Reporting Changes in Assumptions and Other Issues
- Contact: FASAB Staff, firstname.lastname@example.org, 202-512-7350
During deliberations on its social insurance project the Board discussed the need to display gains and losses from changes in assumptions as a discrete item on the statement of net costs. Changes in assumption(s) create differences between the new estimate and the prior estimate. For example, the discount rates may change from 3 percent to 4 percent. The effect of such changes is a gain or a loss that sometimes exceed all other operating costs of the program. These gains and losses may cause extreme volatility in total annual costs.
In addition to the display issue, there has been uncertainty in practice regarding what U.S. Treasury borrowing rates should be used for discount rates when calculating present values for federal civilian and military employee pensions, ORB, and OPEB. Current guidance can be interpreted in various ways. Also, guidance for selecting the valuation date for such programs is in need of codification.
This project will result in standards for displaying the effect of changes in assumptions as a discrete item on the statement of net cost, for certain note disclosure, and for selecting certain discount rates and valuation dates for present valuations.
The resulting standard would apply to federal civilian and military employee pensions, other retirement benefits (ORB), and other post-employment benefits (OPEB) and add to the provisions of SFFAS 5, Accounting for Liabilities of the Federal Government, pertaining to such programs, and rescind Interpretation 3, Measurement Date for Pension and Retirement Health Care Liabilities.
HISTORY OF BOARD DELIBERATIONS (reverse chronology):
August 20-21, 2008 Board Meeting
The Board has completed its deliberation on this statement. The statement was approved for issuance by all members of the Board in June 2008 and submitted to the sponsors and the Director of the Congressional Budget Office on July 16, 2008 for the sponsors’ 90-day review period. The Board is planning to release this statement, numbered Statement of Federal Financial Accounting Standards 33, as a final statement October 14, 2008, effective for fiscal years beginning after September 30, 2009.
June 18-19, 2008 Board Meeting
At the June 19, 2008, FASAB meeting the Board approved the issuance of Reporting Gains and Losses from Changes in Assumptions and Selection of Discount Rates and Valuation Dates, as a final Statement of Federal Financial Accounting Standards (SFFAS). The Board decided to exclude FECA/workers’ compensation from the standard and to retain the requirement for “five historical rates” in developing the average historical Treasury rates. The Statement has been submitted to the Board’s sponsors for a ninety-day review which will conclude in late October. The Statement will be issued after successful completion of the review.
June 5, 2008
At the upcoming meeting, the Board will review the changes made by staff to address the remaining issues for and approve the issuance of the standard on Reporting Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates. The briefing material supporting this discussion is available below.
April 16-17, 2008 Board Meeting
The objective for April17 was to review and approve the changes needed to convert the exposure draft Reporting Gains and Losses from Changes in Assumptions and Selection of Discount Rates and Valuation Dates (“the ED”) to a final Statement of Federal Financial Accounting Standards (SFFAS).
The staff asked the Board to respond to four questions regarding changes to the ED. The first question was whether the Board continued to prefer that the standard have a limited scope and address only pensions, other retirement benefits (ORB), and other post-employment benefits (OPEB), rather than all changes in long-term assumptions other than instances specifically addressed in other FASAB standards. The Board agreed not to change paragraph 17 in that regard.
The second staff question was whether the Board approved the guidance regarding the administrative and employer entity reporting requirements. The Board did not think the standard was clear enough regarding the employer entity responsibilities. Employer entities, as defined in SFFAS 5, would not have to reported gains and losses from changes in assumptions separately on the cost statement if they do not report the associated liability. In those instances, the administrative entity is reporting all costs and the liability. The staff will clarify the standard in this regard.
The third staff question asked whether the Board wished to require a minimum number of yearly rates, for example, 5 yearly rates, for the calculation of an average historical Treasury discount rate. The Board discussed the quality of the average that would result from the number of yearly rates used from each maturity. Board agreed to set a minimum of 5 yearly rates to include in the average historical Treasury rate.
The fourth staff question asked whether the Board wished to be more specific with respect to the assumptions to be reviewed by the preparer. The Board discussed this and decided not to change the standard. The Board discussed paragraph 26 of the standard that required disclosure of 10-, 20-, and 30-year current market rates for Treasury securities to compare the discount rate the entity was using. A member found this somewhat contradictory in that the standard requires using average historical Treasury rates. The current market rates are a benchmark with which to compare the average historical rates, and that the Board had considered but decided not to require the preparer to discuss what the cost would have been had the entity used the current market rate. The Board discussed the relative merits of average historical rates vs. current market rates as a benchmark with which to compare the average historical rates used by the preparer. Staff explained that the reason was to disclose the current market rate as a benchmark is that the discount rate can make a big difference in what the entity reports as a cost. Other standard-setters do require the current market rate, and therefore a good contrast with the average historical rates. Staff noted that the Board had discussed but decided not to require an analysis of the effect of using current market rates on cost and liabilities to accompany the rates themselves. A member noted that the standard does not require the preparer to disclose the rates they use. He said he would vote to take it out because there would be nothing to compare it to. The Board voted six to four to delete paragraph 26.
April 4, 2008
At the upcoming meeting, the Board will review the changes recommended by staff to address the remaining changes needed to convert the exposure draft Reporting Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates to a final Statement of Federal Financial Accounting Standards. The briefing material supporting this discussion is available below.
February 13-14, 2008 Board Meeting
At its meeting on February 14, 2008, the Board discussed the comments relative to assumptions and activities that would be within the scope of the standard. The consensus of the Board was in favor of limiting the scope of the standard to the activities involving employee benefits, including military and veterans’ benefits.
February 1, 2008
At the upcoming meeting, the Board will discuss comments received on the exposure draft Reporting Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates. The briefing material supporting this discussion is available below.
December 4-5, 2007 Board Meeting
The FASAB extended the comment period for the exposure draft Reporting Gains and Losses from Changes in Assumption and Selecting Discount Rates and Valuation Dates until January 15, 2008. The FASAB is seeking public comment on this exposure draft for consideration at its February meeting and subsequent meetings. Your response will be very much appreciated. Board will consider the next steps at the February meeting.
September 19-20, 2007 Board Meeting
The exposure draft Reporting Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates, is out for comment. The comment period ends November 30, 2007.
July 25-26, 2007
At the July 25, 2007, FASAB meeting the members reviewed the ballot draft of the exposure draft entitled, Reporting Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates. Some minor changes were agreed upon. At the conclusion of the session, the Board voted to release the exposure draft for comment. The comment period will run from August through November 2007.
May 24, 2007
Based on the March discussion and the subsequent communication with Board members, staff presented a number of questions and tentative conclusions about the proposed exposure draft (ED).The Board generally agreed with the staff’ conclusions.
The Board discussed whether the proposed standard would preclude display of more than one line item on the statement of net cost (SNC). The Board decided that the proposal should provide for more than one line item if needed for a fair presentation.
The Board discussed two issues regarding the discount rate provisions. A member mentioned that preparers might interpret the word “historical” differently. The Board decided to add a question for respondents asking the respondents how they would interpret “historical” in the phrase “historical average discount rates.” Also, the Board decided to add paragraphs to the basis for conclusions explaining the Congressional Budget Office position regarding market rates.
The Board considered and approved the staff proposal to replace “best estimate” with “reasonable estimate.” In addition, a member was concerned that the phrase “most likely” in the paragraph discussing “reasonable estimate” was inconsistent with the concept of “reasonable estimate.” The Board decided to eliminate that phrase. The Board also decided to require that the preparer merely explain why it did not use assumptions in use generally in the federal government.
The staff will make the changes describe above and any other editorial changes the members submit, circulate a pre-ballot draft for member comments, and present a ballot draft in July.
March 21-22, 2007
At the March 2007 FASAB meeting the staff discussed comments received from agencies, its recommendations based on comments received, and other activity resulting from the January FASAB meeting. A key activity since the January meeting had been to vet the standards with the affected agencies, especially actuaries, although there were several other issues to develop as well. The staff explained that agency commentors did not object to any aspects of the display and valuation date standards, except for HHS representatives as noted below. Many comments focused on the discount rate standard. The objective of this session was to review the agencies comments and staff recommendations, make changes as the members might direct, and decide whether to proceed to a pre-ballot draft of the proposed standard.
The Board approved the display standard. However, the requirement will continue to be that gains and losses from changes in assumptions are to be displayed as a separate line item and will not be combined with gains and losses from differences between assumptions and experience. In addition, there will be more explanation in the basis of conclusions regarding why the market rate benchmark is important information; for example, it allows the reader to distinguish between the program’s assumptions versus the market. A question for respondents will ask whether the market rate benchmark has value from a financial reporting transparency standpoint and reference the appropriate basis for conclusions paragraphs. Finally, the staff will revisit the market rate disclosure standard regarding whether it should require the disclosure of a single rate or multiple rates.
January 17-18, 2007
The proposed standard on reporting gains and losses from changes in assumptions and selecting discount rates and valuation dates addresses (1) reporting gains and losses from changes in assumptions (the “display standard”), (2) selecting discount rates (the “discount rate standard”), (3) guidance regarding the phrase “best estimate” and (4) selecting valuation dates (the “valuation date standard”).
Tentative Decisions :
- The draft ED will be vetted with preparer and actuarial personnel before further Board deliberation.
- General decisions of the Board:
- The scope paragraph in the ED, paragraph 3, tentatively captures the scope of the standard-long term liabilities- provided that the words “and discounted present value” are deleted to reflect the fact that the discount rate assumption is considered a long-range assumption rather than a criteria for being within the scope of the standard.
- The display standard will be general but list examples of the known programs.
- Explore the concepts of controllable and non-controllable assumptions and operating and non-operating costs to govern what types of changes are “changes in assumptions” and what types are operational.
- Resolve the issue of dramatic swings in estimates each year due to short term fluctuations in interest rate assumptions without conflicting with actuarial practices and professional standards.
- Judgment on the necessity of a materiality paragraph is pending staff research for the March meeting.
- Consult with affected agencies and auditors regarding their experiences with the current “best estimate” language.
Issue Paper for January 2007, not including draft exposure draft
September 27-28, 2006
The staff presented a draft exposure draft (ED) addressing three issues: (1) the display of the effect of “actuarial gains and losses” and note disclosure of the components of cost, (2) the selection of certain discount rates, and (3) actuarial valuation dates. The proposed standard would cover federal employee pensions, other retirement benefits (ORB), OPEB, including veterans’ compensation, and social insurance, if applicable.
The Board decided as follows:
Display and Disclosure – The Board decided to limit the display requirement to the effects of changes in assumptions. The Board agreed that the components should be broken out in the note disclosure as proposed in the draft ED.
Valuation Date – The Board approved the staff proposal regarding the valuation date.
Discount Rate – The Board decided to:
- Require a discount rate that would reflect expected future Treasury borrowing rates giving consideration to historical experience rather than current market rates.
- Specify that the discount rate should not change frequently.
- Address both funded and unfunded situations.
- Model the standard on current usage at OPM and other agencies.
The ED defines “actuarial gains and losses” as “ A change in the value of either the projected benefit obligation or the plan assets resulting from experience different from that assumed or from a change in an actuarial assumption. Past experience of the covered group is reflected in current costs through actuarial gains and losses.”