of another class of employees of the localgovernments, should the portion of the assets associated with each class be considered a separate plan?

A—Yes, if, on an ongoing basis, each portion of assets held in the trust may not legally be used to pay benefitsto other classes of plan members. Paragraph 13 of Statement 67 requires that, in that circumstance, the portionof trust assets segregated to pay benefits to each class of plan members be considered a separate definedbenefit pension plan for financial reporting purposes. In this case, because each plan is used to provide benefitsto more than one employer, each plan would be reported as a separate multiple-employer plan.

23. Q—Within a trust used to administer defined benefit pensions, a certain portion of employer contributions andearnings on those contributions are accumulated in a separate account to be used as the basis for determiningad hoc cost-of-living adjustments that, if granted, will adjust the benefits of all retirees. Should the assets in theseparate account be reported as a separate pension plan?

A—No. Paragraph 13 of Statement 67 requires that “if, on an ongoing basis, all assets accumulated in a definedbenefit pension plan for the payment of benefits may legally be used to pay benefits . . . to any of the planmembers, the total assets should be reported as assets of one defined benefit pension plan even if adminis-trative policy requires that separate reserves, funds, or accounts for specific groups of plan members,employers, or types of benefits be maintained. . . .” That paragraph further differentiates between a separateaccount used as described in this question—that is, to provide an additional benefit to all retirees—and anaccount legally restricted for the benefits to only certain classes or groups of plan members or to plan memberswho are employees of certain entities. Although the assets in the separate account should not be reported asa separate plan, information should be included in notes to the plan’s financial statements to meet therequirements of paragraph 30e related to setting aside a portion of the pension plan’s fiduciary net position thatotherwise would be available for existing pensions or for pension plan administration.

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Financial Statements

Statement of Fiduciary Net Position

24. Q—In paragraph 14 of Statement 67, deferred outflows of resources and deferred inflows of resources areidentified in the list of elements that should be included, as applicable, in a statement of fiduciary net positionfor a defined benefit pension plan. However, paragraphs 15−21 of that Statement, which discuss recognition ofspecific items in a defined benefit pension plan’s statement of fiduciary net position, do not include any specificitems to be recognized as deferred outflows of resources or deferred inflows of resources. Does this mean thatthere are no transactions for which a defined benefit pension plan would be required to report a deferred outflowof resources or a deferred inflow of resources in its statement of fiduciary net position?

A—No. A pension plan should report deferred outflows of resources or deferred inflows of resources if thatrecognition is required by other accounting and financial reporting requirements applicable to the transactionsand other events reported in its basic financial statements (for example, Statement No. 53, Accounting andFinancial Reporting for Derivative Instruments, as amended). Statement 67 does not include requirements forthe recognition of deferred outflows of resources or deferred inflows of resources by defined benefit pensionplans because the approach used in that Statement is to establish requirements for transactions for which theaccounting or financial reporting is specific to pension plans. No pension-plan specific transactions or otherevents were identified during the development of Statement 67 for which reporting deferred outflows ofresources or deferred inflows of resources would be required.

Assets

Receivables

25. Q—If, at the end of a pension plan’s fiscal year, a contractually required contribution due from a cost-sharingemployer for the last month of the year is unpaid, should the amount of the contribution be recognized as areceivable under the requirements of paragraph 16 of Statement 67? That is, is a contractually requiredcontribution considered to be “due pursuant to legal requirements”?

A—Yes. The reference to legal requirements in paragraph 16 is intended to broadly describe circumstances inwhich the pension plan has a legally enforceable right to the resources that are due to it. Concepts StatementNo. 4, Elements of Financial Statements, defines assets as “resources with present service capacity that thegovernment presently controls.” One embodiment of control over the present service capacity of resources is alegally enforceable right to the resources. Contractual provisions or statutory requirements for employercontributions create a legally enforceable right of the pension plan to the resources due. Therefore, the planshould recognize a receivable for unpaid contractually required contributions at its fiscal year-end.

26. Q—An agent employer that has no statutory or contractual requirement as to the amount of contributions thatit makes to the pension plan each year has a policy of making contributions to the pension plan based onactuarially determined contribution rates. The employer has consistently contributed those amounts in the pastand, although it has not yet made a contribution for the last month of the plan’s fiscal year, has appropriated forthat purpose an amount equal to the actuarially determined contribution for that period. Should the pension planrecognize a receivable for the appropriated but unpaid contribution amount as of its fiscal year-end?

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A—No. Paragraph 16 of Statement 67 limits receivables recognition to circumstances in which amounts are duepursuant to legal requirements. As discussed in Question 25, paragraph 16 was intended to require recognitionof a receivable in circumstances in which the pension plan has a legally enforceable right to the resources. Inthis circumstance, the appropriation of an amount by the employer does not create a legally enforceable rightto the resources as of the pension plan’s fiscal year-end. Therefore, the plan should not recognize a receivablefor the appropriated but unpaid contributions.

27. Q—In a cost-sharing plan, employers’ contractually required contributions are based on an actuarially deter-mined contribution rate, but they can opt to pay the required amount in installments over a 10-year period. Howshould this arrangement be reported by the pension plan?

A—The pension plan should recognize an employer contribution equal to the employers’ contractually requiredactuarially determined contributions for the plan’s fiscal year. At the end of the pension plan’s fiscal year, theunpaid portion of the amount should be reported as a receivable. The pension plan also should discloseinformation required by paragraph 30c of Statement 67 about the terms of and outstanding balance on theinstallment arrangement at the end of its reporting period.

28. Q—A pension plan has a noninterest-bearing long-term receivable. Can the plan report the receivable at its fullcontract value, or is the plan required to report the receivable at its discounted present value?

A—Neither Statement 67 nor other pronouncements applicable to pension plans for purposes of preparingfinancial statements in conformity with GAAP require that a receivable be valued at its discounted present value.(Guidance in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained inPre-November 30, 1989 FASB and AICPA Pronouncements, as amended, addresses this issue but is notapplicable to fiduciary activities.) Therefore, the pension plan can report the receivable at its full contract value.If, however, the receivable is reported at its discounted present value, paragraph 17 of Statement 67 requiresthat interest be accrued using the effective interest method, unless use of the straight-line method would notproduce significantly different results.

29. Q—May receivables and payables arising from trade-date accounting be reported net?

A—No. Receivables and payables should be reported net only if there is a right of offset and offsetting is notprohibited by another financial reporting standard.

30. Q—A state has created a “window of opportunity” during which enhanced retirement benefits through thestate’s cost-sharing multiple-employer pension plan may be offered by individual employers to encourage theiremployees to take early retirement. Employers are not required to participate in this initiative. Because of this,the cost of the additional benefits will be determined for each participating employer and will not affect therequired contributions of employers that do not participate in the initiative. Each participating employer will makecontributions—in addition to its regular contractually required contributions—with interest, in equal amounts overthe next five plan years, with respect to its employees who elect to retire under the offer. Should the plan treatthe additional contribution requirements as a contribution receivable pursuant to an installment contract? If so,should the entire estimated cost of the additional benefits be recognized as a receivable in the year that theemployees accept the offer (and as a contribution for that year in the statement of changes in fiduciary netposition)?

A—Yes. The pension plan should account for the additional contribution requirements as contributions receiv-able pursuant to an installment agreement (see paragraph 17 of Statement 67) and as additions (employercontributions) in full in the year in which the installment agreements with the employers become effective. Also,the plan should disclose the terms and outstanding balances of installment contracts. (See paragraph 30c ofStatement 67.)

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31. Q—A plan’s terms permit any active plan member to enter into an installment agreement with the plan for thepurchase of certain service credits. If the member dies or otherwise terminates employment before all paymentshave been made under the installment agreement, the agreement is canceled and only the years actually paidfor are credited. How should such installment agreements be reported?

A—Contributions receivable and additions to the plan’s fiduciary net position pursuant to an installment contractshould be recognized in full in the year in which the contract is made. As with receivables in general, a plan mayconsider its past and projected experience with respect to contracts not completed as a basis for creating anallowance for cancellations, which would adjust the net book value of the receivable to its expected realizablevalue.

32. Q—Would the answer to the previous question be different if no service credit is granted unless and until themember has paid for the entire service contract?

A—No. Accrual accounting would require the same treatment.

Investments

33. Q—A defined benefit pension plan has certain debt securities that management intends to hold to maturity. Maythese investments be reported at cost? Would the answer be different if the plan is legally restricted from sellingthe securities below cost?

A—No. Neither Statement 67 nor Statement No. 31, Accounting and Financial Reporting for Certain Invest-ments and for External Investment Pools, as amended, provides for valuing such investments at cost based onmanagement’s intent to hold the securities to maturity, or when the likelihood of selling the security issignificantly limited by legal provisions.

34. Q—If commissions and other normal sales costs of investments are not determinable, does that fact have to bedisclosed?

A—These costs generally are determinable. Although Statement 67 does not specifically require it, plans areencouraged to disclose instances when costs are not determinable but may be significant.

35. Q—How should the principal components of defined benefit pension plan investments be reported when almostall of the plan’s investments are in mutual funds or external investment pools, each of which invests in a crosssection of investments? For example, should the plan report its share of each category of assets held by thevarious funds or pools—in effect “looking through” the funds or pools to the securities they hold?

A—The mutual funds or investment pools in which the plan invests should be categorized and displayed by type(for example, “Mutual Funds—Equities” and “State Treasury Investment Pool”). (See Question 1.3.2 in theComprehensive Implementation Guide for additional discussion of investment types.) There is no basis for“looking through” a mutual fund or investment pool to report the plan’s share of each category of assets heldby the fund or pool. Moreover, the latter method of presentation could be misleading. For example, presentinga pro rata share of a pool’s bonds as an investment of a pension plan in bonds would imply that suchinvestments have fixed maturities when, typically, the plan’s investment in the investment pool would have nomaturity.

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Liabilities

36. Q—Because benefit payments not yet due and payable are not recognized as plan liabilities, should planliabilities, as reported in the financial statements, be limited to current liabilities?

A—No. Plan liabilities should include noncurrent liabilities other than those related to benefits. For example, aplan might have a mortgage loan or a liability under a long-term capital lease on the office building used for planadministration.

37. Q—Should amounts held pursuant to a deferred retirement option program (DROP) be reported by a definedbenefit pension plan as a liability for benefits in the plan’s statement of fiduciary net position?

A—Paragraph 20 of Statement 67 requires that a defined benefit pension plan recognize a liability for benefitswhen the benefits currently are due and payable to a plan member. Therefore, only those amounts in the DROPaccounts that are due and payable to the plan member at the plan’s reporting date should be reported as aliability in the pension plan’s statement of fiduciary net position. Within the context of a DROP, benefits generallywould be due and payable only when they are required to be distributed to the plan member from the DROPaccount. Paragraph 30f of Statement 67 requires that the pension plan disclose the balance of amounts heldpursuant to the DROP, as well as information describing the DROP terms, in notes to its financial statements.

Fiduciary net position

38. Q—Should assets credited to individual member accounts pursuant to a DROP be included in the fiduciary netposition reported by the defined benefit plan?

A—Yes. One feature of a program that meets the definition of a DROP in paragraph 51 of Statement 67 is thatindividual member accounts pursuant to the program are held within the defined benefit pension plan, ratherthan in a separate plan. Therefore, assets associated with the DROP should be included in the fiduciary netposition reported by the defined benefit pension plan. Paragraph 30f of Statement 67 requires that informationabout the DROP, including amounts held by the pension plan pursuant to the DROP, be disclosed in notes tothe pension plan’s financial statements.

Statement of Changes in Fiduciary Net Position

39. Q—A PERS administers numerous defined benefit pension plans for state employees. These plans remit moneyto an investment pool for operating expenses of the pool. Also, movements of member account asset balancesoccur between plans when members change employment from one state department or agency to another and,thereby, from one plan to another. In the plan’s statement of changes in fiduciary net position, should anadditional section, below the additions and deductions sections, be added for transfers? If not, how should thesetypes of transactions be reported?

A—All changes in fiduciary net position should be reported either in the additions section or in the deductionssection of the statement of changes in fiduciary net position. The term transfer implies activity internal to anentity, whereas, from the standpoint of Statement 67, each defined benefit pension plan is effectively a separateentity. Thus, for purposes of financial reporting under Statement 67, movements of resources between a definedbenefit pension plan and any other plan, fund, government, company, or individual are external transactions,rather than transfers. With regard to the particular types of resource movements in question:

a. Those to an investment pool for operating expenses of the pool should be reported by the plan asinvestment expense.

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b. Those that move member account asset balances from one pension plan to another may be reported asseparate line items within the deductions and additions sections, respectively, of each plan’s statement ofchanges in fiduciary net position.

Additions

40. Q—Plan members have an arrangement with their employer that each pay period, the employer makescontributions to the pension plan to satisfy plan member contribution requirements. Should the pension planclassify the contributions received from the employer under this arrangement as employer contributions or planmember contributions?

A—If the contributions are recognized by the employer as salary expense, the pension plan should classify thecontributions as plan member contributions. (Because the amounts are treated as plan member salaries by theemployer, contributions paid from those salaries, whether transmitted by the plan member or by the employer,are plan member contributions.) If, instead, the employer does not include the amount of the contributions insalary expense, Statement 67 requires that the contribution be classified as an employer contribution to thepension plan. In both circumstances, the net effect on the employer’s compensation expense (salaries pluspensions) would be the same, and the employer’s net pension liability would be reduced by the amount of thecontributions.

Investment income

41. Q—May a defined benefit pension plan separately display (a) realized gains and losses on sales of investmentsduring the reporting period and (b) unrealized gains and losses on investments?

A—No. The net increase (decrease) in the fair value of investments during the reporting period should bedisplayed as a single line item in the statement of changes in fiduciary net position. In fair value reporting, theincrease (decrease) in an investment’s fair value is recognized as an addition to (deduction from) the plan’sfiduciary net position each reporting period. However, a realized gain or loss on an investment sold during areporting period is the difference between the proceeds of the sale and the original cost of the investment. Thus,when an investment that has been held for more than one year is sold, the realized gain (loss) includes amountsthat were recognized as increases (decreases) in prior periods.

The net increase (decrease) for any year is not the sum of realized and unrealized gains (losses). Therefore,attempts to identify unrealized gains (losses) by calculating realized gains (losses) for a particular year andsubtracting them from the net increase (decrease) for that year would produce an incorrect result.

Although realized gains and losses should not be displayed separately in the financial statement, disclosure ofrealized gains and losses is permitted in the notes to the financial statements, if disclosure also is made of bothof the following, as required by Statement 67, paragraph 24:

a. That the calculation of the realized gains and losses disclosed is independent of the calculation of the netchange in the fair value of pension plan investments reported in the financial statements

b. Realized gains and losses on investments sold in the current year that had been held for more than one yearwere included in investment income reported for a previous year or years (as part of the reported netincrease or decrease for those years).

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42. Q—Is the net increase (decrease) in fair value required to be reported separately for each principal componentof investments?

A—No. Plans may choose to compute the net increase (decrease) separately for each category of investments,but a single line item is all that is required for financial reporting.

43. Q—A pension plan chooses to separately display investment income in its statement of changes in fiduciary netposition. Should the amortization of premium (discount) on bonds be included in the amount reported as interestincome?

A—No. Interest income should be reported at the stated (or coupon) interest rate. If the stated rate is zero, nointerest income should be reported for that bond. (Effectively, interest on a zero-coupon bond is reflected in thereported fair value and, therefore, in the reported net increase [decrease] in fair value.)

44. Q—In its reports to its investors, an investment company that offers pooled investment vehicles for pensionplans reports all investment income as an increase (decrease) in investors’ accounts. Is this form of reportingacceptable for use by the pension plan in its financial statements?

A—Yes. Statement 67, paragraph 23, provides that a net increase (decrease) may be combined for financialreporting purposes with interest, dividends, and other investment income. In addition, paragraph 26 providesthat investment-related costs should be reported as investment expense if they are separable from(a) investment income and (b) the administrative expense of the pension plan. Based on those provisions,because the income is reported to the plan net of related expense and, therefore, is not readily separable frominvestment income, a plan could comply with the requirements of Statement 67 with regard to reportinginvestment income using the form of reporting provided by the investment company.

Investment expense

45. Q—What determines whether investment-related expenses that are included in general administrative ex-penses are readily separable and, thus, should be reported in the additions section of a plan’s statement ofchanges in fiduciary net position as part of investment expense in conformity with paragraph 26 of State-ment 67? For example, should chief investment officer and investment staff salaries, payroll taxes for these,hardware and software purchases for those employees, and costs of subscriptions, data services, and suppliesfor them be reported as investment expense?

A—Statement 67 requires separate display of investment expense, including investment management andcustodial fees and all other significant investment-related costs (paragraph 22d(2)). The purpose of thisrequirement is to help users of the pension plan’s financial statements assess both gross and net investmentincome. Paragraph 26 provides that investment-related costs should be reported as investment expense if theyare separable from (a) investment income and (b) the administrative expense of the pension plan. For purposesof applying these paragraphs, each investment-related cost should be evaluated on its own merits. The costassociated with each of the examples given in the question (that is, salaries of the chief investment officer andof the investment staff, related payroll taxes, depreciation of software and hardware used by the investment staff,and subscriptions, data services, and supplies for the investment staff) is readily identifiable as an investment-related cost and should be reported as an investment expense.

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46. Q—Should the salary and fringe benefits of a plan employee whose time is allocated 50 percent to investmentsand 50 percent to general plan administrative duties be allocated between investment expense and adminis-trative expense?

A—If the employee spends a significant portion of time on tasks related to investments, allocation to investmentexpense of a portion of salary and related costs for a plan employee is appropriate. In contrast, if a planemployee whose responsibilities are basically administrative spends only an insignificant or highly variablepercentage of time on tasks that are investment related, so that the investment-related costs are not readilyseparable from general administrative expense, professional judgment should be used to determine whether toseparately measure the cost of that person’s investment-related activities.

Notes to Financial Statements

47. Q—Does Statement 67 establish specific requirements for a defined benefit pension plan that is closed to newentrants?

A—The only requirement of Statement 67 that is specific to a closed plan is the requirement in paragraph 30a(4)that, if a pension plan is closed to new entrants, that fact should be disclosed. Apart from that provision, a definedbenefit pension plan that is closed to new entrants is required to follow the same requirements as plans that arenot closed.

Paragraph 30b

Investment concentrations

48. Q—Paragraph 30b(3) of Statement 67 requires pension plans to identify investments in any one organizationthat represent 5 percent or more of the pension plan’s fiduciary net position. Do the requirements of para-graph 11 of Statement No. 40, Deposit and Investment Risk Disclosures, for governments to provide informationabout the concentration of credit risk associated with their investments by disclosing, by amount and issuer,investments in any one issuer that represent 5 percent or more of total investments also apply to pension plans?

A—Yes. The focus of the two disclosures is different, and a pension plan should include both, if applicable. Thedisclosure requirement of Statement 40 is limited to concentrations of credit risk—a notion associated with therisk of loss on fixed-income investments if a creditor or other counterparty fails to meet its obligations to repay.The requirement in paragraph 30b(3) of Statement 67 is broader—that is, concentrations of investments.

49. Q—How should investments in mutual funds be viewed in relation to the requirement in Statement 67,paragraph 30b(3), to disclose investments in any one organization that represent 5 percent or more of thepension plan’s fiduciary net position? For example, is a mutual fund, or a bank that sponsors mutual funds, anorganization, as the term is used in that paragraph, to which the 5 percent criterion applies?

A—Mutual funds diversify investments among organizations. Therefore, for purposes of the requirements ofStatement 67, paragraph 30b(3), the 5 percent test need not be applied to a mutual fund.

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Money-weighted rate of return on pension plan investments

50. Q—For purposes of determining the money-weighted rate of return on pension plan investments, should thebeginning and ending values of investments that are used as the basis for the calculation equal the amountsreported in the investments line item in the pension plan’s statements of fiduciary net position?

A—Generally, no. For purposes of determining the money-weighted rate of return on pension plan investments,investments should include cash, investments, and other investment-related balances, such as receivables forinvestment income, receivables to/payables from brokers for unsettled trades, and assets/liabilities associatedwith securities lending cash collateral. (See Appendix 3, Illustration 2, for an example of the determination ofbeginning and ending pension plan investment balances using amounts reported in a pension plan’s financialstatements for purposes of calculating the money-weighted rate of return.)

51. Q—What should be considered an investment expense for purposes of the calculation of the annual money-weighted rate of return?

A—Similar to the manner in which investment expense is defined for financial statement recognition purposes,for purposes of calculating the money-weighted rate of return on pension plan investments, investment expenseshould include, to the extent separable from investment income and the administrative expense of the pensionplan, investment management fees, custodial fees, and other significant investment-related costs. Within thecontext of calculating the money-weighted rate of return, investment expense should include such fees andcosts that are associated with the types of assets and liabilities that are discussed in Question 50, whether ornot those items are reported as investments in the pension plan’s statement of fiduciary net position.

52. Q—Should cash flows associated with investment expense be included in the calculation of the money-weighted rate of return on pension plan investments?

A—No. In the calculation of the money-weighted rate of return on pension plan investments, the beginning andending values of investments reflect the effects of net investment income, which includes the effect of investmentexpense. (See Illustration 2 in Appendix 3.) Accordingly, cash flows for transactions associated with investmentexpense should not be included in the measures of the periodic external cash flows used to determine themoney-weighted rate of return.

53. Q—Should the money-weighted rate of return be calculated net of pension plan administrative expense?

A—No. Consistent with the measure of the long-term expected rate of return required by Statement 67, themoney-weighted rate of return for purposes of that Statement should be determined net of investment expensebut not net of pension plan administrative expense. Therefore, cash flows associated with transactions includedin pension plan administrative expense, along with all other noninvestment-related cash flows, should beincluded in the measures of the periodic external cash flows used to determine the money-weighted rate ofreturn.

54. Q—For purposes of determining the money-weighted rate of return on pension plan investments, if externalcash flows are determined monthly, how should those cash flows be weighted?

A—The plan should use a cash flow weighting methodology that is representative of the pattern of the plan’sexternal cash flows. Depending on the timing of the cash flows throughout the month, weighting methodologiescould include, for example, beginning of the month (1.0 weight), midddle of the month (0.5 weight), and end ofthe month (zero weight).

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Disclosures Specific to Single-Employer and Cost-Sharing Multiple-Employer Pension Plans

55. Q—In a defined benefit pension plan’s financial statements for the fiscal year ended June 30, 20X4, is the plan’smost recent fiscal year-end, as referred to in paragraph 31 of Statement 67, the fiscal year endedJune 30, 20X4, or the fiscal year ended June 30, 20X3?

A—For purposes of application of Statement 67 to the plan in this question, the plan’s most recent fiscalyear-end is June 30, 20X4. Therefore, for example, the information required by paragraph 31 about the netpension liability should relate to the net pension liability measured as of June 30, 20X4.

Required Supplementary Information

Single-Employer and Cost-Sharing Multiple-Employer Pension Plans

56. Q—Within a single-employer plan, multiple tiers of benefits have been created such that each tier providesdifferent benefits (for example, through different salary multipliers or different vesting schedules) to planmembers hired between certain dates. Separate actuarial valuations are performed to establish the employer’sannual contributions for plan members in each tier. Is the pension plan required to present separate schedulesof RSI with information about the employer’s obligations relative to plan members in each tier?

A—No. The pension plan is required to present schedules of RSI for the plan as a whole. RSI is limited toinformation specifically required. Therefore, the plan should not present the schedules of RSI by tier.

57. Q—A cost-sharing multiple-employer pension plan covers only volunteer firemen. The volunteers are not paida salary. Therefore, there is no covered-employee payroll. How does this affect requirements for presentation ofinformation in schedules of RSI about measures of the net pension liability and contributions in relation tocovered-employee payroll?

A—The requirements of Statement 67, paragraphs 32b and 32c, for ratios that present the net pension liabilityand contributions, respectively, as a percentage of covered-employee payroll would not be applicable for thisplan. Therefore, those ratios should not be presented in the RSI schedules.

58. Q—A county issued pension obligation bonds and used the proceeds to make higher-than-usual contributionsto its single-employer pension plan. How should the plan report the amount received from the employer as aresult of the bond proceeds in the schedule of changes in the net pension liability and in the schedule thatpresents the employer’s contributions as compared to actuarially determined contributions?

A—The higher-than-usual contributions made with the pension obligation bond proceeds should be reported asfollows:

Schedule of changes in the net pension liability. The net pension liability is affected by the change, if any, in thepension plan’s fiduciary net position as a result of all employer contributions, regardless of the manner in whichthe employer financed the contributions. Therefore, unless the amounts received by the pension plan are forpayment of a separately financed liability of the employer to the pension plan (which would have beenrecognized as a receivable and a contribution in the period in which the liability arose), the plan recognizes theamounts as an addition to fiduciary net position, resulting in a decrease in the net pension liability that would bepresented in the schedule of changes in the net pension liability. If the amounts received by the pension plan arefor payment of a separately financed liability to the plan, the plan recognizes the amount received as a reduction

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of a receivable from the employer. As a result, in this case, there would be no change in the pension plan’sfiduciary net position resulting from the receipt of the bond proceeds, and there would be no effect to be includedin the schedule of changes in the net pension liability as a result of the transaction.

Schedule of contributions. The purpose of the contribution-related schedule is to present the trend of theemployer’s contributions in relation to the employer’s actuarially determined contributions. In order to avoiddistorting the trend, the plan should include in the schedule only the contributions (whether special or regular)that are related to the employer’s actuarially determined contribution. Paragraph 32c(1) specifies that, forpurposes of this schedule, actuarially determined employer contributions should exclude amounts, if any, toseparately finance specific liabilities of an individual employer to the pension plan. Therefore, if all or a part ofthe proceeds were intended to pay a separately financed liability to the plan, amounts received by the pensionplan for that purpose would not be a contribution related to the actuarially determined contribution.

Paragraph 32a

59. Q—If part of the total service cost in a single-employer defined benefit plan is identified as being paid by the planmembers through their annual contribution requirement, should the amount presented in the schedule ofchanges in the net pension liability be only the portion of the total service cost that is required to be paid by theemployer?

A—No. Service cost under Statement 67 is the total service cost, including the portions associated withfinancing requirements of employers, nonemployer contributing entities, and plan members. Therefore, theamount presented as service cost in the schedule of changes in the net pension liability should be the totalservice cost of the period.

60. Q—For a plan’s fiscal year ended June 30, 20X5, can service cost be calculated based on the results of theactuarial valuation used to determine the June 30, 20X4 net pension liability?

A—Yes. Use of a service cost measure based on the results of the actuarial valuation that determined thebeginning net pension liability for the reporting period is consistent with the requirement to calculate interest onthe total pension liability over the period. Interest on service cost should be included in the amount reported asinterest on the total pension liability. (See Question 61.)

61. Q—If the approach used in the preceding question is used to determine the service cost reported in theschedule of changes in the net pension liability for the pension plan’s fiscal year ended June 30, 20X5, shouldthe amounts identified as interest on the total pension liability be calculated on the beginning total pensionliability, adjusted for projected service cost and actual benefit payments (including refunds of plan membercontributions), or should projected benefit payments from the actuarial valuation that is used to determine theservice cost be used for purposes of the adjustment?

A—Interest on the total pension liability should be determined based on the beginning total pension liability,adjusted for projected service cost and actual benefit payments. Because the actual amounts of benefitpayments and contributions are components of the total change in the plan’s fiduciary net position, it would beconsistent to use actual amounts to determine other components of the change in the net pension liability,including the changes in the total pension liability resulting from benefit payments and interest on the totalpension liability.

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62. Q—How should the effects of an ad hoc cost-of-living adjustment (COLA) granted to retirees be classified in theschedule of changes in the net pension liability if the effects of the COLA were not included in the present valueof projected benefit payments as of the pension plan’s prior fiscal year-end because the COLA was notdetermined to be substantively automatic?

A—An ad hoc COLA that is determined not to be substantively automatic is a form of postemployment benefitchange. Therefore, the effects of such an ad hoc COLA should be classified as a change of benefits in theschedule of changes in the net pension liability.

63. Q—The effects of a COLA that was determined to be substantively automatic were included in the present valueof projected benefit payments in the total pension liability as of the pension plan’s prior fiscal year-end. TheCOLA was not provided in the current fiscal year. At the plan’s current fiscal year-end, the COLA still isdetermined to be substantively automatic. In this circumstance, how should the effects on the total pensionliability that result from not providing the COLA be classified in the schedule of changes in the net pension liabilityof the employers and nonemployer contributing entities?

A—The effects on the total pension liability that result from not providing the COLA should be classified as adifference between expected and actual experience.

64. Q—Would the answer to Question 63 be different if, at the current fiscal year-end, the COLA is no longerconsidered to be substantively automatic?

A—No. The effects on the total pension liability that result from the COLA not being provided in the currentperiod should be classified as a difference between expected and actual experience, even if the COLA isdetermined to no longer be substantively automatic at the plan’s current fiscal year-end. The reclassification ofthe COLA as ad hoc rather than as substantively automatic is a separate event, and the effects of thatreclassification on the total pension liability should be classified as a change of benefit terms.

65. Q—If the terms of a defined benefit pension plan are amended and a change of assumption is made as a directresult of the amendment, should the impact of the change of assumption on the total pension liability be includedwith the effect of the change of benefit terms in the schedule of changes in the net pension liability?

A—Yes. Although, generally, the effects of a change of assumption on the total pension liability should beseparated from the effects of a change of benefit terms, in circumstances in which the change of assumption isadopted as a direct result of the change of benefit terms, the effect of the change of assumption should beclassified as a component of the effect of the change of benefit terms for purposes of presentation of changesin the net pension liability by source. For example, if the mandatory retirement age in a plan is modified, changesof assumptions about the retirement ages of active plan members that are made to adjust for the change ofbenefit terms would be directly related to the benefit change. Although mathematically separable, if the changeof assumptions would not have occurred in the absence of the change of benefit terms, the change ofassumptions is, in substance, a component of the change of benefit terms, and should be included in theschedule of changes in the net pension liability as a change of benefit terms. In contrast, if, at the same actuarialvaluation date, a change is made to mortality assumptions based on the results of a recent experience study andmortality rates are not associated with retirement age, the effect of the change of mortality assumption wouldnot be directly related to the change of benefit terms and should be included as a change of assumption in theschedule of changes in the net pension liability.

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66. Q—If a pension plan purchases an allocated insurance contract that meets the criteria in paragraph 19 ofStatement 67, how should the effects on the components of the net pension be classified in the schedule ofchanges in the net pension liability?

A—The amount paid for the purchase of an allocated insurance contract should be classified as a reduction ofthe pension plan’s fidiciary net position, as well as a reduction of the total pension liability, due to benefitpayments. In addition, if there is a difference between the amount recognized as a benefit payment by thepension plan and the amount of the actuarial present value of projected benefit payments that is removed fromthe total pension liability as a result of the purchase, that amount should be classified as a difference betweenexpected and actual experience in the schedule of changes in the net pension liability.

Paragraph 32c

67. Q—If a contribution rate for the period from July 1, 20X2, to June 30, 20X3, is adopted at October 31, 20X1,based on the results of an actuarial valuation as of June 30, 20X1, should the resulting actuarially determinedcontribution be reported in the schedule of contributions for the plan’s fiscal year ended June 30, 20X2, orJune 30, 20X3?

A—The actuarially determined contribution is an amount determined based on the most recent measurementavailable when the contribution for the reporting period was adopted. Therefore, in this example, assuming thatthe results of the June 30, 20X1 actuarial valuation are the most recent results available as of October 31, 20X1,amounts based on those results should first be presented in the contribution schedule required by para-graph 32c for the plan’s fiscal year ended June 30, 20X3.

68. Q—If an actuarially determined contribution is calculated for an employer’s fiscal year and the plan’s fiscal yeardoes not coincide with the fiscal year of the employer, what amount should be reported in the contribution-related schedule required by Statement 67, paragraph 32c?

A—The amount reported in the contribution schedule required by paragraph 32c should be the amount that isapplicable to the plan’s fiscal year for which the information is being reported. Therefore, if the actuarialdetermined contribution is not calculated for the plan’s fiscal year, it would be determined as the aggregate ofthe employer’s actuarially determined contributions for the portions of the employer’s fiscal years that overlapthe plan’s fiscal year. For example, a plan’s fiscal year is from July 1 to June 30, and the employer’s fiscal yearis from January 1 to December 31. The actuarially determined contribution applicable to the plan’s year endedJune 30, 20X7, would be one-half of the employer’s fiscal year 20X6 actuarially determined contribution(because that fiscal year overlapped the first six months of the plan’s fiscal year) plus one-half of the employer’sfiscal year 20X7 actuarially determined contribution (because that fiscal year overlapped the last six months ofthe plan’s fiscal year).

69. Q—Should the schedule of contribution-related information required by paragraph 32c of Statement 67 includeinformation for the year between actuarial valuations if actuarially determined contributions are calculatedbiennially?

A—Yes. The actuarially determined contribution for the period between actuarial valuations should be reported,using the results of the actuarial valuation that establishes the contribution applicable to that period.

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70. Q—What actuarial methods and assumptions should be used to calculate the actuarially determined contribu-tion reported in conformity with the requirements of paragraph 32c?

A—For purposes of applying the requirements of paragraph 32c, an actuarially determined contribution isdefined, in part, as a contribution calculated in conformity with Actuarial Standards of Practice. Statement 67does not establish requirements for the specific methods and assumptions used to calculate an actuariallydetermined contribution.

71. Q—If a pension plan uses an actuarial value of assets that incorporates differences between projected andactual returns on pension plan investments over a three-year period for purposes of determining contributionrequirements of employers that provide pensions through the plan, can the plan continue to use that methodafter implementation of Statement 67?

A—Yes. Statement 67 does not establish requirements for the specific methods and assumptions, if any, usedfor funding purposes. Therefore, an actuarial value of assets can continue to be used for funding purposes.However, for purposes of complying with Statement 67, all changes in plan net position, including the full amountof the returns on pension plan investments, should be included in the calculation of the net pension liability andchanges in the net pension liability.

72. Q—Paragraph 50 of Statement 67 states that schedules of RSI “should not include information that is notmeasured in accordance with the requirements of this Statement.” Does that mean that information aboutactuarially determined contributions should be presented only if it is calculated using the same methods andassumptions as are required to be applied for purposes of measuring the net pension liability?

A—No. As noted in Question 70, an actuarially determined contribution is defined, in part, as a contributioncalculated in conformity with Actuarial Standards of Practice; however, Statement 67 does not establishrequirements for the specific methods and assumptions that are used to calculate an actuarially determinedcontribution. Therefore, if calculated, the pension plan should present measures of actuarially determinedcontributions, regardless of the methods and assumptions used to calculate them.

73. Q—Should contributions recognized by a pension plan for amounts payable to the plan by an employer pursuantto an installment contract be included in the amount reported by the plan as contributions in relation to theactuarially determined contribution?

A—No. The intent of the schedule that presents information about actual contributions as compared toactuarially determined contributions is to demonstrate the degree to which employers and nonemployercontributing entities are meeting the actuarially determined financing requirements. The installment contract isan example of an individual employer’s separately financed liability to the pension plan. The measure of theactuarially determined contribution that is required by paragraph 32c(1) excludes amounts, if any, to separatelyfinance specific liabilities of an individual employer or nonemployer contributing entity to the pension plan.Similarly, the amount of contributions recognized during the fiscal year by the pension plan in relation to theactuarially determined contribution should exclude amounts recognized as additions to the pension plan forseparately financed specific liabilities of an individual employer or nonemployer contributing entity to the pensionplan.

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74. Q—When actuarially determined contribution rates are calculated for the employer in a single-employer pensionplan and a nonemployer contributing entity, should the schedule of RSI that presents actual contributions ascompared to actuarially determined contributions (paragraph 32c of Statement 67) include amounts for thenonemployer contributing entity?

A—Yes. If an actuarially determined contribution is calculated for both the employer and a nonemployercontributing entity, the contribution-related information in the schedule should present the aggregated totals forthe employer and nonemployer contributing entity. In that case, Statement 67, paragraph 32c, indicates that theschedule should identify that the information includes amounts related to both the employer and the nonem-ployer contributing entitity.

75. Q—May plan member contributions be added to the RSI schedule that presents actual contributions ascompared to actuarially determined contributions (paragraph 32c of Statement 67)?

A—No. Plan member contributions generally are not discretionary; therefore, including them in the schedule,even if plan member contribution rates are actuarially determined, could obscure information about employer ornonemployer contributing entity contribution decisions. Plan member contribution rates should be disclosed inthe notes to the financial statements of all types of defined benefit pension plans—single-employer, agentmultiple-employer, and cost-sharing multiple-employer—as required by Statement 67, paragraph 30a(6).

76. Q—The actuary for a defined benefit pension plan calculates the dollar amount of an employer’s actuariallydetermined contribution based on the projected covered payroll for the year to which the contribution will apply,and also calculates an actuarially determined contribution rate, expressed as a percentage of the projectedcovered payroll. The employers contribute based on that actuarially determined contribution rate, applied to theiractual covered payrolls, which frequently are not the same as the projected covered payroll. Thus, the dollaramount of employer contributions may differ from the dollar amount of the actuarially determined contributioncalculated by the actuary because of the difference between projected and actual covered payrolls. Whichamount should be reported as the actuarially determined contribution in the plan’s schedule of contribution-related information required by paragraph 32c?

A—The intent of the schedule required by paragraph 32c is to provide information to allow a reader to evaluatethe degree to which employers and nonemployer contributing entities are meeting actuarially determinedfinancing requirements. Therefore, the actuarially determined contribution and the amount of contributionsrecognized by the plan in relation to that contribution should be presented on a comparable basis. Thus, for thisschedule, the dollar amount of the actuarially determined contribution should be adjusted, if necessary, so thatthe amount reported is based on the same measure of payroll as the contributions recognized as additions inthe plan’s statement of changes in fiduciary net position. (See Appendix 3, Illustration 4, for an example.)

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Measurement of the Net Pension Liability

Total Pension Liability

Timing and frequency of actuarial valuations

77. Q—In a single-employer pension plan with a June 30 fiscal year-end, actuarial valuations are obtained annuallyas of December 31. To meet the requirement of paragraph 35 that the net pension liability reported in thepension plan’s notes to financial statements and schedules of RSI be measured as of the pension plan’s mostrecent fiscal year-end, each reporting period, the results from the mid-year actuarial valuation are updated toJune 30. Are there specific procedures that are required for an update for financial reporting purposes?

A—No. Statement 67 does not establish specific procedures for this purpose. Therefore, professional judgmentshould be applied to determine the extent of procedures necessary to faithfully represent the total pensionliability as of the pension plan’s fiscal year-end. In all circumstances, the total pension liability should include allsignificant effects of transactions and other events between the actuarial valuation date and the pension plan’sfiscal year-end. In some circumstances, for example, if there are few differences between expected and actualexperience, no changes in benefit terms, and no circumstances suggesting that a significant change ofassumption is needed, it might be reasonable to roll forward the results of the mid-year actuarial valuation to theplan’s fiscal year-end with few adjustments. However, in other circumstances, more significant adjustmentsmight be necessary to update the results of the mid-year actuarial valuation to the plan’s fiscal year-end. (SeeQuestion 78 for examples of events that might result in a significant change.) The Statement also requires thatin evaluating the extent of procedures necessary to update the measure to the pension plan’s fiscal year-end,among the factors that should be considered is whether a new actuarial valuation is needed for this purpose.

78. Q—What are some examples of transactions or other events that can occur between the actuarial valuationdate and the pension plan’s fiscal year-end that might result in a significant change in the total pension liability?

A—A significant change in the total pension liability can arise from a single factor or a combination of factors.Some examples of circumstances that might result in a significant change include a change of benefit terms, achange in the size or composition of the covered group, a change in the municipal bond yield or index ratecomponent of the discount rate, and a change in the pension plan’s fiduciary net position such that the discountrate used in the calculation of the total pension liability is impacted.

79. Q—When a single-employer or cost-sharing multiple-employer pension plan has biennial actuarial valuations,does Statement 67 require an update in the intervening year for financial reporting purposes?

A—Yes. Statement 67 requires that information presented in notes and in schedules of RSI about the netpension liability for benefits provided through a single-employer or cost-sharing multiple-employer pension planbe measured as of the end of the pension plan’s fiscal year. That requirement can be met through the use ofthe results of an actuarial valuation as of the plan’s fiscal year-end or through the use of update procedures toroll forward the results of an actuarial valuation performed as of a date no earlier than 24 months prior to thefiscal year-end of the pension plan. For plans, if update procedures are used and significant changes in, forexample, benefits, the covered population, or other factors affecting the valuation results have occurredbetween the actuarial valuation date and the pension plan’s fiscal year-end, professional judgment should beused to determine the extent of the procedures needed to roll forward the measurement of the total pensionliability, and consideration should be given to whether a new actuarial valuation is needed.

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Projection of benefit payments

80. Q—The amount of a defined benefit pension is determined based on a plan member’s years of service and finalthree-year average pay. The calculation of pay for this purpose includes the plan member’s base salary andovertime pay. Should the projection of benefit payments include an assumption about overtime pay?

A—Yes. In this circumstance, overtime pay should be considered in the projection of benefit payments.Paragraph 39 of Statement 67 requires that the projection of benefit payments include all benefits to be providedto the plan member in accordance with the benefit terms. That paragraph further specifically requires that theeffects of projected salary changes be included in the projection of benefit payments in circumstances in whichthe pension formula incorporates future compensation levels. Although not part of the plan member’s basesalary, the pension formula establishes overtime compensation as a relevant factor in determining the amountof a plan member’s pension. Therefore, consistent with the requirements of paragraph 39, the projected impactof future overtime compensation on the benefit payments that will be made to the plan member should beincluded in the measure.

81. Q—A plan’s enabling statute provides for a COLA if the investment earnings rate for the plan’s fiscal yearexceeds the actuarially assumed rate. Should this COLA be treated as an automatic COLA?

A—Yes. Paragraph 39 of Statement 67 requires that the effects of any COLAs that are embedded in the benefitterms for which there is no discretion as to timing or amount be included in the projection of future benefitpayments. In this example, although a certain economic condition is required to be met for the COLA to beeffective, if that condition is met, there is no discretion regarding whether the COLA will be granted.

82. Q—A defined benefit pension plan’s enabling statute provides that the board of trustees can annually authorizea COLA not to exceed a specified percentage increase or the change in the consumer price index, whicheveris lower. The maximum allowable COLA has always been authorized. Should the effects of this COLA provisionbe included in the projection of future benefit payments?

A—This COLA is not automatic because approval of the board of trustees is required to authorize the benefitincrease. Therefore, the effects of the COLA provision should be included in the projection of future benefitpayments only if the provision is evaluated to be substantively automatic. Footnote 14 of Statement 67 identifiessome of the factors that might be relevant in making this determination—the historical pattern of granting thechanges, the consistency in the amounts of the changes or in the amounts of the changes relative to a definedcost-of-living or inflation index, and whether there is evidence to conclude that changes might not continue tobe granted in the future despite what might otherwise be a pattern that would indicate such changes aresubstantively automatic. If, after evaluation, the COLA is determined not to be substantively automatic, theprojected effects of future COLAs should not be included in the measurement. In the latter case, the increasedbenefits should be included in the measurement of the total pension liability as of the first plan fiscal year-endat which the COLA has been granted and the amount is known or reasonably estimable.

83. Q—A collective-bargaining agreement that includes a provision for a postemployment benefit increase has beenmade prior to the pension plan’s fiscal year-end. However, the increase does not go into effect until the nextfiscal year. Should the increase in projected benefit payments as a result of this agreement be included in themeasurement of the total pension liability?

A—Yes. The actuarial present value of projected benefit payments should include benefits to be providedpursuant to a contractual agreement, including a collective-bargaining agreement that is in effect at the plan’sfiscal year-end. In other words, the criterion is whether the agreement is in effect at that date, not whether thebenefits included in the agreement will begin to accrue or begin to be paid by that date.

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84. Q—A collective-bargaining agreement that includes an agreement for a postemployment benefit increase hasbeen made after the plan’s June 30, 20X5 fiscal year-end (the measurement date of the net pension liability) butbefore the completion of the actuarial valuation. Should the increase in projected benefits as a result of thisagreement be included in the measurement of the total pension liability presented in the plan’s June 30, 20X5financial report?

A—No. Paragraph 39 of Statement 67 requires that projected benefit payments include “all benefits to beprovided to current active and inactive plan members through the pension plan in accordance with the benefitterms and any additional legal agreements to provide benefits that are in force at the pension plan’s fiscalyear-end.” Because the agreement was not in effect at the plan’s 20X5 fiscal year-end, the effect of theincreased benefits should not be included in the total pension liability reported by the plan at that date.

Discount rate

85. Q—If the actuarial valuation date is earlier than the plan’s fiscal year-end and the long-term expected rate ofreturn assumption remains the same at the pension plan’s fiscal year-end as it was at the actuarial valuationdate, does the discount rate have to be evaluated for significant changes between the actuarial valuation dateand the plan’s fiscal year-end?

A—Yes. A change in the discount rate can occur due to factors other than a change in the long-term expectedrate of return. For example, a change in the municipal bond yield or index rate (if used in the determination ofthe discount rate) or a change in the projected fiduciary net position of the pension plan that affects the relativeweighting of the long-term expected rate of return and the municipal bond yield or index rate can affect thediscount rate. Therefore, each of these factors, if appicable, also should be considered when evaluating whethersignificant changes have occurred that should be reflected in the net pension liability at the pension plan’s fiscalyear-end.

Comparing projections of the pension plan’s fiduciary net position to projected benefit payments

86. Q—An employer has an actuarially determined contribution rate and has a written policy of contributing theactuarially determined rate each period. The employer has consistently adhered to its policy for the past 10years, and there are no known events or conditions that indicate that the employer will not continue to adhereto its policy in the future. In this circumstance, for purposes of determining the discount rate, how would theamount of projected employer contributions that should be included in the projection of the pension plan’sfiduciary net position be determined?

A—In this circumstance, the actuarially determined contribution rate of the employer would be used as the basisfor the projection of future employer contributions. Future employer contributions based on the actuarially basedfunding method should be evaluated to determine the extent to which they are associated with the service costsof future plan members. The portion of future contribution rates that is not associated with the service costs offuture plan members would be included in the projection of future plan fiduciary net position, which would becompared to projected future benefit payments for current plan members to determine whether and, if so, towhat extent, the municipal bond yield or index rate should be reflected in the discount rate.

87. Q—If the benefit payments in a period are projected to be partially covered by projected plan fiduciary netposition, should the covered portion be discounted using the long-term expected rate of return on pension planinvestments, with only the remainder discounted at the required municipal bond yield or index rate?

A—Paragraphs 41 and 44 of Statement 67 require that projected benefit payments for a period be comparedto the pension plan’s fiduciary net position in the period for purposes of determining whether the long-termexpected rate of return or the municipal bond yield or index rate should be used to discount the benefit payments

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of the period when determining the discount rate. The Statement does not require that a specific approach beused to assign the total of the projected benefit payments in each period to the “funded” and “unfunded”categories. Therefore, the total of the benefit payments that are projected to occur in a period during which planfiduciary net position is projected to not be sufficient to make those benefit payments may be split into “funded”and “unfunded” portions or the entire total may be classified as “unfunded.”

88. Q—Paragraph 43 of Statement 67 indicates that, if the results are sufficiently reliable, any approach toevaluating the sufficiency of future plan fiduciary net position to make projected benefit payments can be usedin place of the projections of cash flows that are described in paragraphs 41 and 42 of the Statement. Is aspecific method contemplated?

A—No. The determination of whether the results of an alternative approach to making the evaluation requiredin paragraph 41 are sufficiently reliable for this purpose is subject to professional judgment.

Calculating the discount rate

89. Q—As of what date should the long-term expected rate of return and the municipal bond yield or index rate thatare used to establish the discount rate be determined—the valuation date or the pension plan’s fiscal year-end?

A—The long-term expected rate of return on pension plan investments is an assumption, and assumptionsgenerally are not required to be updated between actuarial valuation dates unless there is an indication that theassumption is no longer valid. Therefore, the expectation developed as of the actuarial valuation date can beused at the pension plan’s fiscal year-end unless it is determined to no longer be appropriate. In contrast, themunicipal bond yield or index rate is not an assumption and should be determined as of the pension plan’s fiscalyear-end. If the actuarial valuation to determine the total pension liability is performed earlier than the pensionplan’s fiscal year-end, consideration should be given to changes in the municipal bond yield or index rate, alongwith other factors that potentially affect the discount rate, such as the pension plan’s fiduciary net position, toevaluate whether those factors would result in significant changes that should be reflected in the total pensionliability at the pension plan’s fiscal year-end, either through update procedures or through a new actuarialvaluation. (See Question 77 for a discussion of update procedures.)

Attribution of the actuarial present value of projected benefit payments to periods

90. Q—In what way are multiple exit ages considered in the attribution of the actuarial present value of projectedbenefit payments to periods for financial reporting purposes?

A—Generally, the end point of the attribution period would not be a single age or single date. Rather,assumptions are made as to when plan members will exit from active service. Examples of events that mightresult in a plan member’s exit from active service are the termination of employment, incurrence of a disability,retirement, and death. Assumptions about events that result in exit from active employment are expressed asthe probability of the occurrence of the triggering event based on, for example, the plan member’s age ornumber of years of service. These probabilities are applied to all projected ages/years of service of a planmember, resulting in multiple exit ages for each plan member.

91. Q—If a plan member in a single-employer plan is inactive but is expected to return to work for the employer,should the attribution period for the plan member extend over expected future years of service?

A—Yes, generally an inactive plan member that is expected to return to service would be assumed to have exitages that extend through future periods. Therefore, to meet the requirement of paragraph 46d of Statement 67,the attribution period generally should extend through the plan member’s assumed retirement age. If, however,

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the plan member is classified as inactive because of the plan member’s participation in a program that meetsthe Statement 67 definition of a DROP, paragraph 46d requires that the date of entry into the DROP beconsidered the plan member’s retirement date (and hence, the end of the attribution period).

92. Q—If benefit terms include a cap on plan members’ service credit, should a portion of the actuarial presentvalue of projected benefit payments be attributed to only those periods in which a plan member is expected toearn service credit, or should the attribution period include all periods within a plan member’s projected workinglifetime?

A—The exchange of benefits for services generally is viewed as related to a plan member’s entire career.Therefore, the attribution period should include all periods of a plan member’s projected service, regardless ofwhether additional service credit is expected to be earned.

Statistical Section Information

93. Q—For purposes of presenting supplementary information about principal participating employers as requiredby paragraph 39c of Statement No. 44, Economic Condition Reporting: The Statistical Section, should a primarygovernment and its component units be listed as separate employers?

A—No. Information about principal participating employers in a pension plan’s statistical section should presenta primary government and its component units as one employer, consistent with the requirement of para-graph 8 of Statement 67.

Defined Contribution Pension Plans

94. Q—Statement 67 addresses financial statement display as well as disclosures for defined benefit pension plans,but only disclosures for defined contribution pension plans. Does this mean that financial statements for definedcontribution pension plans are not required?

A—No. Defined contribution pension plans should follow the disclosure requirements of Statement 67, as wellas all other accounting and financial reporting requirements applicable to transactions and other eventsreported in their basic financial statements, including notes to those statements, and RSI. Those requirementsinclude the provisions of paragraphs 106−109 of Statement 34, as amended, which discuss the requiredfinancial statements for fiduciary funds—a statement of fiduciary net position and a statement of changes infiduciary net position.

Effective Date and Transition

95. Q—If comparative financial statements are presented, should the financial statements for the prior year berestated?

A—Yes, if it is practical to do so. If it is not practical to restate the financial statements for the prior year, thereason for not restating prior periods should be explained in notes.

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96. Q—At the beginning of the initial period of implementation of Statement 67, a defined benefit pension plan hasa balance of $750,000 of receivables for employer contributions due pursuant to formal commitments. BecauseStatement 67 does not permit the recognition of receivables based solely on formal commitments, the plan“derecognizes” those receivables. The plan makes no other changes to amounts recognized in its financialstatements to comply with the requirements of Statement 67. The plan does not present comparative financialstatements. How should the change be reported in the pension plan’s financial statements?

A—Paragraph 49 of Statement 67 requires that changes made to comply with Statement 67 be treated as anadjustment of prior periods. Therefore, the pension plan in this question should reduce its beginning fiduciary netposition by $750,000—the cumulative effect of applying the Statement. The plan also should disclose the natureof the restatement and its effect.

97. Q—In the initial year of implementation, is a single-employer or cost-sharing multiple-employer pension planrequired to present a schedule of changes in the net pension liability?

A—Yes. The schedule is required and should present at least one year of information, including informationabout the net pension liability as of the beginning of the fiscal year, in order to present changes in the net pensionliability during the initial year of implementation. If information is not available to present the additional nine yearsof historical information calculated in conformity with the requirements of Statement 67 at transition, the planshould present information in the schedule for as many years as are available. If this approach is used,additional years should be added prospectively, until 10 years of information is available.

98. Q—A single employer pension plan intends to have annual actuarial valuations for purposes of determining thenet pension liability information required to be presented in its financial statements. On an ongoing basis, theplan intends to base the measurement of the net pension liability on an actuarial valuation performed as of theend of the prior fiscal year, updated to the end of the current fiscal year. In the initial year of implementation (thepension plan’s fiscal year ended June 30, 2014), can the results of the June 30, 2013 actuarial valuation be usedas the basis for determining the total pension liability at both July 1, 2013, and June 30, 2014?

A—Yes. Use of the results of an actuarial valuation as of June 30, 2013, for purposes of determining the totalpension liability as of the pension plan’s June 30, 2014 fiscal year-end would be consistent with the timingrequirements of paragraph 37 of Statement 67. That is, the actuarial valuation date would be within 24 monthsof the pension plan’s fiscal year-end. Therefore, the same actuarial valuation can be used to determine the totalpension liability as of the beginning and as of the end of the initial year of implementation, provided that amountsreported as of the end of the plan’s fiscal year are updated to June 30, 2014, to include the significant effectsof transactions and other events that occur during the year.

99. Q—A single-employer pension plan intends to have annual actuarial valuations for purposes of determining thenet pension liability information required by Statement 67 to be presented in its financial report. On an ongoingbasis, the plan intends to base the measurement of the net pension liability on an actuarial valuation performedas of the end of its fiscal year. In the initial year of implementation (the pension plan’s fiscal year ended June30, 2014), can the results of the June 30, 2014 actuarial valuation be used as the basis for determining the totalpension liability at both July 1, 2013, and June 30, 2014?

A—Yes. Use of the results of an actuarial valuation as of the plan’s fiscal year-end would be consistent with thetiming requirements of paragraph 37 of Statement 67. Therefore, the same actuarial valuation can be used todetermine the total pension liability as of the beginning and as of the end of the initial year of implementation,provided that the rollback of the amounts to the beginning of the plan’s fiscal year reflect the significant effectsof only transactions and other events that occurred to that date.

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Appendix 1

GLOSSARY

This appendix contains definitions of certain terms as they are used in Statement 67; the terms may have differentmeanings in other contexts.

Actuarial present value of projected benefit paymentsProjected benefit payments discounted to reflect the expected effects of the time value (present value) of moneyand the probabilities of payment.

Actuarial valuationThe determination, as of a point in time (the actuarial valuation date), of the service cost, total pension liability, andrelated actuarial present value of projected benefit payments for pensions performed in conformity with ActuarialStandards of Practice unless otherwise specified by the GASB.

Actuarial valuation dateThe date as of which an actuarial valuation is performed.

Actuarially determined contributionA target or recommended contribution to a defined benefit pension plan for the reporting period, determined inconformity with Actuarial Standards of Practice based on the most recent measurement available when thecontribution for the reporting period was adopted.

Ad hoc cost-of-living adjustments (ad hoc COLAs)Cost-of-living adjustments that require a decision to grant by the authority responsible for making such decisions.

Ad hoc postemployment benefit changesPostemployment benefit changes that require a decision to grant by the authority responsible for making suchdecisions.

Agent multiple-employer defined benefit pension plan (agent pension plan)A multiple-employer defined benefit pension plan in which pension plan assets are pooled for investment purposesbut separate accounts are maintained for each individual employer so that each employer’s share of the pooledassets is legally available to pay the benefits of only its employees.

Allocated insurance contractsContracts with an insurance company under which related payments to the insurance company are currently usedto purchase immediate or deferred annuities for individual plan members. Also may be referred to as annuitycontracts.

Automatic cost-of-living adjustments (automatic COLAs)Cost-of-living adjustments that occur without a requirement for a decision to grant by a responsible authority,including those for which the amounts are determined by reference to a specified experience factor (such as theearnings experience of the pension plan) or to another variable (such as an increase in the consumer price index).

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Automatic postemployment benefit changesPostemployment benefit changes that occur without a requirement for a decision to grant by a responsibleauthority, including those for which the amounts are determined by reference to a specified experience factor (suchas the earnings experience of the pension plan) or to another variable (such as an increase in the consumer priceindex).

Cost-of-living adjustmentsPostemployment benefit changes intended to adjust benefit payments for the effects of inflation.

Cost-sharing multiple-employer defined benefit pension plan (cost-sharing pension plan)A multiple-employer defined benefit pension plan in which the pension obligations to the employees of more thanone employer are pooled and pension plan assets can be used to pay the benefits of the employees of anyemployer that provides pensions through the pension plan.

Covered-employee payrollThe payroll of employees that are provided with pensions through the pension plan.

Deferred retirement option program (DROP)A program that permits a plan member to elect a calculation of benefit payments based on service credits andsalary, as applicable, as of the DROP entry date. The plan member continues to provide service to the employerand is paid for that service by the employer after the DROP entry date; however, the pensions that would havebeen paid to the plan member (if the plan member had retired and not entered the DROP) are credited to anindividual member account within the defined benefit pension plan until the end of the DROP period.

Defined benefit pension plansPension plans that are used to provide defined benefit pensions.

Defined benefit pensionsPensions for which the income or other benefits that the plan member will receive at or after separation fromemployment are defined by the benefit terms. The pensions may be stated as a specified dollar amount or as anamount that is calculated based on one or more factors such as age, years of service, and compensation. (Apension that does not meet the criteria of a defined contribution pension is classified as a defined benefit pensionfor purposes of Statement 67.)

Defined contribution pension plansPension plans that are used to provide defined contribution pensions.

Defined contribution pensionsPensions having terms that (1) provide an individual account for each plan member; (2) define the contributionsthat an employer is required to make (or the credits it is required to provide) to an active plan member’s accountfor periods in which that member renders service; and (3) provide that the pensions a plan member will receive willdepend only on the contributions (or credits) to the plan member’s account, actual earnings on investments ofthose contributions (or credits), and the effects of forfeitures of contributions (or credits) made for other planmembers, as well as pension plan administrative costs, that are allocated to the plan member’s account.

Discount rateThe single rate of return that, when applied to all projected benefit payments, results in an actuarial present value ofprojected benefit payments equal to the total of the following:

1. The actuarial present value of benefit payments projected to be made in future periods in which (a) the amount ofthe pension plan’s fiduciary net position is projected (under the requirements of Statement 67) to be greater than

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the benefit payments that are projected to be made in that period and (b) pension plan assets up to that point areexpected to be invested using a strategy to achieve the long-term expected rate of return, calculated using thelong-term expected rate of return on pension plan investments.

2. The actuarial present value of projected benefit payments not included in (1), calculated using the municipal bondrate.

Entry age actuarial cost methodA method under which the actuarial present value of the projected benefits of each individual included in anactuarial valuation is allocated on a level basis over the earnings or service of the individual between entry age andassumed exit age(s). The portion of this actuarial present value allocated to a valuation year is called the normalcost.1 The portion of this actuarial present value not provided for at a valuation date by the actuarial present valueof future normal costs is called the actuarial accrued liability.2 [This definition is from “Definitions from ASOPs[Actuarial Standards of Practice] and ACGs [Actuarial Compliance Guidlines] of the ASB [Actuarial StandardsBoard] (including those from current exposure drafts) February 2011.” Actuarial Standards Board,http://www.actuarialstandardsboard.org/pdf/definitions.pdf. Accessed on June 25, 2012. Footnotes not part oforiginal definition.]

Money-weighted rate of returnA method of calculating period-by-period returns on pension plan investments that adjusts for the changingamounts actually invested. For purposes of Statement 67, money-weighted rate of return is calculated as theinternal rate of return on pension plan investments, net of pension plan investment expense.

Multiple-employer defined benefit pension planA defined benefit pension plan that is used to provide pensions to the employees of more than one employer.

Net pension liabilityThe liability of employers and nonemployer contributing entities to plan members for benefits provided through adefined benefit pension plan.

Nonemployer contributing entitiesEntities that make contributions to a pension plan that is used to provide pensions to the employees of otherentities. For purposes of Statement 67, plan members are not considered nonemployer contributing entities.

Other postemployment benefits (OPEB)All postemployment benefits other than retirement income (such as death benefits, life insurance, disability, andlong-term care) that are provided separately from a pension plan, as well as postemployment healthcare benefits,regardless of the manner in which they are provided. Other postemployment benefits do not include terminationbenefits.3

Pension plansArrangements through which pensions are determined, assets dedicated for pensions are accumulated andmanaged, and benefits are paid as they come due.

1For purposes of application to the requirements of Statement 67, the term normal cost is the equivalent of service cost.2For purposes of application to the requirements of Statement 67, the term actuarial accrued liability is the equivalent of total pension liability.3The effects of a termination benefit on an employer’s defined benefit obligations for OPEB should be accounted for and reported in conformity withthe requirements for defined benefit OPEB.

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PensionsRetirement income and, if provided through a pension plan, postemployment benefits other than retirement income(such as death benefits, life insurance, and disability benefits). Pensions do not include postemployment health-care benefits and termination benefits.4

Plan membersIndividuals that are covered under the terms of a pension plan. Plan members generally include (1) employees inactive service (active plan members) and (2) terminated employees who have accumulated benefits but are not yetreceiving them and retirees or their beneficiaries currently receiving benefits (inactive plan members).

PostemploymentThe period after employment.

Postemployment benefit changesAdjustments to the pension of an inactive plan member.

Postemployment healthcare benefitsMedical, dental, vision, and other health-related benefits paid subsequent to the termination of employment.

Projected benefit paymentsAll benefits estimated to be payable through the pension plan to current active and inactive plan members as aresult of their past service and their expected future service.

Public employee retirement systemA special-purpose government that administers one or more pension plans; also may administer other types ofemployee benefit plans, including postemployment healthcare plans and deferred compensation plans.

Real rate of returnThe rate of return on an investment after adjustment to eliminate inflation.

Service costThe portion of the actuarial present value of projected benefit payments that is attributed to a valuation year.

Single-employer defined benefit pension plan (single-employer pension plan)A defined benefit pension plan that is used to provide pensions to employees of only one employer.

Stand-alone pension plan financial reportA report that contains the financial statements of a pension plan and is issued by the pension plan or by the publicemployee retirement system that administers the plan. The term stand-alone is used to distinguish such a financialreport from pension plan financial statements that are included as a pension trust fund of another government.

Termination benefitsInducements offered by employers to active employees to hasten the termination of services, or payments madein consequence of the early termination of services. Termination benefits include early retirement incentives,severance benefits, and other termination-related benefits.

4The effects of a termination benefit on an employer’s or governmental nonemployer contributing entity’s defined benefit obligations for pensionsshould be accounted for and reported in conformity with the requirements for defined benefit pensions.

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Total pension liabilityThe portion of the actuarial present value of projected benefit payments that is attributed to past periods of memberservice in conformity with the requirements of Statement 67.

Unallocated insurance contractsContracts with an insurance company under which payments to the insurance company are accumulated in anunallocated pool or pooled account (not allocated to specific plan members) to be used either directly or throughthe purchase of annuities to meet benefit payments when plan members retire. Monies held by the insurancecompany under an unallocated contract may be withdrawn and otherwise invested.

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Appendix 2

INTRODUCTION, STANDARDS, AND EFFECTIVE DATE AND TRANSITION SECTIONSFROM STATEMENT 67

Introduction

1. The objective of this Statement is to improve the usefulness of pension information included in the general purposeexternal financial reports (financial reports) of state and local governmental pension plans1 for making decisions andassessing accountability.

2. Statement No. 68, Accounting and Financial Reporting for Pensions, establishes standards for governmentalemployer recognition, measurement, and presentation of information about pensions provided through pensionplans that are within the scope of this Statement. It also establishes requirements for reporting information aboutpension-related financial support provided by entities that make contributions to pension plans that are used toprovide pensions to the employees of other entities. The two Statements are closely related in some areas, andcertain provisions of this Statement refer to Statement 68.

Standards of Governmental Accounting and Financial Reporting

Scope and Applicability of This Statement

3. This Statement establishes financial reporting standards for state and local governmental pension plans—definedbenefit pension plans and defined contribution pension plans—that are administered through trusts or equivalentarrangements (hereafter jointly referred to as trusts) in which:

a. Contributions from employers2 and nonemployer contributing entities to the pension plan and earnings onthose contributions are irrevocable.3

b. Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms.4

c. Pension plan assets are legally protected from the creditors of employers, nonemployer contributing entities, andthe pension plan administrator. If the plan is a defined benefit pension plan, plan assets also are legally protectedfrom creditors of the plan members.

4. This Statement focuses on provisions specific to pension plans. Pension plans should continue to follow all otheraccounting and financial reporting requirements applicable to the transactions and other events reported in their basicfinancial statements, including notes to those statements, and required supplementary information.

1Terms that are defined in the Glossary are shown in boldface type the first time they appear in this Statement.2In some circumstances, contributions are made by the employer to satisfy plan member contribution requirements. If the contribution amounts arerecognized by the employer as salary expense, those contributions should be classified as plan member contributions for purposes of this Statement.Otherwise, those contributions should be classified as employer contributions.3For purposes of this Statement, refunds to an employer or nonemployer contributing entity of the nonvested portion of its contributions that areforfeited by plan members in a defined contribution pension plan are consistent with this criterion.4For purposes of this Statement, the use of pension plan assets to pay pension plan administrative costs or to refund plan member contributions inaccordance with benefit terms is consistent with this criterion.

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5. The provisions of this Statement apply to state and local governmental pension plans. The requirements applywhether (a) the pension plan’s financial statements are included in a separate financial report issued by the pensionplan or by the public employee retirement system that administers the pension plan (stand-alone pension planfinancial report) or (b) the pension plan is included as a pension trust fund of another government.

6. As used in this Statement, the term pensions includes the following:

a. Retirement incomeb. Postemployment benefits other than retirement income (such as death benefits, life insurance, and disability

benefits) that are provided through a pension plan.

Pensions do not include postemployment healthcare benefits and termination benefits.5 When postemploymentbenefits other than retirement income are provided separately from a pension plan, they are classified as otherpostemployment benefits (OPEB),6 and the plans through which those benefits are provided should be accountedfor and reported as OPEB plans. For financial reporting purposes, assets accumulated and managed for the paymentof postemployment healthcare benefits should be accounted for and reported as part of an OPEB plan.

7. Defined benefit pensions are pensions for which the income or other benefits that the plan member will receiveat or after separation from employment are defined by the benefit terms. The pensions may be stated as a specifieddollar amount or as an amount that is calculated based on one or more factors such as age, years of service, andcompensation. Defined contribution pensions are pensions having terms that:

a. Provide an individual account for each plan memberb. Define the contributions that an employer is required to make (or credits that it is required to provide) to an active

plan member’s account for periods in which that member renders servicec. Provide that the pensions a plan member will receive will depend only on the contributions (or credits) to the plan

member’s account, actual earnings on investments of those contributions (or credits), and the effects of forfeituresof contributions (or credits) made for other plan members, as well as pension plan administrative costs, that areallocated to the plan member’s account.

If the pensions to be provided are a function of factors other than those identified in (c), above, the pension planthrough which the pensions are provided should be classified as a defined benefit pension plan. Otherwise, thepension plan should be classified as a defined contribution pension plan.

8. Defined benefit pension plans are classified according to (a) the number of employers whose employees areprovided with pensions through the pension plan and (b) whether pension obligations and pension plan assets areshared. For purposes of this classification, a primary government and its component units are considered to be oneemployer. If a defined benefit pension plan is used to provide pensions to the employees of only one employer, thepension plan should be classified for financial reporting purposes as a single-employer defined benefit pensionplan (single-employer pension plan). Single-employer pension plans should apply the measurement and recog-nition requirements of paragraphs 14−29 of this Statement, as well as the requirements for note disclosures andrequired supplementary information in paragraphs 30−32 and 34−46.

5Termination benefits primarily are addressed in Statement No. 47, Accounting for Termination Benefits, as amended. However, the effects of atermination benefit on the defined benefit pension liabilities of an employer or governmental nonemployer contributing entity should be included inmeasures of those pension liabilities that are required by this Statement.6Financial reporting for OPEB plans primarily is addressed in Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other ThanPension Plans, as amended.

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9. If a defined benefit pension plan is used to provide pensions to the employees of more than one employer, thepension plan is classified for financial reporting purposes as a multiple-employer defined benefit pension plan. Ifthe assets of a multiple-employer defined benefit pension plan are pooled for investment purposes but separateaccounts are maintained for each individual employer so that each employer’s share of the pooled assets is legallyavailable to pay the benefits of only its employees, the pension plan should be classified as an agent multiple-employer defined benefit pension plan (agent pension plan). Agent pension plans should apply the measurementand recognition requirements of paragraphs 14−29 of this Statement, as well as the requirements for note disclosuresand required supplementary information in paragraphs 30, 33, and 34. For agent pension plans, the provisions of thisStatement apply at the aggregate plan level for each agent pension plan administered.

10. In a multiple-employer defined benefit pension plan, if the pension obligations to the employees of more than oneemployer are pooled and pension plan assets can be used to pay the benefits of the employees of any employer thatprovides pensions through the pension plan, the pension plan is considered to be a cost-sharing multiple-employerdefined benefit pension plan (cost-sharing pension plan). Cost-sharing pension plans should apply the meas-urement and recognition requirements of paragraphs 14−29 of this Statement, as well as the requirements for notedisclosures and required supplementary information in paragraphs 30−32 and 34−46.

11. In many cases, a state or local government acts as the fiduciary entrusted with administering one or more pensionplans. Some governments also administer other types of plans, including deferred compensation plans and OPEBplans. If the financial report of a public employee retirement system or other government includes more than onepension plan that is within the scope of this Statement, the provisions of this Statement should be applied separatelyto each such pension plan administered. Considerations relevant to the determination of the number of defined benefitpension plans administered are discussed in paragraph 13.

12. This Statement amends Statement No. 14, The Financial Reporting Entity, paragraph 81; Statement No. 25,Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, para-graph 8; Statement No. 28, Accounting and Financial Reporting for Securities Lending Transactions, footnotes 7 and12; Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools,paragraph 4; Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for Stateand Local Governments, paragraphs 107−109, 129, and 140, and footnotes 43, 44, 63, and 64; Statement No. 44,Economic Condition Reporting: The Statistical Section, footnote 4; Statement No. 50, Pension Disclosures,paragraph 3; and Interpretation No. 3, Financial Reporting for Reverse Repurchase Agreements, paragraph 5 andfootnote 2.

Defined Benefit Pension Plans

Number of Pension Plans

13. If, on an ongoing basis, all assets accumulated in a defined benefit pension plan for the payment of benefits maylegally be used to pay benefits (including refunds of plan member contributions) to any of the plan members, the totalassets should be reported as assets of one defined benefit pension plan even if administrative policy requires thatseparate reserves, funds, or accounts for specific groups of plan members, employers, or types of benefits bemaintained (for example, a reserve for plan member contributions, a reserve for disability benefits, or separateaccounts for the contributions of state government versus local government employers) or separate actuarialvaluations are performed for different classes of plan members (for example, general employees and public safetyemployees) or different groups of plan members because different contribution rates may apply for each class orgroup depending on the applicable benefit structures, benefit formulas, or other factors. A separate defined benefit

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pension plan should be reported for a portion of the total assets, even if the assets are pooled with other assets forinvestment purposes, if that portion of assets meets both of the following criteria:

a. The portion of assets is accumulated solely for the payment of benefits to certain classes or groups of planmembers or to plan members who are the active or inactive employees of certain entities (for example, stategovernment employees).

b. The portion of assets may not legally be used to pay benefits to other classes or groups of plan members or otherentities’ plan members (for example, local government employees).

Financial Statements

14. A defined benefit pension plan should present the following financial statements, prepared on the accrual basisof accounting:

a. A statement of fiduciary net position, which includes information about assets, deferred outflows of resources,liabilities, deferred inflows of resources, and fiduciary net position, as applicable, as of the end of the pension plan’sreporting period

b. A statement of changes in fiduciary net position, which includes information about the additions to, deductions from,and net increase (or decrease) in fiduciary net position for the pension plan’s reporting period.

Statement of fiduciary net position

Assets

15. Pension plan assets should be subdivided into (a) the major categories of assets held (for example, cash andcash equivalents, receivables, investments, and assets used in pension plan operations) and (b) the principalcomponents of the receivables and investments categories.

Receivables

16. Pension plan receivables generally are short term and consist of contributions due as of the end of the reportingperiod from employers, nonemployer contributing entities, and plan members, and interest and dividends oninvestments. Amounts recognized as receivables for contributions should include only those due pursuant to legalrequirements.

17. Receivables for contributions that are payable to the pension plan more than one year after the end of thereporting period (for example, pursuant to installment contracts) should be recognized in full in the period thereceivable arises. If a receivable is recognized at its discounted present value, interest should be accrued using theeffective interest method, unless use of the straight-line method would not produce significantly different results.

Investments

18. Purchases and sales of investments should be recorded on a trade-date basis. Unless otherwise provided for inthis paragraph, pension plan investments—whether equity or debt securities, real estate, investment derivativeinstruments, or other investments—should be reported at their fair value at the end of the pension plan’s reportingperiod. The fair value of an investment is the amount that the pension plan could reasonably expect to receive in acurrent sale between a willing buyer and a willing seller—that is, other than in a forced or liquidation sale.7 Fair valueshould be measured by the market price if there is an active market for the investment. If such prices are not available,fair value should be estimated. The fair value of open-end mutual funds, external investment pools, and interest-

7The fair value of an investment should reflect brokerage commissions and other costs normally incurred in a sale, if determinable.

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earning investment contracts should be determined as provided in Statement 31, paragraphs 7−11, as amended, andin Statement No. 59, Financial Instruments Omnibus, paragraph 5. Investments in life insurance should be reportedat cash surrender value. Unallocated insurance contracts should be reported as interest-earning investmentcontracts according to the provisions of Statement 31, paragraph 8. Synthetic guaranteed investment contracts thatare fully benefit responsive (as defined in Statement No. 53, Accounting and Financial Reporting for DerivativeInstruments, paragraph 67) should be reported at contract value.

19. Allocated insurance contracts should be excluded from pension plan assets if (a) the contract irrevocablytransfers to the insurer the responsibility for providing the benefits, (b) all required payments to acquire the contractshave been made, and (c) the likelihood is remote that the employer or the pension plan will be required to makeadditional payments to satisfy the benefit payments covered by the contract.

Liabilities

20. Pension plan liabilities generally consist of benefits (including refunds of plan member contributions) due to planmembers and accrued investment and administrative expenses. Pension plan liabilities for benefits should berecognized when the benefits are currently due and payable in accordance with the benefit terms. Benefits payablefrom allocated insurance contracts excluded from pension plan assets in conformity with paragraph 19 should beexcluded from pension plan liabilities.

Fiduciary net position

21. Assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources at the end of thepension plan’s reporting period should be reported as net position restricted for pensions.

Statement of changes in fiduciary net position

Additions

22. The additions section of the statement of changes in fiduciary net position should include separate display of thefollowing, if applicable:

a. Contributions from employersb. Contributions from nonemployer contributing entities (for example, state government contributions to a local

government pension plan)c. Contributions from plan members, including those transmitted by the employersd. Net investment income, including separate display of (1) investment income (see paragraphs 23−25) and (2)

investment expense, including investment management and custodial fees and all other significant investment-related costs (see paragraph 26).

Investment Income

23. For purposes of this Statement, investment income includes (a) the net increase (decrease) in the fair value ofpension plan investments and (b) interest income, dividend income, and other income not included in (a). Components(a) and (b) of investment income may be separately displayed or combined and reported as one amount.

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24. The net increase (decrease) in the fair value of investments should include realized gains and losses oninvestments that were both bought and sold during the period. Realized and unrealized gains and losses should notbe separately displayed in the financial statements. Realized gains and losses, computed as the difference betweenthe proceeds of sale and the original cost of the investments sold, may be disclosed in notes to financial statements.8

The disclosure also should state:

a. The calculation of realized gains and losses is independent of the calculation of the net change in the fair value ofpension plan investments.

b. Realized gains and losses on investments that had been held in more than one reporting period and sold in thecurrent period were included as a change in the fair value reported in the prior period(s) and the current period.

25. Consistent with reporting investments at fair value, interest income should be reported at the stated interest rate.Any premiums or discounts on debt securities should not be amortized.

Investment Expense

26. Investment-related costs should be reported as investment expense if they are separable from (a) investmentincome and (b) the administrative expense of the pension plan.

Deductions

27. The deductions section of the statement of changes in fiduciary net position should separately display, at aminimum, (a) benefit payments to plan members (including refunds of plan member contributions) and (b) totaladministrative expense.

28. Amounts paid by the pension plan to an insurance company pursuant to an allocated insurance contract that isexcluded from pension plan assets in conformity with paragraph 19, including purchases of annuities with amountsallocated from existing investments with the insurance company, should be included in amounts recognized asbenefits paid. Dividends from an allocated insurance contract should be recognized as a reduction of benefit paymentsrecognized in the period. Benefit payments should not include benefits paid by an insurance company in accordancewith such a contract.

Net increase (decrease) in fiduciary net position

29. The difference between total additions and total deductions presented in the statement of changes in fiduciary netposition should be reported as the net increase (or decrease) in net position.

Notes to Financial Statements9

30. The following should be disclosed in notes to financial statements, as applicable:

a. Plan description:(1) The name of the pension plan, identification of the public employee retirement system or other entity that

8The disclosure of default losses and recoveries on reverse repurchase agreements and securities lending transactions, as provided by paragraph 80of Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, andparagraph 15 of Statement 28, respectively, does not constitute a reporting of realized losses that under the provisions of this Statement would requirereporting of all realized gains and losses for the year.9The notes to financial statements of a defined benefit pension plan should include all disclosures required by paragraphs 30 and 31, as applicable,when the financial statements are presented (a) in a stand-alone pension plan financial report or (b) solely in the financial report of another government(as a pension trust fund). If (a) a defined benefit pension plan is included in the financial report of a government that applies the requirements ofStatement 68 for benefits provided through the pension plan and (b) similar information is required by this Statement and Statement 68, thegovernment should present the disclosures in a manner that avoids unnecessary duplication.

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administers the pension plan, and identification of the pension plan as a single-employer, agent, or cost-sharing pension plan.

(2) The number of participating employers (if the pension plan is a multiple-employer pension plan) and thenumber of nonemployer contributing entities, if any.

(3) Information regarding the pension plan’s board and its composition (for example, the number of trustees bysource of selection or the types of constituency or credentials applicable to selection).

(4) Classes of plan members covered and the number of plan members, separately identifying numbers of thefollowing:(a) Inactive plan members (or their beneficiaries) currently receiving benefits(b) Inactive plan members entitled to but not yet receiving benefits(c) Active plan members.If the pension plan is closed to new entrants, that fact should be disclosed.

(5) The authority under which benefit terms are established or may be amended and the types of benefits providedthrough the pension plan. If the pension plan or the entity that administers the pension plan has the authorityto establish or amend benefit terms, a brief description should be provided of the benefit terms, including thekey elements of the pension formulas and the terms or policies, if any, with respect to automatic postemploy-ment benefit changes, including automatic cost-of-living adjustments (automatic COLAs), and ad hocpost-employment benefit changes, including ad hoc cost-of-living adjustments (ad hoc COLAs).

(6) A brief description of contribution requirements, including (a) identification of the authority under whichcontribution requirements of employers, nonemployer contributing entities, if any, and plan members areestablished or may be amended and (b) the contribution rates (in dollars or as a percentage of covered payroll)of those entities for the reporting period. If the pension plan or the entity that administers the pension plan hasthe authority to establish or amend contribution requirements, disclose the basis for determining contributions(for example, statute, contract, an actuarial basis, or some other manner).

b. Pension plan investments:(1) Investment policies, including:

(a) Procedures and authority for establishing and amending investment policy decisions(b) Policies pertaining to asset allocation(c) Description of significant investment policy changes during the reporting period.

(2) A brief description of how the fair value of investments is determined, including the methods and significantassumptions used to estimate the fair value of investments if that fair value is based on other than quotedmarket prices.

(3) Identification of investments (other than those issued or explicitly guaranteed by the U.S. government) in anyone organization that represent 5 percent or more of the pension plan’s fiduciary net position.

(4) The annual money-weighted rate of return on pension plan investments calculated as the internal rate ofreturn on pension plan investments, net of pension plan investment expense, and an explanation that amoney-weighted rate of return expresses investment performance, net of pension plan investment expense,adjusted for the changing amounts actually invested. Pension plan investment expense should be measuredon the accrual basis of accounting. Inputs to the internal rate of return calculation should be determined at leastmonthly. The use of more frequently determined inputs is encouraged.

c. Receivables—The terms of any long-term contracts for contributions to the pension plan between (1) an employeror nonemployer contributing entity and (2) the pension plan, and the balances outstanding on any such long-termcontracts at the end of the pension plan’s reporting period.

d. Allocated insurance contracts excluded from pension plan assets:(1) The amount reported in benefit payments in the current period that is attributable to the purchase of allocated

insurance contracts(2) A brief description of the pensions for which allocated insurance contracts were purchased in the current period(3) The fact that the obligation for the payment of benefits covered by allocated insurance contracts has been

transferred to one or more insurance companies.

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e. Reserves—In circumstances in which there is a policy of setting aside, for purposes such as benefit increases orreduced employer contributions, a portion of the pension plan’s fiduciary net position that otherwise would beavailable for existing pensions or for pension plan administration:(1) A description of the policy related to such reserves(2) The authority under which the policy was established and may be amended(3) The purposes for and conditions under which the reserves are required or permitted to be used(4) The balances of the reserves.

f. Deferred retirement option program (DROP) balances—If a pension plan includes terms that permit a planmember to be credited for benefit payments into an individual member account within the pension plan whilecontinuing to provide services to the employer and to be paid a salary:(1) A description of the DROP terms(2) The balance of the amounts held by the pension plan pursuant to the DROP.

Disclosures specific to single-employer and cost-sharing pension plans

31. In addition to the information required by paragraph 30, the information identified in subparagraphs (a)−(c),below, should be disclosed in notes to financial statements. All information should be measured as of the pensionplan’s most recent fiscal year-end. Information about cost-sharing pension plans should be presented for the pensionplan as a whole.

a. The components of the liability of the employers and nonemployer contributing entities to plan members forbenefits provided through the pension plan (net pension liability),10 calculated in conformity with the require-ments of paragraphs 35−46:(1) The total pension liability(2) The pension plan’s fiduciary net position(3) The net pension liability(4) The pension plan’s fiduciary net position as a percentage of the total pension liability.

b. Significant assumptions and other inputs used to measure the total pension liability, including assumptions aboutinflation, salary changes, and ad hoc postemployment benefit changes (including ad hoc COLAs). With regard tomortality assumptions, the source of the assumptions (for example, the published tables on which the assumptionis based or that the assumptions are based on a study of the experience of the covered group) should be disclosed.The dates of experience studies on which significant assumptions are based also should be disclosed. If differentrates are assumed for different periods, information should be disclosed about what rates are applied to thedifferent periods of the measurement.(1) The following information should be disclosed about the discount rate:

(a) The discount rate applied in the measurement of the total pension liability and the change in the discountrate since the pension plan’s prior fiscal year-end, if any

(b) Assumptions made about projected cash flows into and out of the pension plan, such as contributions fromemployers, nonemployer contributing entities, and plan members

(c) The long-term expected rate of return on pension plan investments and a description of how it wasdetermined, including significant methods and assumptions used for that purpose

(d) If the discount rate incorporates a municipal bond rate, the municipal bond rate used and the source of thatrate

(e) The periods of projected benefit payments to which the long-term expected rate of return and, if used,the municipal bond rate applied to determine the discount rate

(f) The assumed asset allocation of the pension plan’s portfolio, the long-term expected real rate of return

10In this Statement, unless otherwise indicated, references to a net pension liability also apply to the situation in which the pension plan’s fiduciarynet position exceeds the total pension liability (see paragraph 36), resulting in a net pension asset. In Statement 68, the net pension liability for benefitsprovided through (a) a cost-sharing pension plan or (b) a single-employer or agent pension plan in certain circumstances in which a nonemployer entityhas a legal requirement to contribute to the plan is referred to as the collective net pension liability.

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for each major asset class, and whether the expected rates of return are presented as arithmetic orgeometric means, if not otherwise disclosed

(g) Measures of the net pension liability calculated using (i) a discount rate that is 1-percentage-point higherthan that required by paragraph 40 and (ii) a discount rate that is 1-percentage-point lower than thatrequired by paragraph 40.

c. The date of the actuarial valuation on which the total pension liability is based and, if applicable, the fact thatupdate procedures were used to roll forward the total pension liability to the pension plan’s fiscal year-end.

Required Supplementary Information11

Single-employer and cost-sharing pension plans

32. Schedules of required supplementary information that include the information indicated in subparagraphs (a)−(d),below, should be presented. The information in subparagraphs (a) and (b) may be presented in a single schedule.Information for each year should be measured as of the pension plan’s most recent fiscal year-end. Information aboutcost-sharing pension plans should be presented for the pension plan as a whole.

a. A 10-year schedule of changes in the net pension liability, presenting for each year (1) the beginning and endingbalances of the total pension liability, the pension plan’s fiduciary net position, and the net pension liability,calculated in conformity with paragraphs 35−46, and (2) the effects on those items during the year of the following,as applicable:(1) Service cost(2) Interest on the total pension liability(3) Changes of benefit terms(4) Differences between expected and actual experience with regard to economic or demographic factors in the

measurement of the total pension liability(5) Changes of assumptions about future economic or demographic factors or of other inputs(6) Contributions from employers(7) Contributions from nonemployer contributing entities(8) Contributions from plan members(9) Pension plan net investment income

(10) Benefit payments, including refunds of plan member contributions(11) Pension plan administrative expense(12) Other changes, separately identified if individually significant.

b. A 10-year schedule presenting the following for each year:(1) The total pension liability(2) The pension plan’s fiduciary net position(3) The net pension liability(4) The pension plan’s fiduciary net position as a percentage of the total pension liability(5) The covered-employee payroll(6) The net pension liability as a percentage of covered-employee payroll.

c. A 10-year schedule presenting for each year the information indicated in subparagraphs (1)−(6), below, if anactuarially determined contribution is calculated for employers or nonemployer contributing entities. Theschedule should identify whether the information relates to the employers, nonemployer contributing entities, orboth.(1) The actuarially determined contributions of employers or nonemployer contributing entities. For purposes of

11Required supplementary information presented by a defined benefit pension plan should include all information required by paragraphs 32−34, asapplicable, when the financial statements are presented (a) in a stand-alone pension plan financial report or (b) solely in the financial report of anothergovernment (as a pension trust fund). If (a) a defined benefit pension plan is included in the financial report of a government that applies therequirements of Statement 68 for benefits provided through the pension plan and (b) similar information is required by this Statement and State-ment 68, the government should present the information in a manner that avoids unnecessary duplication.

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this schedule, actuarially determined contributions should exclude amounts, if any, to separately financespecific liabilities of an individual employer or nonemployer contributing entity to the pension plan.12

(2) For cost-sharing pension plans, the contractually required contribution of employers or nonemployer contrib-uting entities, if different from (1). For purposes of this schedule, contractually required contributions shouldexclude amounts, if any, to separately finance specific liabilities of an individual employer or nonemployercontributing entity to the pension plan.

(3) The amount of contributions recognized during the fiscal year by the pension plan in relation to the actuariallydetermined contribution in (1). For purposes of this schedule, contributions should include only amountsrecognized as additions to the pension plan’s fiduciary net position resulting from cash contributions and fromcontributions recognized by the pension plan as current receivables.

(4) The difference between the actuarially determined contribution in (1) and the amount of contributionsrecognized by the pension plan in relation to the actuarially determined contribution in (3).

(5) The covered-employee payroll.(6) The amounts of contributions recognized by the pension plan in relation to the actuarially determined

contribution in (3) as a percentage of covered-employee payroll in (5).d. A 10-year schedule presenting for each fiscal year the annual money-weighted rate of return on pension plan

investments calculated as required by paragraph 30b(4).

Agent pension plans

33. A 10-year schedule presenting for each fiscal year the annual money-weighted rate of return on pension planinvestments calculated as required by paragraph 30b(4) should be presented in required supplementary information.

Notes to the required schedules

34. Significant methods and assumptions used in calculating the actuarially determined contributions, if any, shouldbe presented as notes to the schedule required by paragraph 32c. In addition, for each of the schedules required byparagraphs 32 or 33, information should be presented about factors that significantly affect trends in the amountsreported (for example, changes of benefit terms, changes in the size or composition of the population covered by thebenefit terms, or the use of different assumptions). (The amounts presented for prior years should not be restated forthe effects of changes—for example, changes of benefit terms or changes of assumptions—that occurred subse-quent to the end of the fiscal year for which the information is reported.)

Measurement of the Net Pension Liability13

35. The net pension liability should be measured as the total pension liability (determined in conformity withparagraphs 36−46), net of the pension plan’s fiduciary net position. The net pension liability should be measured asof the pension plan’s most recent fiscal year-end.

Total pension liability

36. The total pension liability is the portion of the actuarial present value of projected benefit payments that isattributed to past periods of plan member service in conformity with the requirements of paragraphs 37−46.

12Examples of separately financed liabilities to the pension plan include long-term receivables recognized for contractually deferred contributions withseparate payment schedules, and cash receipts or long-term receivables for amounts assessed to an individual employer upon joining a multiple-employer pension plan or for increases in the total pension liability for changes of benefit terms specific to an employer in a multiple-employer pensionplan.13Statement 68 includes similar requirements for measuring the total pension liability.

44

Timing and frequency of actuarial valuations

37. The total pension liability should be determined by (a) an actuarial valuation as of the pension plan’s most recentfiscal year-end or (b) the use of update procedures to roll forward to the pension plan’s most recent fiscal year-endamounts from an actuarial valuation as of a date no more than 24 months earlier than the pension plan’s most recentfiscal year-end. If update procedures are used and significant changes occur between the actuarial valuation dateand the pension plan’s fiscal year-end, professional judgment should be used to determine the extent of proceduresneeded to roll forward the measurement from the actuarial valuation to the pension plan’s fiscal year-end, andconsideration should be given to whether a new actuarial valuation is needed. For purposes of this determination, theeffects of changes in the discount rate resulting from changes in the pension plan’s fiduciary net position or fromchanges in the municipal bond rate, if applicable (see paragraphs 40−45), should be among the factors evaluated. Forfinancial reporting purposes, an actuarial valuation of the total pension liability should be performed at least biennially.More frequent actuarial valuations are encouraged.

Selection of assumptions

38. Unless otherwise specified by this Statement, the selection of all assumptions used in determining the totalpension liability should be made in conformity with Actuarial Standards of Practice issued by the Actuarial StandardsBoard. The pension plan, employers, and, if any, governmental nonemployer contributing entities that makecontributions to the pension plan should use the same assumptions when measuring similar or related pensioninformation.

Projection of benefit payments

39. Projected benefit payments should include all benefits to be provided to current active and inactive plan membersthrough the pension plan in accordance with the benefit terms and any additional legal agreements to provide benefitsthat are in force at the pension plan’s fiscal year-end. Projected benefit payments should include the effects ofautomatic postemployment benefit changes, including automatic COLAs. In addition, projected benefit paymentsshould include the effects of (a) projected ad hoc postemployment benefit changes, including ad hoc COLAs, to theextent that they are considered to be substantively automatic;14 (b) projected salary changes (in circumstances inwhich the pension formula incorporates future compensation levels); and (c) projected service credits (both indetermining a plan member’s probable eligibility for benefits and in the projection of benefit payments in circum-stances in which the pension formula incorporates years of service). Benefit payments to be provided by means ofan allocated insurance contract excluded from pension plan assets in conformity with paragraph 19 should beexcluded from projected benefit payments.

Discount rate

40. The discount rate should be the single rate that reflects the following:

a. The long-term expected rate of return on pension plan investments that are expected to be used to finance thepayment of benefits, to the extent that (1) the pension plan’s fiduciary net position is projected (in conformity withparagraphs 41−43) to be sufficient to make projected benefit payments (determined in conformity with para-graph 39) and (2) pension plan assets are expected to be invested using a strategy to achieve that return

b. A yield or index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aaor higher (or equivalent quality on another rating scale), to the extent that the conditions in (a) are not met.

14Considerations that might be relevant to determining whether such changes are substantively automatic include the historical pattern of grantingthe changes, the consistency in the amounts of the changes or in the amounts of the changes relative to a defined cost-of-living or inflation index, andwhether there is evidence to conclude that changes might not continue to be granted in the future despite what might otherwise be a pattern that wouldindicate such changes are substantively automatic.

45

Comparing Projections of the Pension Plan’s Fiduciary Net Position to Projected Benefit Payments

41. For purposes of applying paragraph 40, the amount of the pension plan’s projected fiduciary net position and theamount of projected benefit payments should be compared in each period of projected benefit payments. Projectionsof the pension plan’s fiduciary net position should incorporate all cash flows for contributions from employers andnonemployer contributing entities, if any, intended to finance benefits of current active and inactive plan members(status at the pension plan’s fiscal year-end) and all cash flows for contributions from current active plan members.It should not include (a) cash flows for contributions from employers or nonemployer contributing entities intended tofinance the service costs of future plan members or (b) cash flows for contributions from future plan members, unlessthose contributions are projected to exceed service costs for those plan members. In each period, contributions fromemployers and nonemployer contributing entities should be considered to apply, first, to service costs of planmembers in the period and, second, to past service costs, unless the effective pension plan terms related tocontributions indicate that a different relationship between contributions to the pension plan from nonemployercontributing entities and service costs should be applied. Member contributions should be considered to be appliedto service costs before contributions from employers and nonemployer contributing entities.

42. Professional judgment should be applied to project cash flows for contributions from employers and nonemployercontributing entities in circumstances in which (a) those contribution amounts are established by statute or contractor (b) a formal, written policy related to those contributions exists. Application of professional judgment shouldconsider the most recent five-year contribution history of the employers and nonemployer contributing entities as akey indicator of future contributions from those sources and should reflect all other known events and conditions. Incircumstances other than those described in (a) and (b), the amount of projected cash flows for contributions fromemployers and nonemployer contributing entities should be limited to an average of contributions from those sourcesover the most recent five-year period and may be modified based on consideration of subsequent events. For thispurpose, the basis for the average (for example, percentage of covered payroll contributed or percentage ofactuarially determined contributions made) should be a matter of professional judgment.

43. If the evaluations required by paragraph 41 can be made with sufficient reliability without a separate projectionof cash flows into and out of the pension plan, alternative methods may be applied in making the evaluations.

Calculating the Discount Rate

44. For each future period, if the amount of the pension plan’s fiduciary net position is projected to be greater thanor equal to the benefit payments that are projected to be made in that period and pension plan assets up to that pointare expected to be invested using a strategy to achieve the long-term expected rate of return, the actuarial presentvalue of benefit payments projected to be made in the period should be determined using the long-term expected rateof return on those investments. The long-term expected rate of return should be based on the nature and mix ofcurrent and expected pension plan investments over a period representative of the expected length of time between(a) the point at which a plan member begins to provide service to the employer and (b) the point at which all benefitsto the plan member have been paid. For this purpose, the long-term expected rate of return should be determined netof pension plan investment expense but without reduction for pension plan administrative expense. The municipalbond rate discussed in paragraph 40 should be used to calculate the actuarial present value of all other benefitpayments.

45. For purposes of this Statement, the discount rate is the single rate of return that, when applied to all projectedbenefit payments, results in an actuarial present value of projected benefit payments equal to the total of the actuarialpresent values determined in conformity with paragraph 44.

46

Attribution of the actuarial present value of projected benefit payments to periods

46. The entry age actuarial cost method should be used to attribute the actuarial present value of projected benefitpayments of each plan member to periods in conformity with the following:

a. Attribution should be made on an individual plan-member-by-plan-member basis.b. Each plan member’s service costs should be level as a percentage of that member’s projected pay. For purposes

of this calculation, if a member does not have projected pay, the projected inflation rate should be used in placeof the projected rate of change in salary.

c. The beginning of the attribution period should be the first period in which the member’s service accrues pensionsunder the benefit terms, notwithstanding vesting or other similar terms.

d. The service costs of all pensions should be attributed through all assumed exit ages, through retirement. In pensionplans in which the benefit terms include a DROP, for purposes of this Statement, the date of entry into the DROPshould be considered to be the plan member’s retirement date.

e. Each plan member’s service costs should be determined based on the same benefit terms reflected in thatmember’s actuarial present value of projected benefit payments.

Defined Contribution Pension Plans

47. The following information should be disclosed in notes to financial statements:15

a. Identification of the pension plan as a defined contribution pension planb. Classes of plan members covered (for example, general employees or public safety employees), the number of

plan members, participating employers (if the pension plan is a mulitple-employer pension plan), and, if any,nonemployer contributing entities

c. The authority under which the pension plan is established or may be amended.

Effective Date and Transition

48. This Statement is effective for financial statements for fiscal years beginning after June 15, 2013. Earlierapplication is encouraged.

49. In the first period that this Statement is applied, changes made to comply with this Statement should be treatedas an adjustment of prior periods, and financial statements presented for the periods affected should be restated. Ifrestatement is not practical, the cumulative effect of applying this Statement, if any, should be reported as arestatement of beginning net position for the earliest period restated. In the period this Statement is first applied, thefinancial statements should disclose the nature of any restatement and its effect. Also, the reason for not restating priorperiods presented should be explained.

50. In the fiscal year in which this Statement is first implemented (transition year), the 10-year schedule of informationabout contributions required by paragraph 32c should be presented, if applicable. Pension plans are encouraged, butnot required, to present all years of other required supplementary information retroactively. If retroactive information

15The notes to financial statements of a defined contribution pension plan should include all disclosures required by paragraph 47, as applicable, whenthe financial statements are presented (a) in a stand-alone pension plan financial report or (b) solely in the financial report of another government (asa pension trust fund). If (a) a defined contribution pension plan is included in the financial report of a government that applies the requirements ofStatement 68 for benefits provided through the pension plan and (b) similar information is required by this Statement and Statement 68, thegovernment should present the information in a manner that avoids unnecessary duplication.

47

is not presented for the full 10 years, required supplementary information should be presented for as many years forwhich information measured in conformity with the requirements of this Statement is available in the transition yearand until 10 years of such information is available. The schedules should not include information that is not measuredin conformity with the requirements of this Statement.

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Appendix 3

ILLUSTRATIONS

This appendix illustrates certain requirements of Statement 67. The facts assumed in these examples are illustrativeonly and are not intended to modify or limit the requirements of Statement 67 or to indicate the Board’s endorsementof the policies or practices shown. Disclosures set forth in Statement 67 and in other GASB pronouncements, inaddition to those shown in Illustrations 5 and 6, are required, if applicable. Amounts presented may include roundingdifferences.

Illustration 1—Calculation of a Money-Weighted Rate of Return

Illustration 2—Reconciliation of Amounts Presented in the Statements of Fiduciary Net Position and Changes inFiduciary Net Position to Amounts Used in Determining the Money-Weighted Rate of Return on Pension PlanInvestments

Illustration 3—Calculation of the Discount Rate

Illustration 4—Determination of Certain Amounts to Be Presented in a Pension Plan’s Required SupplementaryInformation Schedule of Contribution-Related Information

Illustration 5—Financial Statements, Note Disclosures, and Required Supplementary Information for a Single-Employer Pension Plan (No Nonemployer Contributing Entities)

Illustration 6—Financial Statements, Note Disclosures, and Required Supplementary Information for a Cost-SharingMultiple-Employer Pension Plan (No Nonemployer Contributing Entities)

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Illustration 1: Calculation of a Money-Weighted Rate of Return

The following illustration depicts the calculation of a money-weighted rate of return on pension plan investments asrequired by paragraph 30b(4) of Statement 67. A money-weighted rate of return considers the changing amountsactually invested during a period and weights the amount of pension plan investments by the proportion of time theyare available to earn a return during that period. The rate of return is then calculated by solving, through an iterativeprocess, for the rate that equates (1) the sum of the weighted external cash flows into and out of pension planinvestments to (2) the ending value of pension plan investments.

In this illustration, the value of pension plan investments at the beginning of the fiscal year is $18,907,442, and thevalue of pension plan investments at the end of the fiscal year is $20,047,797. Inputs (external cash flows) aredetermined on a monthly basis and are assumed to occur at the end of each month. External cash inflows are nettedwith external cash outflows, resulting in a net external cash outflow in each month of this illustration.

The following details the two broad steps of the calculation of the money-weighted rate of return for the period fromJuly 1−June 30.

Step 1:

Step 2:

Solve for rmw such that the ending value of pension plan investments, which is $20,047,797, equals the sum of amountsin column (d). In this illustration, rmw is 7.96 percent.

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Illustration 2: Reconciliation of Amounts Presented in the Statements of FiduciaryNet Position and Changes in Fiduciary Net Position to Amounts Used in Determiningthe Money-Weighted Rate of Return on Pension Plan Investments

This illustration identifies how some of the key components used in calculating a money-weighted rate of return onpension plan investments, as required by paragraph 30b(4) of Statement 67, reconcile with amounts reported in apension plan’s financial statements. These key components include the beginning and ending amounts for pensionplan investments and the net external cash flows into and out of pension plan investments.

Note: For purposes of reconciling to amounts reported in the pension plan’s financial statements in this illustration,the external cash flows are determined in the aggregate for the year. For use in determining the money-weighted rateof return, external cash flows should be determined at least monthly, and use of more frequently determined cashflows for this purpose is encouraged.

In this example, the amounts of pension plan investments and aggregate external cash flows are determined from theamounts in the following pension plan financial statements:

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MUNICIPAL PENSION PLAN

Statement of Fiduciary Net PositionJune 30, 20X2 and 20X1

(Dollar amounts in thousands)

52

MUNICIPAL PENSION PLAN

Statement of Changes in Fiduciary Net Positionfor the Year Ended June 30, 20X2


53

The following schedule identifies the amounts reported in the statement of fiduciary net position that are used indetermining the beginning and ending balances of pension plan investments. Note that for this purpose, pension planinvestments include cash, amounts identified in the investments line item, and other investment-related balances.

Determination of Beginning and Ending Balances of Pension Plan Investments for Purposesof Calculating the Annual Money-Weighted Rate of Return

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The following schedule demonstrates how the aggregate external cash flows reconcile with amounts reported in thepension plan’s financial statements. Note that external cash flows used in determining the money-weighted rate ofreturn on pension plan investments are required to be determined more frequently.

Aggregate External (Noninvestment) Cash Flows

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The following schedule reconciles the amounts of beginning and ending pension plan investments, aggregate externalcash flows, and net investment income, demonstrating that the changes from beginning pension plan investmentsconsist solely of the external cash flows and net investment income.

Reconciliation of Beginning and Ending Balances of Pension Plan Investments,Aggregate External Cash Flows, and Net Investment Income

56

Illustration 3—Calculation of the Discount Rate

The following illustration is an example of the projections and calculations used to determine the discount rate asrequired by paragraphs 40−45 of Statement 67. The discount rate is the single rate that reflects (1) the long-termexpected rate of return on pension plan investments that are expected to be used to finance the payment of benefits,to the extent that the pension plan’s fiduciary net position is projected to be sufficient to make projected benefitpayments and pension plan assets are expected to be invested using a strategy to achieve that return, and (2) a yieldor index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher (orequivalent quality on another scale), to the extent that the conditions for use of the long-term expected rate of returnare not met.

In this illustration, projected cash flows into and out of the pension plan are assumed to be contributions to the pensionplan (Table 1), benefit payments (Table 2), pension plan administrative expense (Table 2), and pension planinvestment earnings (Table 2). These projected cash flows are used to project the pension plan’s fiduciary net positionat the beginning of each period (Table 2). The pension plan’s projected fiduciary net position at the beginning of eachperiod is compared to the amount of benefit payments projected to occur in that period (Table 3). In this illustration,it is assumed that the pension plan’s fiduciary net position is expected to always be invested using a strategy toachieve the long-term expected rate of return on pension plan investments. Consequently, in this illustration, thebenefit payments that are projected to occur in a period are discounted using the long-term expected rate of returnon pension plan investments if the amount of the pension plan’s beginning fiduciary net position is projected to besufficient to make the benefit payments in that period (Table 3, column (f)). In periods in which benefit payments areprojected to be greater than the amount of the pension plan’s fiduciary net position, they are discounted using amunicipal bond rate as required by paragraph 40 of Statement 67 (Table 3, column (g)).

Determining the single rate that is the discount rate for purposes of Statement 67 is an iterative process that involvesthe following steps:

1. A single rate that is between the long-term expected rate of return on pension plan investments and the municipalbond rate used to calculate amounts in Table 3, column (g), is selected.

2. The selected rate is used to calculate the total actuarial present value of all projected benefit payments.3. The total actuarial present value resulting from step 2 is compared to the sum of the actuarial present values

determined in Table 3, columns (f) and (g).4. If the selected rate results in a total actuarial present value greater than the sum of the actuarial present values

determined in columns (f) and (g) in Table 3, a new higher rate is selected. If the total actuarial present value is lessthan the sum of the actuarial present values determined in columns (f) and (g) in Table 3, a new lower rate isselected.

5. Steps 2−4 are repeated until the single rate that results in a total actuarial present value of all projected benefitpayments equal to the sum of the actuarial present values determined in Table 3, columns (f) and (g), isdetermined.

In this illustration, solving for the single rate that satisfies the condition of step 5 results in a discount rate of 5.29percent (rounded). The proof of this calculation is shown in Table 3, column (h).

Facts and Assumptions

The following facts are assumed in this illustration:

a. Total covered-employee payroll increases 4.25 percent per year.b. Active employees (active plan members) are required by statute to contribute 5.00 percent of pay to the pension

plan.

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c. In all years, the employer is required by statute to contribute 13.63 percent of covered-employee payroll to thepension plan. In years 1−10, the employer is required by statute to contribute an additional 3.00 percent ofcovered-employee payroll.

d. Benefit payments are projected as required by paragraph 39 of Statement 67.e. The service cost is 18.63 percent of covered-employee payroll.f. The pension plan’s initial fiduciary net position is $1,241,029.g. Initial pension plan administrative expense is $1,000.h. Total pension plan administrative expense increases 3.00 percent per year and is allocated to current employees

based on the ratio of current employees (current plan members) to total employees (total plan members).i. Contributions, benefit payments, and pension plan administrative expense occur halfway through the year for

purposes of projecting pension plan investment earnings.j. The long-term expected rate of return on pension plan investments is 7.50 percent.k. The tax-exempt, high-quality general obligation municipal bond index rate is 4.00 percent.

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Illustration 4—Determination of Certain Amounts to Be Presented in a Pension Plan’sRequired Supplementary Information Schedule of Contribution-Related Information

The following examples illustrate the determination of certain amounts to be presented in the contribution-relatedschedules that are required by paragraph 32(c) of Statement 67 to be presented in required supplementaryinformation by single-employer and cost-sharing multiple-employer plans if certain conditions are met. Specifically,they illustrate circumstances in which the measure of payroll on which actual contributions are determined differs fromthe measure of payroll on which actuarially determined contribution rates are calculated.

Example A

As a result of an actuarial valuation, both the plan (single-employer plan with the same fiscal year-end as theemployer) and the employer are notified that the actuarially determined contribution for the coming year is 15 percentof covered-employee payroll. The calculation of the actuarially determined contribution rate was based on a projectedcovered-employee payroll of $2.0 million for the year to which the actuarially determined contribution will apply. Theemployer is legally required to contribute to the plan an amount equal to the actuarially determined contribution rateapplied to the actual covered-employee payroll, rather than the projected covered-employee payroll. The actualcovered-employee payroll for the year is $2.1 million. By year-end, the plan has recognized (on the accrual basis)$315,000 of employer contributions (that is, $2,100,000 × 0.15).

To ensure an appropriate comparison of actuarially determined contributions to contributions received (on the accrualbasis), the information in the plan’s schedule of contribution-related information should be on the same measure ofpayroll. In this example, the plan should report $315,000 (the actual covered-employee payroll for the year times theactuarially determined contribution rate) as the actuarially determined contribution for the year. Actual amounts shouldbe equal to those recognized by the pension plan in relation to the actuarially determined contribution (in this case,$315,000). Thus, the amounts presented in the most recent year of the plan’s schedule of contribution-relatedinformation should be the following:

71

Example B

As in Example A, the actuarially determined contribution rate is 15 percent of covered-employee payroll, based on aprojected covered-employee payroll of $2.0 million. The actual covered-employee payroll for the current year is$2.1 million. In contrast to Example A, however, the employer is legally required to contribute to the plan at a statutoryrate of 10 percent of actual covered-employee payroll. Therefore, the employer’s statutorily required contributions forthe year are $210,000 ($2,100,000 × 0.10). This is the amount that the plan recognizes as an addition to fiduciary netposition from employer contributions in its statement of changes in fiduciary net position for the year. The amountspresented in the most recent year of the plan’s schedule of contribution-related information should be the following:

Example C

If in Example B, the employer was required to contribute based on projected covered-employee payroll instead ofactual covered-employee payroll, the amount recognized by the plan as employer contributions in its statement ofchanges in fiduciary net position would be $200,000 ($2,000,000 × 0.10), and the amounts presented in the mostrecent year of the plan’s schedule of contribution-related information should be the following:

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Illustration 5—Financial Statements, Note Disclosures, and Required SupplementaryInformation for a Single-Employer Pension Plan (No Nonemployer ContributingEntities)

[Note: This illustration includes only note disclosures and required supplementary information required by State-ment 67. If the pension plan is included in the financial report of a government that applies the requirements ofStatement No. 68, Accounting and Financial Reporting for Pensions, the pension plan should apply the requirementsof footnotes 9 and 11 of Statement 67, as applicable. The circumstances of this pension plan do not include allcircumstances for which note disclosures and required supplementary information should be presented.]

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COUNTY EMPLOYEES RETIREMENT SYSTEM

County Employees Pension Plan

Statement of Fiduciary Net PositionJune 30, 20X9


74

Statement of Changes in Fiduciary Net Positionfor the Year Ended June 30, 20X9


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Notes to the Financial Statementsfor the Year Ended June 30, 20X9


Summary of Significant Accounting Policies

Method used to value investments. Investments are reported at fair value. Securities traded on a national orinternational exchange are valued at the last reported sales price at current exchange rates. Real estate assets arereported at fair value utilizing an income approach to valuation. By contract, an independent appraisal is obtainedonce every year to determine the fair market value of the real estate assets.

Plan Description

Plan administration. The County Employees Retirement System (CERS) administers the County Employees PensionPlan (CEPP)—a single-employer defined benefit pension plan that provides pensions for all permanent full-timegeneral and public safety employees of the County. Article 15 of the Regulations of the State grants the authority toestablish and amend the benefit terms to the CERS Board of Trustees (CERS Board).

Management of the CEPP is vested in the CERS Board, which consists of nine members—four elected by planmembers, four appointed by the County Board, and the County Treasurer, who serves as an ex-officio member.

Plan membership. At June 30, 20X9, pension plan membership consisted of the following:

[If the pension plan was closed to new entrants, the pension plan should disclose that fact, as required by para-graph 30a(4) of Statement 67.]

Benefits provided. CEPP provides retirement, disability, and death benefits. Retirement benefits for general planmembers are calculated as 2 percent of the member’s final 5-year average salary times the member’s years ofservice. Benefits for public safety plan members are calculated as 3 percent of the member’s final 3-year averagesalary times the member’s years of service. General plan members with 10 years of continuous service are eligibleto retire at age 60. Public safety plan members with 10 years of continuous service are eligible to retire at age 55.General plan members may retire at any age after 30 years of service. Public safety plan members may retire at anyage after 20 years of service. All plan members are eligible for non-duty disability benefits after 10 years of serviceand for duty-related disability benefits upon hire. Disability retirement benefits are determined in the same manner asretirement benefits but are payable immediately without an actuarial reduction. Death benefits equal two times themember’s final full-year salary. A plan member who leaves County service may withdraw his or her contributions, plusany accumulated interest.

Benefit terms provide for annual cost-of-living adjustments to each member’s retirement allowance subsequent to themember’s retirement date. The annual adjustments are one-half of the change in the Consumer Price Index, limitedto a maximum increase in retirement allowance of 2 percent for general plan members and 3 percent for public safetyplan members. [If the benefit terms included ad hoc postemployment benefit changes, the pension plan shoulddisclose information about those terms, as required by paragraph 30a(5) of Statement 67.]

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Contributions. Article 15 of the Regulations of the State grants the authority to establish and amend the contributionrequirements of the County and active plan members to the CERS Board. The Board establishes rates based on anactuarially determined rate recommended by an independent actuary. The actuarially determined rate is the estimatedamount necessary to finance the costs of benefits earned by plan members during the year, with an additional amountto finance any unfunded accrued liability. The County is required to contribute the difference between the actuariallydetermined rate and the contribution rate of plan members. For the year ended June 30, 20X9, the average activemember contribution rate was 7.0 percent of annual pay, and the County’s average contribution rate was17.74 percent of annual payroll.

Investments

Investment policy. The pension plan’s policy in regard to the allocation of invested assets is established and may beamended by the CERS Board by a majority vote of its members. It is the policy of the CERS Board to pursue aninvestment strategy that reduces risk through the prudent diversification of the portfolio across a broad selection ofdistinct asset classes. The pension plan’s investment policy discourages the use of cash equivalents, except forliquidity purposes, and aims to refrain from dramatically shifting asset class allocations over short time spans. Thefollowing was the Board’s adopted asset allocation policy as of June 30, 20X9:

[If there had been a change in the pension plan’s investment policy during the reporting period, the pension planshould disclose information required by paragraph 30b(1)(c) of Statement 67.]

Concentrations. [If the pension plan held investments (other than those issued or explicitly guaranteed by the U.S.government) in any one organization that represent 5 percent or more of the pension plan’s fiduciary net position, thepension plan should disclose information required by paragraph 30b(3) of Statement 67.]

Rate of return. For the year ended June 30, 20X9, the annual money-weighted rate of return on pension planinvestments, net of pension plan investment expense, was 9.58 percent. The money-weighted rate of returnexpresses investment performance, net of investment expense, adjusted for the changing amounts actually invested.

Receivables

[If the pension plan reported receivables from long-term contracts with the County for contributions, the pension planshould disclose information required by paragraph 30c of Statement 67.]

Allocated Insurance Contracts

[If the pension plan had allocated insurance contracts that are excluded from pension plan assets, the pension planshould disclose information required by paragraph 30d of Statement 67.]

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Reserves

[If the pension plan had reserves, the pension plan should disclose information required by paragraph 30e ofStatement 67.]

Deferred Retirement Option Program

[If the pension plan had a deferred retirement option program, the pension plan should disclose information requiredby paragraph 30f of Statement 67.]

Net Pension Liability of the County

The components of the net pension liability of the County at June 30, 20X9, were as follows:

Actuarial assumptions. The total pension liability was determined by an actuarial valuation as of June 30, 20X9, usingthe following actuarial assumptions, applied to all periods included in the measurement:

Mortality rates were based on the RP-2000 Healthy Annuitant Mortality Table for Males or Females, as appropriate,with adjustments for mortality improvements based on Scale AA.

The actuarial assumptions used in the June 30, 20X9 valuation were based on the results of an actuarial experiencestudy for the period July 1, 20X5−April 30, 20X7.

[If the benefit terms included ad hoc postemployment benefit changes, the pension plan should disclose informationabout assumptions related to those changes, as required by paragraph 31b of Statement 67.]

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The long-term expected rate of return on pension plan investments was determined using a building-block method inwhich best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investmentexpense and inflation) are developed for each major asset class. These ranges are combined to produce thelong-term expected rate of return by weighting the expected future real rates of return by the target asset allocationpercentage and by adding expected inflation. Best estimates of arithmetic real rates of return for each major assetclass included in the pension plan’s target asset allocation as of June 30, 20X9 (see the discussion of the pensionplan’s investment policy) are summarized in the following table:

Discount rate. The discount rate used to measure the total pension liability was 7.75 percent. The projection of cashflows used to determine the discount rate assumed that plan member contributions will be made at the currentcontribution rate and that County contributions will be made at rates equal to the difference between actuariallydetermined contribution rates and the member rate. Based on those assumptions, the pension plan’s fiduciary netposition was projected to be available to make all projected future benefit payments of current plan members.Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projectedbenefit payments to determine the total pension liability. [If there had been a change in the discount rate since the endof the prior fiscal year, the pension plan should disclose information about that change, as required by para-graph 31b(1)(a) of Statement 67.]

Sensitivity of the net pension liability to changes in the discount rate. The following presents the net pension liabilityof the County, calculated using the discount rate of 7.75 percent, as well as what the County’s net pension liabilitywould be if it were calculated using a discount rate that is 1-percentage-point lower (6.75 percent) or 1-percentage-point higher (8.75 percent) than the current rate:

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Illustration 6—Financial Statements, Note Disclosures, and Required SupplementaryInformation for a Cost-Sharing Multiple-Employer Pension Plan (No NonemployerContributing Entities)

[Note: This illustration includes only note disclosures and required supplementary information required by State-ment 67. If the pension plan is included in the financial report of a government that applies the requirements ofStatement 68, the pension plan should apply the requirements of footnotes 9 and 11 of Statement 67, as applicable.The circumstances of this pension plan do not include all circumstances for which note disclosures and requiredsupplementary information should be presented.]

TEACHERS RETIREMENT SYSTEM

Teachers Pension Plan

Statement of Fiduciary Net PositionDecember 31, 20X8


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Statement of Changes in Fiduciary Net Positionfor the Year Ended December 31, 20X8


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Notes to the Financial Statementsfor the Year Ended December 31, 20X8


Summary of Significant Accounting Policies

Method used to value investments. Investments are reported at fair value. Securities traded on a national orinternational exchange are valued at the last reported sales price at current exchange rates. The fair values of privateequities are based on management’s valuation of estimates and assumptions from information and representationsprovided by the respective general partners, in the absence of readily ascertainable market values. Real estateassets are reported at fair value utilizing an income approach to valuation. By contract, an independent appraisal isobtained once every year to determine the fair market value of the real estate assets.

Plan Description

Plan administration. The Teachers Retirement System (TRS) administers the Teachers Pension Plan (TPP)—acost-sharing multiple-employer defined benefit pension plan that provides pensions for teaching-certified employeesof 369 participating school districts. Article 33 of the State Statutes grants the authority to establish and amend thebenefit terms to the TRS Board of Trustees (TRS Board).

Management of TPP is vested in the TRS Board, which consists of nine members—five elected by the active andretired plan members, and the state director of finance, the state superintendent, the state treasurer, and the statecontroller, who serve as ex-officio members.

Plan membership. At December 31, 20X8, pension plan membership consisted of the following:

[If the pension plan was closed to new entrants, the pension plan should disclose that fact, as required by para-graph 30a(4) of Statement 67.]

Benefits provided. TPP provides retirement, disability, and death benefits. Retirement benefits are determined as2.5 percent of the member’s final 3-year average compensation times the member’s years of service. Plan memberswith 10 years of continuous service are eligible to retire at age 60. Plan members are eligible for service-relateddisability benefits regardless of length of service. Five years of service is required for nonservice-related disabilityeligibility. Disability benefits are determined in the same manner as retirement benefits but are payable immediatelywithout an actuarial reduction. Death benefits equal the member’s final full-year salary. [If the benefit terms includedpostemployment benefit changes, the pension plan should disclose information about those terms, as required byparagraph 30a(5) of Statement 67.]

Contributions. Per Article 33 of the State Statutes, contribution requirements of the active plan members and theparticipating school districts are established and may be amended by the TRS Board. Plan members are required tocontribute 6.20 percent of their annual pay. The school districts’ contractually required contribution rate for the year

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ended December 31, 20X8, was 17.89 percent of annual payroll, actuarially determined as an amount that, whencombined with plan member contributions, is expected to finance the costs of benefits earned by plan members duringthe year, with an additional amount to finance any unfunded accrued liability.

Investments

Investment policy. The pension plan’s policy in regard to the allocation of invested assets is established and may beamended by the TRS Board. Plan assets are managed on a total return basis with a long-term objective of achievingand maintaining a fully funded status for the benefits provided through the pension plan. The following was the TRSBoard’s adopted asset allocation policy as of December 31, 20X8:

The preceding target allocation was amended at the beginning of 20X8 to reduce the previous allocation to domesticequities and to increase the allocation to commodities. The previous target allocation was 32 percent domestic equityand no allocation to commodities.

Concentrations. [If the pension plan held investments (other than those issued or explicitly guaranteed by the U.S.government) in any one organization that represent 5 percent or more of the pension plan’s fiduciary net position, thepension plan should disclose information required by paragraph 30b(3) of Statement 67.]

Rate of return. For the year ended December 31, 20X8, the annual money-weighted rate of return on pension planinvestments, net of pension plan investment expense, was 8.19 percent. The money-weighted rate of returnexpresses investment performance, net of investment expense, adjusted for the changing amounts actually invested.

Receivables

In addition to actuarially determined contractually required contributions, certain school districts also make semian-nual installment payments, including interest at 8 percent per year, for the cost of service credits granted retroactivelywhen the school districts initially joined TPP. As of December 31, 20X8, the outstanding balance was $6,409. Thesepayments are due over various time periods not exceeding 5 years at December 31, 20X8.

Allocated Insurance Contracts

[If the pension plan had allocated insurance contracts that are excluded from pension plan assets, the pension planshould disclose information required by paragraph 30d of Statement 67.]

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Reserves

[If the pension plan had reserves, the pension plan should disclose information required by paragraph 30e ofStatement 67.]

Deferred Retirement Option Program

[If the pension plan had a deferred retirement option program, the pension plan should disclose information requiredby paragraph 30f of Statement 67.]

Net Pension Liability of Participating School Districts

The components of the net pension liability of the participating school districts at December 31, 20X8, were as follows:

Actuarial assumptions. The total pension liability was determined by an actuarial valuation as of December 31, 20X8,using the following actuarial assumptions, applied to all prior periods included in the measurement:

Mortality rates were based on the RP-2000 Combined Mortality Table for Males or Females, as appropriate, withadjustments for mortality improvements based on Scale AA.

The actuarial assumptions used in the December 31, 20X8 valuation were based on the results of an actuarialexperience study for the period January 1, 20X6−October 31, 20X8.

[If the benefit terms included ad hoc postemployment benefit changes, the pension plan should disclose informationabout assumptions related to those changes, as required by paragraph 31b of Statement 67.]

The long-term expected rate of return on pension plan investments was determined using a building-block method inwhich best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investmentexpense and inflation) are developed for each major asset class. These ranges are combined to produce thelong-term expected rate of return by weighting the expected future real rates of return by the target asset allocationpercentage and by adding expected inflation. Best estimates of arithmetic real rates of return for each major assetclass included in the pension plan’s target asset allocation as of December 31, 20X8 (see the discussion of thepension plan’s investment policy) are summarized in the following table:

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Discount rate. The discount rate used to measure the total pension liability was 7.75 percent. The projection of cashflows used to determine the discount rate assumed that contributions from plan members will be made at the currentcontribution rate and that contributions from school districts will be made at contractually required rates, actuariallydetermined. Based on those assumptions, the pension plan’s fiduciary net position was projected to be available tomake all projected future benefit payments of current plan members. Therefore, the long-term expected rate of returnon pension plan investments was applied to all periods of projected benefit payments to determine the total pensionliability. [If there had been a change in the discount rate since the end of the prior fiscal year, the pension plan shoulddisclose information about that change, as required by paragraph 31b(1)(a) of Statement 67.]

Sensitivity of the net pension liability to changes in the discount rate. The following presents the net pension liability ofthe school districts calculated using the discount rate of 7.75 percent, as well as what the school districts’ net pensionliability would be if it were calculated using a discount rate that is 1-percentage-point lower (6.75 percent) or1-percentage-point higher (8.75 percent) than the current rate:

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Notes to Required Supplementary Informationfor the Year Ended December 31, 20X8

Changes of benefit terms. In 20X7, disability benefits were increased to be equivalent to retirement benefits. In 20X3,benefit terms were modified to incorporate a new definition of base compensation.

Changes of assumptions. In 20X8, the expectation of life after disability was adjusted to more closely reflect actualexperience. In 20X5 and later, the expectation of retired life mortality was based on RP-2000 Mortality Tables ratherthan on the 1983 Group Annuity Mortality Table, which was used prior to 20X5. In 20X2, expected retirement ageswere adjusted to more closely reflect actual experience. In 20W9, assumed life expectancies were adjusted to moreclosely reflect actual experience.

Methods and assumptions used in calculations of actuarially determined contributions. The actuarially determinedcontribution rates in the schedule of school districts’ contributions are calculated as of December 31, two years priorto the end of the fiscal year in which contributions are reported. The following actuarial methods and assumptionswere used to determine contribution rates reported in that schedule:

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TOPICAL INDEX*

Actuarially determined contributionsActuarial value of assets: 71Biennial valuations: 69Exclusions: 73−75Installment contracts: 73Member: 75Methods and assumptions: 70−72, 76Nonemployer contributing entity: 74Timing of measurement: 67, 68

Actuarial Standards of Practice: 70−72

Actuarial valuationsBiennial: 79Separate within a single plan: 12, 13Timing: 77Updates: 77

Actuarial value of assets: 71

AdditionsEmployer-paid member contributions: 40From other plans: 39Investment expense: 45, 46Investment income: 41−44

Ad hoc cost-of-living adjustment/postemploymentbenefit change: 82Classification of impact on net pension liability:62−64

Administrative expense: 44−46Money-weighted rate of return: 53

Agent multiple-employer plans: 16Financial statements: 24, 26, 28, 29, 31−46Note disclosures: 47−54

Allocated insurance contracts: 66

Assets, planInvestments: 33−35Receivables: 25−32

AttributionDeferred retirement option program (DROP): 91Effect of breaks in service: 91Effect of service caps: 92Exit ages: 90−92

Automatic cost-of-living adjustment/postemploymentbenefit change: 81

Benefit changeClassification of impact on net pension liability:62−65

Postemployment: 62−64, 81−84Projection of benefit payments: 81−84Reserves for: 23

Benefit payments: 36Allocated insurance contracts: 66Deferred retirement option program (DROP)accounts: 37

Refunds of plan member contributions: 61

Change of assumption: 65

Classes of plan members: 12−14, 21, 22

Closed plans: 4, 47

Comparative financial statements, transition: 95

Component unitsNumber of employers: 93Number of plans: 14

Concentration of credit risk: 48

Concentrations, investments: 48

ContributionsActuarially determined: 56, 58, 67−76, 86Contractually required: 25, 27, 30Employer, discount rate: 86Employer-paid member: 40Installment contracts: 27, 30−32, 73Irrevocability of: 6, 7

*Unless otherwise noted, the topics in this index are referenced to questions and answers.

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Member: 31, 32, 40, 59, 75Nonemployer contributing entities: 74Pay-as-you-go: 3Postemployment healthcare: 17, 20Proceeds of pension obligation bonds: 58Receivable: 25−27, 96Refunds: 6, 7, 61Schedule of: 58, 67−76Schedule of changes in the net pension liability: 58

Cost-of-living adjustment. See Postemployment benefitchange

Cost-sharing multiple-employer plans: 12, 13, 16Financial statements: 24, 25, 27−46Note disclosures: 47−55Required supplementary information: 57, 60−73, 75,76

Covered-employee payroll, schedule ofcontributions: 76

Debt securities: 33

Deductions, to other plans: 39

Deferred inflows/outflows of resources: 24

Deferred retirement option programs (DROPs): 37, 38Attribution period: 91

Defined benefit plansAgent multiple-employer. See Agentmultiple-employer plans

Applicability of Statement 67: 2−5Classification of benefits: 8−11Closed plans: 4, 47Cost-sharing. See Cost-sharing multiple-employerplans

Net pension liability: 77−79Note disclosures: 47−55Number of plans: 21−23Required supplementary information: 56−92Reserves: 23Single-employer. See Single-employer plansStand-alone reporting: 1, 2, 19

Statement of changes in fiduciary net position:30−32, 39−46

Statement of fiduciary net position: 24−38Trust criteria: 6, 7

Defined contribution plans: 94Classification of benefits: 8−11

Difference between expected and actualexperience: 64Allocated insurance contracts: 66

Discount on bonds: 43

Discount rate: 85Employer contributions: 86Evaluation for significant changes: 85Sufficiency of plan fiduciary net position: 87, 88Timing of measurement: 89

Effective interest method: 28

Employer-paid member contributions: 40

External investment pools: 35

GASB Comprehensive Implementation Guide,Question 1.3.2: 35

GASB Concepts Statement No. 4: 25

GASB Statement No. 25: 5


GASB Statement No. 34Paragraph 106: 2, 19, 94Paragraphs 107−109: 94Paragraphs 139−141: 19

GASB Statement No. 40, paragraph 11: 48

GASB Statement No. 43: 17, 19, 20Paragraph 6a: 18

GASB Statement No. 44, paragraph 39c: 93

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Healthcare, postemployment: 17−20

Installment contracts: 27, 30−32Schedule of contributions: 73

InterestIncome: 43Receivables: 28Service cost: 60Total pension liability: 61

Investment expense: 39Level of display: 41, 42, 44Money-weighted rate of return: 51, 52Separable from administrative expense: 45, 46Separate display: 43

InvestmentsCommissions: 34Concentrations: 48Debt securities: 33Disclosures: 48, 49Display: 35External investment pools: 35Limitations on sale: 33Money-weighted rate of return: 50−54Mutual funds: 35, 49Note disclosures: 34Premium (discount) on bonds: 43Sales costs: 34Valuation: 33

Irrevocability of contributions: 6, 7

Level of presentation, financial statements: 21

Liabilities, employer and nonemployer contributingentities. See Net pension liability

Liabilities, planBenefit payments: 36, 37

Deferred retirement option (DROP) accounts: 37Noncurrent: 36

Long-term expected rate of return, timing ofmeasurement: 89

Member contributionsEmployer-paid: 40Installment contracts: 31, 32Schedule of contributions: 75

Money-weighted rate of return: 50Administrative expense: 53Beginning and ending investments value: 50−53Cash flows: 51−54Investment expense: 51, 52Investments, defined: 50

Most recent fiscal year-end, defined: 55

Mutual funds: 35

Net increase (decrease) in fair value ofinvestments: 41Level of display: 42, 44

Net pension liabilityDetermining at transition: 98, 99Measurement: 77−92Schedule of changes in: 56−66Total pension liability: 61, 77−92. See also Totalpension liability

Nonemployer contributing entities, actuariallydetermined contributions: 74

Note disclosuresAgent multiple-employer plans: 47−54Closed plans: 47Concentrations: 48Cost-sharing multiple-employer plans: 47−55Credit risk concentration: 48Deferred retirement option (DROP)accounts: 37, 38

Installment contracts: 27, 30Investments: 34, 48, 49Level of presentation: 21

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Money-weighted rate of return: 50−54Mutual funds: 49Net pension liability: 55Realized gains (losses): 41Receivables: 27, 30Reserves: 23Single-employer plans: 47−55

Number of employers, component units: 14, 15, 93

Number of plans: 12, 13, 16, 21−23Component units: 14

Other postemployment benefit plans: 18, 19

Other postemployment benefits: 17−20

Pay as you go: 3

Payables: 29

Pension obligation bonds: 58

Pension trust fund reporting: 19

Plan classification: 12, 13, 16Component units: 14, 15

Postemployment benefit changeAd hoc: 62−64, 82Automatic: 81Classification of impact on net pensionliability: 62−64

Projection of benefit payments: 8−84Reserves for: 23Substantively automatic: 63, 64, 82

Postemployment healthcare plan: 18

Premium on bonds: 43

Projection of benefit paymentsCost-of-living adjustment/postemployment benefitchange: 81−84

Overtime: 80

Public employee retirement system (PERS)reporting: 19, 39

Realized gains (losses): 41, 42

ReceivablesContributions: 25−27, 30−32, 96Effective interest method: 28Installment contracts: 30−32Netting: 29Noninterest bearing: 28Schedule of contributions: 73Trade-date accounting: 29Transition: 96

Required supplementary informationCost-sharing multiple-employer plans: 57, 60−73,75, 76

Level of presentation: 21, 56Money-weighted rate of return: 51−54Ratios: 57Schedule of changes in the net pensionliability: 57−66

Schedule of contributions: 57, 67−79Single-employer plans: 56, 58−76Tiers: 56Transition: 97

Reserves: 23

Rollbacks, at transition: 99

Schedule of changes in the net pension liabilityAllocated insurance contracts: 66Benefit change: 65Change of assumption: 65Contributions: 58Cost-of-living adjustment/postemployment benefitchange: 62−64

Interest on total pension liability: 61Pension obligation bond proceeds: 58Service cost: 59, 60

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Schedule of contributionsActuarially determined contribution, methods andassumptions: 70−72

Actuarially determined contribution, timing ofmeasurement: 67−69

Contributions: 58Covered-employee payroll: 76Member contributions: 75Nonemployer contributing entities: 74Payments on installment contracts: 73Pension obligation bond proceeds: 58

Scope and applicability: 1−20

Service caps, effect on attribution: 92

Service cost: 59, 60Attribution: 90−92Interest on: 60

Single-employer plansFinancial statements: 24, 28, 29, 31−46Note disclosures: 47−55Required supplementary information: 56, 58−76

Stand-alone plan reporting: 1, 2, 19

Statement of changes in fiduciary net positionAdditions: 39−46Administrative expense: 45, 46Deductions: 39Employer contributions: 30−32Investment expense: 45, 46Investment income: 41−43Net increase (decrease) in fair value ofinvestments: 41, 42

Statement of fiduciary net positionBenefit payments: 36

Deferred inflows/outflows of resources: 24Deferred retirement option program (DROP)accounts: 37, 38

Investments: 33−35Liabilities, noncurrent: 36Payables: 29Receivables: 25−32

Statistical section: 93

Substantively automatic cost-of-livingadjustment/postemployment benefit change: 82Classification of impact on net pension liability: 63, 64

Total pension liabilityActuarial valuations, timing: 77−79Attribution: 90−92Discount rate: 85−89Interest on: 61Projection of benefit payments: 80−84Significant changes: 78Updates: 77−79

Trade-date accounting: 29

Transfers: 39

Transition: 95−99

Trust criteria: 6, 7

Unfunded plans: 3

UpdatesDiscount rate: 85, 89Total pension liability: 77−79Transition: 98, 99

Volunteers: 57

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