Project Pages

Termination Benefits—Project Plan

Project Description: The objective of the project is to provide guidance to governmental employers in measuring and reporting liabilities and expenses related to termination benefits.

Background: In Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (April 2004), and No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions (June 2004), the Board tentatively defined termination offers and benefits, broadly, as “inducements offered by employers to employees to hasten the termination of services, or payments made in consequence of the early termination of services … including special termination benefits as defined in NCGA Interpretation 8, Certain Pension Matters, early-retirement incentive programs, and other termination-related benefits.” The Board distinguished, conceptually, between:

• OPEB, which the Board concluded is compensation for employee services and decided should be accounted for in a manner that results in systematic recognition of cost over periods that approximate employees’ periods of service, and

• Termination offers and benefits, which the Board concluded are not compensation but incentives or settlements for early termination of services.

In deliberations leading to the OPEB Statements, the Board agreed in concept that:

• Because the two are different in substance, the approach taken for OPEB accounting and reporting generally would not be appropriate for termination offers and benefits. (Nevertheless, for practical reasons, the Board decided that termination benefits that increase existing defined benefit OPEB should be accounted for under the standards for OPEB. This approach was consistent with decisions made by the Board previously in regard to accounting for the effect on a pension obligation of an acceptance of an offer for special termination benefits.)

• Issues related to recognition and measurement of termination benefits should be looked at separately.

The scope of current standards, originating with NCGA Interpretation 8 (1983), as amended—codified as GASB Codification Section T25, Termination Benefits (Special)—is limited to accounting and financial reporting of special termination benefits, or those offered “for a short period of time.” NCGA Interpretation 8 referred to and quoted FASB No. Statement 74, Accounting for Special Termination Benefits Paid to Employees, in regard to the manner in which special termination benefits should be measured and recognized in accrual-basis financial statements. That is, an employer should recognize a liability and expense when the employees accept the offer, and the amount, including any lump-sum payments and the present value of any expected future payments, can be reasonably estimated. In addition, an employer should include, as part of the liability for a special termination benefit, any directly resulting changes in the estimated costs of other employee benefits, such as compensated absences, if reliably measurable.

Subsequently, NCGA Interpretation 8 was amended by GASB Statement No. 27, Accounting and Financial Reporting by State and Local Governmental Employers (1994), in regard to accounting for special termination benefits that are offered in the form of an increase in pension benefits provided through a defined benefit pension plan. To avoid accounting for some pension benefits in a manner different from that required for the pension benefits generally, Statement 27 requires that the incremental pension benefits arising from a special termination offer be accounted for in accordance with the requirements of that Statement, rather than being recognized and measured as would otherwise be required by NCGA Interpretation 8. Similarly, Statements 43 and 45 require that special termination benefits offered in the form of an increase in an existing OPEB (for example, an increase in existing postemployment healthcare benefits) be accounted for in accordance with the requirements of those Statements.

Current standards do not cover termination benefits that are offered for more than “a short period of time.” For example, the standards do not cover an ongoing incentive program offered by a school district to induce qualifying teachers to take early retirement. Nor do they address benefits provided as a consequence of voluntary or involuntary terminations, when those benefits are not offered as part of a termination incentive. Research indicates that, in most cases, termination offers take the form of (a) cash payments, (b) an increase in an existing pension or postemployment healthcare benefit, or (c) an offer of a postemployment healthcare benefit where none would be provided otherwise. Anecdotal evidence also indicates that such offers are not uncommon. Governments may be especially likely to consider making such offers in times of fiscal stress.

Current Developments: An Exposure Draft was issued on December 10, 2004. The comment period concluded March 11, 2005. Twenty-six comment letters were received in response to the Exposure Draft. The comments with staff recommendations are scheduled reviewed by the Board at the April meeting and the April teleconference meeting.

Work Plan:

Termination Benefits—Recent Developments

June 2005 Board Teleconference

The Board reviewed and approved for issuance Statement No. 47, Accounting for Termination Benefits.

May 2005 Board Meeting

The Board reviewed a preballot draft of Statement No. 47, Accounting for Termination Benefits, which included changes to the Exposure Draft discussed at the April 25 teleconference. Discussion of the draft focused on several issues highlighted in an accompanying staff paper:

• The first issue discussed was whether a provision should be made in the final Statement for pro rata recognition of the expense of voluntary termination benefits over the period of time between an employee’s acceptance of an employer’s offer and the end point of any future service required as a condition of receiving benefits—similar to the provision adopted previously in regard to involuntary termination benefits with a future service requirement. After discussion, the Board reaffirmed its previous tentative conclusion that the expense of voluntary termination benefits should be recognized at the point when the offer has been made and accepted.

• The Board then reconsidered its previous tentative conclusion that in accounting for non-healthcare-related termination benefits, for which the Board had decided that measurement at the discounted present value of expected future benefit payments would not be required, an employer’s options would be limited to whether or not to discount. In either case, the Exposure Draft proposal would have required an employer to take into consideration cost level changes in determining expected future benefit payments. After discussion, the Board concluded that the measurement options should be revised, so that an employer may either (1) include consideration of cost level changes in the projection of expected future benefit payments and discount expected payments to present value or (2) measure expected future benefit payments at current cost without discounting.

• The Board reaffirmed its previous views that the disclosure of significant methods used in accounting for termination benefits (for example, whether expected future benefit payments have been discounted) would be required as part of the summary of significant accounting policies—and, moreover, that the disclosure of significant assumptions (for example, the discount rate and the healthcare cost trend rate) would be a reasonable application of existing disclosure requirements. However, to ensure consistency of practice, the Board decided to include in the final Statement an explicit requirement to disclose significant methods and assumptions used to determine termination benefit liabilities and expenses.

• The Board also discussed again the guidance to be provided in the final Statement with regard to the need for professional judgment in determining whether the substance of a particular benefit arrangement is (1) to give benefits in exchange for early termination of employee services (a termination benefit) or (2) to give benefits as part of the total compensation package in exchange for employee services (a pension benefit or other postemployment benefit). The Board concluded that the Standards language proposed in the preballot draft should be amplified to include examples of factors to consider in making that determination.

Individual Board members also made a number of suggestions for changes of an editorial nature. A ballot draft of the final Statement will be discussed at the June 2 Board teleconference.

April 2005 Board Teleconference

The Board discussed remaining issues raised by respondents to the Exposure Draft (ED), Accounting for Termination Benefits. In addition to editorial changes to clarify some of the ED requirements, the Board made the following tentative decisions:

• The incremental effect of termination benefits on other employee benefits, such as compensated absences, should be included in the total cost of termination benefits, as was proposed in the ED.

• Fringe benefits related to termination benefit payments should be included in the measurements required by the Statement, and language should be added to the final Statement to clarify this point.

• Unemployment compensation should continue to be excluded from the scope of the Statement.

• The final Statement should not include detailed illustrations of the projection of healthcare-related termination benefits. The discussion in the Basis for Conclusions included in the ED that directs readers to extensive discussion and illustration in Statement 45 should be retained. Questions and answers illustrating application of the measurement concepts discussed in the termination benefits Statement might be appropriate for inclusion in a future edition of the Comprehensive Implementation Guide.

• The Basis for Conclusions should include a discussion to emphasize that the measurement options given for non-healthcare-related termination benefits that are not required to be discounted are limited to a choice of whether to discount the expected future benefit payments.

• The final Statement should explicitly state that the liability and expense related to termination benefits should be updated annually until the liability is settled.

• Language should be included in the final Statement to clarify that involuntary termination benefits should be recognized only when amounts are reasonably estimable.

• The final Statement should not include a provision similar to the substantive plan notion included in Statement 45 for purposes of determining the terms of a plan of voluntary or involuntary termination.

• The Basis for Conclusions of the final Statement should discuss the requirement that a plan of involuntary termination be communicated to the employees for recognition to occur. The discussion should emphasize (1) that to meet the recognition requirement, specific employees need not be notified of their certain termination; however, direct communication of the terms of the termination plan by the employer to the employees potentially affected should occur, and (2) that professional judgment will be required to determine when such a communication has occurred.

• The “minimum notification period” provision provided in the ED in regard to the recognition of involuntary termination benefits that have a future service requirement should be eliminated from the final Statement because the provision adds unnecessary complexity to the standard.

• The final Statement should clarify that the period over which involuntary termination benefits with a future service requirement should be recognized begins when the recognition requirements of the Statement otherwise would be met and continues through the end of the future service period. In addition, illustrative examples of the application of the recognition requirements for involuntary termination benefits (including a plan with no future service requirement, a plan with a benefit entirely dependent on future service, and a hybrid scenario) should be included in the final Statement.

• Voluntary termination benefits that have a future service requirement should be recognized similarly to involuntary termination benefits with a future service requirement—that is, the termination benefit liability and expense should be recognized ratably over the future service period, beginning when the offer is accepted.

• The final Statement should not include an exception to the disclosure requirements in the event there is a material termination benefit covered by legal or contractual privacy or nondisclosure provisions.

• Examples should be included in the final Statement to clarify the types of information that might be included in the required disclosure of a description of the termination benefit arrangement. Such information might include a brief description of the benefits provided, including the type(s) of benefits, the number of employees affected, and the period of time over which benefits are expected to be provided.

• Current literature requires that governments disclose information about their significant accounting policies; therefore, the final Statement should clarify that those disclosures should include the methods and assumptions used in measuring the termination benefit liability and expense, including whether amounts are discounted and, if so, the discount rate selected, and the healthcare cost trend rate, if applicable.

• The final Statement should not provide an exception for cost-sharing employers to the basic disclosure requirement to provide information about the cost of termination benefits in the period in which the employer becomes obligated. The Basis for Conclusions should include a discussion to clarify that for employers in a cost-sharing pension or OPEB plan, the requirement could be met by disclosing the amount of pension- or OPEB-related debt to the plan attributable to the termination benefits.

• The Basis for Conclusions should clarify that the termination benefits Statement does not intend to modify the requirements for reporting of required supplementary information in Statement 27 and Statement 45. This issue also might be addressed in a future edition of the Comprehensive Implementation Guide.

• The proposed effective date of the Statement should not be amended.

• The final Statement should include transition provisions to clarify that in the initial year of implementation, its requirements should be applied to any previous commitments of termination benefits that remain unpaid at the effective date of the Statement. In addition, the cumulative effect of applying the Statement should be reported as a restatement of beginning net assets (or equity or fund balance, as appropriate), and restatement of financial statements for prior periods should not be required.

The Board also asked staff to follow up with respondents who commented on the ED provision regarding selection of a discount rate when a government has no assets to clarify their concerns.

In addition, the Board reaffirmed its position that the ED proposal to require disclosure of the cost of termination benefits in the period in which the employer becomes obligated is intended to apply in the initial reporting period of obligation, not to be an ongoing disclosure.

April 2005 Board Meeting

The Board discussed feedback received from respondents to the Exposure Draft, Accounting for Termination Benefits, on the following three issues:

• Should healthcare-related benefits, including benefits provided under the provisions of COBRA, be required to be measured based on claims cost, or age-adjusted premiums approximating claims costs, for the terminated group—that is, considered separately from the costs of providing healthcare coverage to active plan members?

  The Board tentatively agreed that if the termination benefit arises as the result of a large-scale termination that is age-related, claims costs should be used as the basis for the measurement of healthcare-related termination benefits. However, termination benefits that arise under other circumstances may be measured using blended premium rates as the basis.

• Should paragraph 25 of the Basis for Conclusions of the Exposure Draft, which discussed the possibility that in some circumstances a long-standing voluntary termination offer might be considered OPEB, rather than a termination benefit, be included in the Standards section of the final Statement?

  The Board tentatively agreed that a discussion similar to that in paragraph 25 should be included in the final Statement and that the Basis for Conclusions should include a discussion of factors that might be considered by a preparer when determining the substance of the transaction.

• Should examples of involuntary termination benefits in paragraph 1 of the Exposure Draft be modified to eliminate references to “career counseling” and “outplacement services”?

  The Board tentatively agreed to retain the examples in the final Statement.