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Business and Policy Areas
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GASB Seeks to Clarify ARC Calculation

July 30, 2008

The Governmental Accounting Standards Board (GASB) has issued for comment a proposed Technical Bulletin (TB), "Determining the Annual Required Contribution for Postemployment Benefits."  The proposal clarifies the use of known amounts for purposes of calculating the Annual Required Contribution  (ARC) adjustment related to pensions and other postemployment benefits.  The proposed TB makes clear that using the known amount in place of the estimation procedure in GASB Statements No. 27, "Accounting for Pensions by State and Local Governmental Employers," and No. 45, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions," is encouraged.

The ARC is essentially comprised of the normal benefit cost for the year and the annual amortized amount of the unfunded actuarial accrued liability (UAAL).  The portion of the actuarial present value allocated to a particular year is called the normal cost.  The portion of the actuarial present value allocated to prior years of employment--and thus not provided for by future normal costs--is called the actuarial accrued liability (AAL). The excess of the AAL over the actuarial value of assets is the unfunded actuarial accrued liability (UAAL). GASB permits the UAAL to be amortized over a period of up to 30 years. 

The proposed TB applies to situations in which the ARC includes a known amount related to the amortization of past employer contribution deficiencies or excess contributions to a pension or other postemployment benefit (OPEB) plan. Because the objective of the ARC adjustment procedure in Statements 27 and 45 is to offset the amount that the actuary has included in the ARC for the amortization of past contribution deficiencies or excesses, it follows that amounts known serve to enhance the accuracy of the calculation and avoid double counting.  The GASB is issuing the proposed clarifying guidance in response to questions regarding such known amounts.  The TB encourages use of the known amount in place of the estimation procedures in Statements 27 and 45.

The provisions of this Technical Bulletin are effective for financial statements for periods ending after December 15, 2008--fiscal 2009 for public colleges and universities--although earlier application is encouraged.  The proposed TB has a comment deadline of September 30, 2008 and is available from the GASB website.

Staff Resource: Sue Menditto, Director, Accounting Policy