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Business and Policy Areas
Business and Policy Areas

GASB Issues Accounting for Termination Benefits Standard

June 30, 2005

On June 27, the Governmental Accounting Standards Board (GASB) issued Statement No. 47, Accounting for Termination Benefits. The standard provides accounting and reporting guidance for both voluntary and involuntary employee termination benefits offered by government employers. The standard addresses recognition, measurement, and disclosure requirements and supersedes accounting guidance in National Council on Governmental Accounting Interpretation 8.

Voluntary employee termination benefits are related to an employee choice, such as early retirement. The benefits related to such a voluntary termination are any accompanying incentives. With voluntary termination benefits, employers recognize a liability and expense when the offer is accepted and the amount of the benefit can be estimated.

Involuntary termination benefits are those that relate to an employer’s plan of involuntary termination. Such plans at a minimum should identify and establish:

  • the number of employees to be terminated,
  • the job classifications that will be affected,
  • the locations that will be affected, and
  • the terms and details of termination benefits.

Involuntary termination benefits should be recognized in the period in which the employer becomes obligated to provide benefits to terminated employees. Statement 47 requires that health-care-related termination benefits be measured by projecting claims costs, evaluating health care cost trends. and discounting to present value. Generally, the cost of non-health-care-related termination benefits should be measured at the discounted present value of expected future benefit payments.

The new GASB statement requires employers to disclose a description of the termination benefit arrangement, the cost of the termination benefits, and significant methods and assumptions used to determine the benefit liability.

Statement 47 provides a general guidance exception when the effects of a termination benefit relate to an employer’s already existing obligations for defined pension or other post employment benefits. Such benefits should be accounted for and reported under the requirements of Statements 27 and 45, Accounting for Pensions by State and Local Governments and Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, respectively. The requirements of the statement would be effective for financial statements for periods beginning after June 15, 2005. 

NACUBO staff resource: Sue Menditto, director, accounting policy, 202.861.2542.