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Accounting for liabilitiesSFFAS No. 5

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Executive Office of the PresidentOffice of Management and Budget

"ACCOUNTING FOR LIABILITIES OF THE FEDERALGOVERNMENT"

Statement of Federal Financial Accounting StandardsNumber 5

September 1995

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This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_5.pdf.

*************From Inside Front Cover**************

APPLICABILITY, MATERIALITY, AND TERMINOLOGY

These standards apply to general purpose financialreports of U.S. Government reporting entities.These standards need not be applied to immaterialitems. Statement of Federal Financial AccountingConcepts No. 2 (SFFAC No. 2), "Entity andDisplay", lists criteria for defining Governmentreporting entities. Paragraph 78 of "Entity andDisplay" notes that some of a reporting entity'scomponents may be required by law or policy toissue financial statements in accordance withaccounting standards other than those recommendedby the FASAB and issued by the OMB and the GAO,e.g., accounting standards issued by the FinancialAccounting Standards Board or by a regulatoryagency. Those components should continue to applythe standards used in these reports. The reportingentities of which the components are a part,however, need to be sensitive to differences thatmay arise from different accounting standards. Ifthese differences are material, the standardsrecommended by the FASAB and issued by the OMB andthe GAO should be applied. In such cases, thecomponents would need to provide any additionaldisclosures or different measurements required bythe accounting standards issued by the OMB and theGAO that would not be required by the otherstandards.

The word "disclosure" in FASAB's recommendedstandards indicates reporting information in notesor narrative that is regarded as an integral partof the basic financial statements, while"supplemental" indicates reporting information inschedules or narrative regarded as "required


supplementary information" as that term is used inaccounting and auditing standards. Governmentauditing standards require little auditingassurance for required supplementary information."Other accompanying information" refers tounaudited information that accompanies the auditedfinancial statements. "Required supplementarystewardship information" is a new category ofinformation FASAB proposes in its exposure draft,"Supplementary Stewardship Reporting", with theexpectation that OMB and GAO will in collaborationagree upon audit procedures that would beappropriate to apply to this information. Theseterms are intended to indicate the Board'sexpectations regarding the minimum auditor'sresponsibility for the information, not itsspecific location within general purpose financialreports.

**************************************************EXECUTIVE SUMMARY**************************************************

a This Statement establishes accountingstandards for liabilities of the federalgovernment not covered in Statement of FederalFinancial Accounting Standards Number 1,"Accounting for Selected Assets and Liabilities",and in Statement of Federal Financial AccountingStandards Number 2, "Accounting for Direct Loansand Loan Guarantees." This Statement defines"liability" as a probable future outflow or othersacrifice of resources as a result of pasttransactions or events. [FN 1:Liabilitiesrecognized according to the standards in thisStatement include both liabilities covered bybudgetary resources and liabilities not covered bybudgetary resources. Liabilities covered bybudgetary resources are liabilities incurred thatwill be covered by available budgetary resourcesencompassing not only new budget authority butalso other resources available to coverliabilities for specified purposes in a givenyear. Liabilities not covered by budgetaryresources include liabilities incurred for whichrevenues or other sources of funds necessary to


pay the liabilities have not been made availablethrough congressional appropriations or currentearnings of the reporting entity. Notwithstandingan expectation that the appropriations will bemade, whether they in fact will be made iscompletely at the discretion of the Congress.(Adapted from OMB Bulletin No. 94-01, "Form andContent of Agency Financial Statements.")]

b The Statements of Federal FinancialAccounting Standards (SFFAS) and Concepts (SFFAC)referred to in this document are statementsrecommended by the Federal Accounting StandardsAdvisory Board (FASAB), approved by the Secretaryof the Treasury, the Director of the Office ofManagement and Budget, and the Comptroller General(the Principals) and issued by the Office ofManagement and Budget (OMB) and the GeneralAccounting Office (GAO).

c This Statement defines the recognition pointsfor liabilities associated with different types ofevents and transactions (***Figure 1 IS AVAILABLEIN HARD COPY ONLY***).[FN 2: Recognition meansreporting a dollar amount on the face of the basicfinancial statements.]

-- A liability arising from reciprocal or"exchange" transactions (i.e., transactions inwhich each party to the transaction sacrificesvalue and receives value in return) should berecognized when one party receives goods orservices in return for a promise to provide moneyor other resources in the future (e.g., a federalemployee performs services in exchange forcompensation).

-- A liability arising from nonreciprocaltransfers or "nonexchange" transactions (i.e.,transactions in which one party to the transactionreceives value without directly giving orpromising value in return, such as grant andcertain entitlement programs) should berecognized for any unpaid amounts due as of thereporting date. The liability includes amountsdue from the federal entity to pay for benefits,


goods, or services [FN 3: Goods or services may beprovided under the terms of the program in theform of, for example, contractors providing aservice for the government on the behalf of thedisaster relief beneficiaries.] provided under theterms of the program, as of the federal entity'sreporting date, whether or not such amounts havebeen reported to the federal entity (e.g.,estimated Medicaid payments due to healthproviders for service that has been rendered andthat will be financed by the federal entity buthave not yet been reported to the federal entity).

-- Government-related events are nontransaction-based events that involve interaction betweenfederal entities and their environment. The eventmay be beyond the control of the entity. Aliability is recognized for a future outflow ofresources that results from a government-relatedevent when the event occurs if the future outflowof resources is probable and measurable (seeparagraphs 33 and 34 for the definitions ofprobable and measurable, respectively) or as soonthereafter as it becomes probable and measurable.Events, such as a federal entity accidentallycausing damage to private property, would create aliability when the event occurred, to the extentthat existing law and policy made it probable thatthe federal government would pay for the damageand to the extent that the amount of the paymentcould be estimated reliably. Government-relatedevents also include hazardous waste spills onfederal property caused by federal operations oraccidents and catastrophes that affect government-owned property.

--Government-acknowledged events are events thatare of financial consequence to the federalgovernment because it chooses to respond to theevent. A liability is recognized for a futureoutflow of resources that results from agovernment-acknowledged event when and to theextent that the federal government formallyacknowledges financial responsibility for theevent and a nonexchange or exchange transactionhas occurred. The liability for a nonexchange


transaction should be recognized for any unpaidamounts due as of the reporting date and theliability for the an exchange transaction shouldbe recognized when goods or services have beenprovided. The liability includes amounts due fromthe federal entity to pay for benefits, goods, orservices provided under the terms of the program,as of the federal entity's reporting date, whetheror not such amounts have been reported to thefederal entity (Examples of government-acknowledged events include toxic waste damagecaused by nonfederal entities and damage fromnatural disasters).

d In addition to discussing the generalliability recognition principle, the Statementincludes several specific federal liabilityaccounting standards which are summarized below.

-- Contingencies - A contingency is an existingcondition, situation, or set of circumstancesinvolving uncertainty as to possible gain or lossto an entity that will ultimately be resolved whenone or more future events occur or fail to occur.Contingent future outflows or other sacrifices ofresources as a result of past transactions orevents may be recognized, may be disclosed [FN 4:"Disclosure" in this document refers to reportinginformation in notes regarded as an integral partof the basic financial statements.], or may not bereported at all, depending on thecircumstances.[FN 5: In the case of government-acknowledged events giving rise to nonexchange orexchange transactions, there must be a formalacceptance of financial responsibility by thefederal government, as when the Congress hasappropriated or authorized (i.e., throughauthorization legislation) resources.Furthermore, exchange transactions that arisefrom government-acknowledged events would berecognized as a liability when goods or servicesare provided. For nonexchange transactions, aliability would then be recognized at the pointthe unpaid amount is due. Therefore, government-acknowledged events do not meet the criterianecessary to be recognized as a contingent


liability.] Contingencies should be recognized asa liability when a past transaction or event hasoccurred, a future outflow or other sacrifice ofresources is probable, and the related futureoutflow or sacrifice of resources is measurable.A contingent liability should be disclosed if anyof the conditions for liability recognition arenot met and there is a reasonable possibility thata loss or an additional loss may have beenincurred. Disclosure should include the nature ofthe contingency and an estimate of the possibleliability, an estimate of the range of thepossible liability, or a statement that such anestimate cannot be made.

-- Capital leases - In a lease transaction, thelessee should report a liability when one or moreof four specified capital lease criteria are met(see detailed criteria on paragraph 43). Theamount to be recorded by the lessee as aliability[FN 6: "The cost of general property,plant, and equipment acquired under a capitallease shall be equal to the amount recognized as aliability for the capital lease at its inception."(See SFFAS No. 6, "Property, Plant, andEquipment".)] under a capital lease is thepresent value of the rental and other minimumlease payments during the lease term, excludingthat portion of the payments representingexecutory cost to be paid by the lessor.

-- Federal debt - Federal debt transactions arerecognized as a liability when there is anexchange between the involved parties. Fixed-value securities are securities that have a knownmaturity or redemption value at the time of issue.These securities should be valued at theiroriginal face (par) values net of any unamortizeddiscount or premium. Amortization of the discountor the premium should normally follow the interestmethod; in certain cases, the straight line methodis permitted (see paragraph 50 ). Variable-valuesecurities should be originally valued andperiodically revalued at their current value onthe basis of the regulations or offering language.The related interest cost of the federal debt


includes the accrued (prorated) share of thenominal interest incurred during the accountingperiod, the amortization amounts of discount orpremium for each accounting period, and the amountof change in the current value for the accountingperiod for variable-value securities.

-- Pensions, other retirement benefits, and otherpostemployment benefits - The liability andassociated expense for pensions and otherretirement benefits (including health care) shouldbe recognized at the time the employee's servicesare rendered. The expense for postemploymentbenefits should be recognized when a futureoutflow or other sacrifice of resources isprobable and measurable based on events occurringon or before the reporting date. Any part of thatcost unpaid at the end of the period is aliability. The aggregate entry age normalactuarial cost method should be used to calculatethe expense and the liability for the pension andother retirement benefits for the administrativeentity financial statements, as well as theexpense for the employer entity financialstatements. The employer entity should recognizean expense and a liability for postemploymentbenefits when a future outflow or other sacrificeof resources is probable and measurable on thebasis of events that have occurred as of thereporting date.

-- Insurance and guarantee programs - Allfederal insurance and guarantee programs [FN 7:Social insurance is considered to be a separateprogram type not included within insurance andguarantee programs. See social insurancediscussion in FASAB ED, "Supplementary StewardshipReporting."] (except social insurance and loanguarantee programs [FN 8: Accounting for federalloan guarantee programs should follow theStatement of Federal Financial AccountingStandards Number 2, "Accounting for Direct Loansand Loan Guarantees" (August 23, 1993).]) shouldrecognize a liability for unpaid claims incurredresulting from insured events that have alreadyoccurred. Insurance and guarantee programs


should recognize as an expense all claims incurredduring the period, including, when appropriate,those not yet reported. The change in acontingent liability during the reporting periodshould also be recognized as a component ofexpense. Life insurance programs should recognizea liability for future policy benefits in additionto the liability for unpaid claims incurred. Allfederal insurance and guarantee programs (exceptlife insurance and loan guarantee programs) shouldalso report as required supplementary stewardshipinformation (RSSI) the expected losses that arebased on risk inherent in the insurance andguarantee coverage in force.

******* FIGURE 1 : "LIABILITY RECOGNITION SUMMARY"APPEARED HERE IN THE HARD COPY TEXT **********

**************************************************TABLE OF CONTENTS**************************************************

EXECUTIVE SUMMARY-- Paragraphs a-d

INTRODUCTION-- Paragraphs 1-18 PURPOSE -- Paragraph 1 SCOPE -- Paragraphs 2-7 OBJECTIVES OF FINANCIAL REPORTING -- Paragraphs 8-10 ENTITY AND DISPLAY -- Paragraphs 11-12 EFFECTIVE DATE -- Paragraph 13 STRUCTURE OF THIS DOCUMENT -- Paragraphs 14-18

LIABILITY STANDARDS-- Paragraphs 19-121 DEFINITION AND GENERAL PRINCIPLES FOR RECOGNITION OF A LIABILITY -- Paragraphs 19-34


CONTINGENCIES -- Paragraphs 35-42 CAPITAL LEASES -- Paragraphs 43-46 FEDERAL DEBT AND RELATED INTEREST COST -- Paragraphs 47-55 PENSIONS, OTHER RETIREMENT BENEFITS, AND OTHER POSTEMPLOYMENT BENEFITS -- Paragraphs 56-96 INSURANCE AND GUARANTEES -- Paragraphs 97-121

APPENDIX A: BASIS FOR CONCLUSIONS-- Paragraphs 122-193 EXCHANGE AND NONEXCHANGE TRANSACTIONS -- Paragraphs 126-133 CONCLUSION ON SOCIAL INSURANCE -- Paragraphs 134-136 IMPACT OF COMMUNICATING INFORMATION IN GENERAL PURPOSE FEDERAL FINANCIAL REPORTS -- Paragraphs 137-141 RELATIONSHIP TO LIABILITY RECOGNITION PRINCIPLES USED BY PRIVATE SECTOR ENTITIES -- Paragraphs 142-143 CONCLUSION ON CONTINGENCIES -- Paragraphs 144-147 CONCLUSION ON PENSIONS, OTHER RETIREMENT BENEFITS AND OTHER POSTEMPLOYMENT BENEFITS -- Paragraphs 148-181 VETERANS MEDICAL CARE COST -- Paragraphs 182-184 CONCLUSION ON INSURANCE AND GUARANTEES -- Paragraphs 185-193

APPENDIX B: LIABILITY RECOGNITION AND MEASUREMENTMATRIX ****THIS MATRIX IS AVAILABLE IN HARD COPYONLY****

GLOSSARY

**************************************************INTRODUCTION**************************************************

PURPOSE


1 The purpose of this Statement is to establishaccounting standards to recognize and measureliabilities in general purpose federal financialreports, which are issued for both internal andexternal users. Appendixes provide background,rationale, and examples of how to apply thisstandard to liabilities associated with federalprograms' transactions and events.

SCOPE

2 This Statement articulates a generalprinciple that should guide preparers of generalpurpose federal financial reports. It alsoprovides more detailed guidance regardingliabilities resulting from deferred compensation,insurance and guarantees (except socialinsurance), certain entitlements, and certainother transactions. The Statement addressesliabilities not covered in Statement of FederalFinancial Accounting Standards (SFFAS) Number 1,"Accounting for Selected Assets and Liabilities",and in Statement of Federal Financial AccountingStandards Number 2, "Accounting for Direct Loansand Loan Guarantees."

3 The concept of a liability in this documentis consistent with those in Statements Number 1and 2. The definition amends the stateddefinition of a liability in SFFAS Number 1.This Statement establishes accounting forliabilities not covered in SFFAS No. 1 and 2.Statement Number 1 addresses only those selectedliabilities that routinely recur in normaloperations and are due within a fiscal year. Theliabilities covered in Statement Number 1 areaccounts payable, interest payable, and othercurrent liabilities, such as accrued salaries,accrued entitlement benefits payable, and unearnedrevenue. [FN 9: Adapted from Statement of FederalFinancial Accounting Standards (SFFAS) Number 1,"Accounting for Selected Assets and Liabilities"(March 30, 1993), p. 25.]

4 Statement Number 2 addresses liabilitiesspecifically arising from direct loans and loan


guarantees. Loan guarantees are "any guarantee,insurance, or other pledge with respect to thepayment of all or part of the principal orinterest on any debt obligation of a nonfederalborrower to a nonfederal lender, but they do notinclude the insurance of deposits, shares, orother withdrawable accounts in financialinstitutions."[FN 10: OMB Circular No. A-11 ascited in Statement of Federal Financial AccountingStandards Number 2, "Accounting for Direct Loansand Loan Guarantees" (August 23, 1993), p. 46.]

5 The general conceptual definition of"liability" underlying this Statement is similarin some respects to that articulated by theFinancial Accounting Standards Board (FASB) butthe FASAB made certain modifications to theprivate sector concept to apply it within thefederal context. Also, as is explained in theBasis for Conclusions, the specific standardsdealing with pensions, other retirement benefits,and postemployment benefits differ from those theFASB has published.

6 This Statement requires certain disclosuresabout existing liabilities. The Statement,however, does not fully address information aboutstewardship responsibilities, including socialinsurance,[FN 11: Stewardship responsibilities arefurther discussed in "Supplementary StewardshipReporting."] related to future financialreporting periods. Such information may bereported in a supplementary stewardship report,pursuant to standards now being developed (seeFASAB's ED, "Supplementary StewardshipReporting"). Information about projected futureoutflows is vital to making informed decisionsabout public policies, including the level ofbenefits promised under current law and the levelof revenues/premiums required to liquidate theliability (if any).

7 The recognition of social insuranceprograms[FN 12: Social insurance programs areincome transfer programs financed by compulsoryearmarked taxes and in certain cases also include


general revenues of the federal government.]presented the Board with significant theoreticaland practical problems. The exposure process forthe draft liability standard brought forthstrongly held positions about social insurance.Upon reconsideration of the issues the Boardconcluded that, regardless of the technical meritsof the arguments concerning the nature of socialinsurance programs, it was questionable whetheradequate information concerning social insurancecould be presented by means of a single, point-in-time number on a Balance Sheet. The Boardmodified the draft standard so it would requireseveral measures of social insurance to bepresented. The Board decided that, given thesensitivity and magnitude of social insurance, thenew proposal should receive additional exposure toallow users to review it and comment. The Boardfelt that the concepts and alternatives had notyet been presented to the user community insufficient detail. Hence, the discussion ofsocial insurance has been withdrawn from theliability standard and presented in the"Supplementary Stewardship Reporting" ExposureDraft. (For more details see the Basis forConclusions).

OBJECTIVES OF FEDERAL FINANCIAL REPORTING

8 When developing accounting standards for thefederal government, the significant environmentaldifferences between the federal government and theprivate sector must be kept in mind. Statement ofFederal Financial Accounting Concepts Number 1,"Objectives of Federal Financial Reporting",discusses the federal accounting and financialreporting environment. It notes the following:

-- The federal government is unique, whencompared with any other entity in the country,because it is the vehicle through which thecitizens of the United States exercise theirsovereign power. The federal government has thepower through law, regulation, and taxation toexercise ultimate control over many facets of thenational economy and society. All other entities


within the nation, both public and private,operate within the context of laws, oversight, andaccountability established by the nationalgovernment. The federal government is accountableonly to its citizens. It is politicallyaccountable to the electorate, but no higheragency has the power to demand an accounting fromthe government.

9 The objectives of federal financial reportingwere designed to guide the Board in developingaccounting standards to enhance the financialinformation reported by the federal government.The four objectives are discussed under theheadings (1) budgetary integrity, (2) operatingperformance, (3) stewardship, and (4) systems andcontrol. These objectives were used as a basis todevelop the Liability Statement. The Boardbelieves that the operating performance objectivehas special relevance to decisions aboutrecognition and measurement of liabilities ingeneral purpose federal financial reports. Thatobjective reads as follows:

"Federal financial reporting should assistreport users in evaluating the service efforts,cost, and accomplishments of the reporting entity;the manner in which these efforts and accomplish-ments have been financed; and the management ofthe entity's assets and liabilities."[FN 13:Statement of Federal Financial Accounting ConceptsNumber 1, 'Objectives of Federal FinancialReporting" (Sept. 2, 1993).]

10 At the same time, the Board recognizes thatthe third objective, dealing with stewardship, isequally important.

"Federal financial reporting should assistreport users in assessing the impact on thecountry of the government's operations andinvestments for the period and how, as a result,the government's and the nation's financialconditions have changed and may change in thefuture. Federal financial reporting should provide


information that helps the reader to determine:

-- whether the government's financialposition improved or deteriorated over the period;

-- whether future budgetary resources willlikely be sufficient to sustain public servicesand to meet obligations as they come due; and

-- whether government operations havecontributed to the nation's current and futurewell-being.

Examples of information relevant to thisobjective include:

-- the amount of assets, liabilities, and netassets (or net position);

-- an analysis of government debt, itsgrowth, and debt service requirements;

-- changes in the amount and servicepotential of capital assets; andthe amount of contingent liabilities andunrecognized obligations [FN 14: The term"obligation" is used in its everyday or genericsense, not as it is used in federal budgetaryaccounting.] (such as the probable cost of depositinsurance)."

Accordingly, information about projectedfuture responsibilities and resources is asimportant as information about assets,liabilities, revenues, and expenses.

ENTITY AND DISPLAY

11 SFFAC Number 2, "Entity and Display" is aconcept statement that provides a framework fordefining the meaningful reporting units forgeneral purpose federal financial reports withconsideration of the relationships among thebudgetary, organizational, and programmatic units.The Concept Statement also describes in generalterms the nature of general purpose federal


financial reports, including their names andformats. Agreement on the concepts of entity anddisplay is necessary to establish standards forpresenting general purpose federal financialreports.

12 The "Entity and Display" and LiabilityStatements are interrelated in several ways.Decisions on each affected the other. Forexample, the "Entity and Display" ConceptStatement suggests what reporting units shouldreport liabilities and, in general terms, howthese liabilities should be displayed. Theprovisions of the Concept Statement thatcontemplate presentation of information aboutfuture stewardship responsibilities as well asinformation about events and transactions thathave occurred are related to the selection ofevents and transactions to be recognized.[FN 15:See Statement of Federal Financial AccountingConcepts (SFFAC) Number 2, "Entity and Display"(April 20, 1995).]

EFFECTIVE DATE

13 The accounting standards presented in thisStatement become effective for fiscal periodsbeginning after September 30, 1996. Earlierimplementation is encouraged.

STRUCTURE OF THIS DOCUMENT

14 This document has three sections, twoappendixes, and a glossary. The first section,the executive summary, precedes this section.This introduction constitutes the second section.The remaining section and appendixes are describedbelow.

Liability Standards

15 This section presents a definition andcriteria for recognizing a liability and relateddisclosure requirements. It also providesspecific standards for contingencies, capitalleases, federal debt, pensions, other


postemployment and retirement benefits, andinsurance (other than social insurance) andguarantees.

Appendix A: Basis For Conclusions

16 This appendix summarizes considerations thatmembers of the Board deemed significant inreaching the conclusions in the Statement.

Appendix B: Liability Recognition and MeasurementMatrix

17 The Liability Recognition and MeasurementMatrix illustrates the measurement attributes andrecognition points for several transactions andevents (***THIS MATRIX IS AVAILABLE IN HARD COPYONLY***).

Glossary

18 The glossary defines various terms used inthis Statement.

**************************************************LIABILITY STANDARDS**************************************************

DEFINITION AND GENERAL PRINCIPLEFOR RECOGNITION OF A LIABILITY

19 A liability for federal accounting purposesis a probable future outflow or other sacrifice ofresources as a result of past transactions orevents. General purpose federal financialreports should recognize [FN 16: Recognition meansreporting a dollar amount on the face of the basicfinancial statements.] probable and measurablefuture outflows or other sacrifices of resourcesarising from (1) past exchange transactions, (2)government-related events, (3) government-acknowledged events, or (4) nonexchangetransactions that, according to current law andapplicable policy, are unpaid amounts due as ofthe reporting date.[FN 17: This document uses the


term "nonexchange transaction" in a way similar toFASB's "nonreciprocal transfer." That is, itimplies a one-way flow of resources, services, orpromises between two parties. "Transaction" inthe phrase "nonexchange transaction" does notinclude reclassification, closing, and similar"internal" entries to the accounting records,though some accountants use the term in thatbroader sense. "Probable" means more likely thannot. "Measurable" means reasonably estimable.]

Events and Transactions

20 The existence of a past event (which includestransactions) is essential for liability recog-nition. An event is a happening of financialconsequence to an entity.[FN 18: "Consequence" isdefined as something of importance orsignificance.] An event may be an internal eventthat occurs within an entity, such as transformingraw materials into a product. An event may alsobe an external event that involves interactionbetween an entity and its environment, such as atransaction with another entity, an act of nature,a theft, vandalism, an injury caused bynegligence, or an accident.

21 As the term is used in this Statement, atransaction involves the transfer of something ofvalue. Transactions may be either exchangetransactions or nonexchange transactions. Thedistinction between exchange and nonexchangetransactions is important in determining the pointof liability recognition in federal accounting.

22 An exchange transaction arises when eachparty to the transaction sacrifices value andreceives value in return. There is a two-way flowof resources or of promises to provide resources.In an exchange transaction, a liability isrecognized when one party receives goods orservices in return for a promise to provide moneyor other resources in the future.[FN 19: Executorycontracts where goods and services have not beenreceived are not generally recognized asliabilities in financial accounting, although they


are generally recognized as obligations ingovernmental budgetary accounting.]

23 An example of an exchange transaction occurswhen a federal employee performs services inexchange for compensation. The compensationincludes current salary and future retirementbenefits. An exchange transaction occurs becauseboth parties (the employee and the employer)receive and sacrifice value. The expense isrecognized in the period that the exchange occurs.The compensation liability includes unpaid salaryamounts earned and the cost of future retirementbenefits related to current period services.

24 A nonexchange transaction arises when oneparty to a transaction receives value withoutdirectly giving or promising value in return.There is a one-way flow of resources or promises.For federal nonexchange transactions, a liabilityshould be recognized for any unpaid amounts due asof the reporting date. This includes amounts duefrom the federal entity to pay for benefits,goods, or services [FN 20: Goods or services maybe provided under the terms of the program in theform of, for example, contractors providing aservice for the government on the behalf of thedisaster relief beneficiaries.] provided underthe terms of the program, as of the federalentity's reporting date, whether or not suchamounts have been reported to the federal entity(for example, estimated Medicaid payments due tohealth providers for service that has beenrendered and that will be financed by the federalentity but have not yet been reported to thefederal entity).

25 Many grant and certain entitlement programsare nonexchange transactions. When the federalgovernment creates an entitlement program or givesa grant to state or local governments, theprovision of the payments is determined by federallaw rather than through an exchange transaction.

26 An event is defined as a happening offinancial consequence to an entity. For federal


financial reporting, some events may be other thantransaction based and these events may beclassified in one of two categories: (1)government-related events or (2) government-acknowledged events.

27 Government-related events are nontransaction-based events that involve interaction between thefederal government and its environment. The eventmay be beyond the control of the federal entity.In general, a liability is recognized inconnection with government-related events on thesame basis as those that arise in exchangetransactions. Events, such as a federal entityaccidentally causing damage to private property,would create a liability when the event occurred,to the extent that existing law and policy made itprobable that the federal government would pay forthe damages and to the extent that the amount ofthe payment could be estimated reliably. [FN 21:The vast majority of claims against the UnitedStates Government stemming from tortiousgovernment conduct are adjudicated under theFederal Tort Claims Act (FTCA), which provides forboth administrative and judicial resolution.Administrative awards under the establishedthreshold are paid from agency appropriations.Administrative awards in excess of the establishedthreshold are paid from the judgmentappropriation. Court judgments and compromisesettlements by the Department of Justice are paidfrom the judgment appropriation regardless ofamount. This Act means that, for certain types ofevents it is not necessary for the government toacknowledge financial responsibility separatelyfor each individual event as is the case forevents described in paragraph 30.]

28 Government-related events include:

(1) cleanup from federal operationsresulting in hazardous waste that the federalgovernment is required by statutes and/orregulations, that are in effect as of the BalanceSheet date, to clean up (i.e., remove, contain, ordispose of);[FN 22: See SFFAS No. 6, "Accounting


for Property, Plant, and Equipment" for a detaileddiscussion of cleanup cost.]

(2) accidental damage to nonfederal propertycaused by federal operations; and

(3) other damage to federal property causedby such factors as federal operations or naturalforces.[FN 23: The subjects of valuing assets andof measuring asset impairments--thus measuring theloss to be recognized--are beyond the scope ofthis Statement. See SFFAS No. 6, Accounting forProperty, Plant, and Equipment for a discussion onthe impairment or loss of federal property.]

29 Government-related events resulting in aliability should be recognized in the period theevent occurs if the future outflow or othersacrifice of resources is probable and theliability can be measured, or as soon thereafteras it becomes probable and measurable.

30 Government-acknowledged events are thosenontransaction-based events that are of financialconsequence to the federal government because itchooses to respond to the event. The federalgovernment has broad responsibility to provide forthe public's general welfare. The federalgovernment has established programs to fulfillmany of the general needs of the public and oftenassumes responsibilities for which it has no priorlegal obligation.

31 Consequently, costs from many events, such astoxic waste damage caused by nonfederal entitiesand natural disasters, may ultimately become theresponsibility of the federal government. Butthese costs do not meet the definition of a"liability" until, and to the extent that, thegovernment formally acknowledges financialresponsibility for the cost from the event and anexchange or nonexchange transaction has occurred.In other words, the federal entity shouldrecognize the liability and expense when both ofthe following two criteria have been met (1) theCongress has appropriated or authorized (i.e.,


through authorization legislation) resources and(2) an exchange occurs (e.g., when a contractorperforms repairs) or nonexchange amounts areunpaid as of the reporting date (e.g., directpayments to disaster victims), whichever applies.

32 The following example illustrates theliability recognition of government-acknowledgedevents. A tornado damages a U.S. town and theCongress appropriates funds in response to thedisaster. This event is of financial consequenceto the federal government because the federalgovernment chooses to provide disaster relief tothe town. Transactions resulting from thisappropriation, including disaster loans, outrightgrants to individuals, and work performed bycontractors paid by the federal entities, arerecognized as exchange or nonexchangetransactions. In the case of exchangetransactions, amounts payable for goods andservices provided to federal entities arerecognized when the goods are delivered or thework is done. In the case of nonexchangetransactions, a liability should be recognized forany unpaid amounts due as of the reporting date.The liability includes amounts due from thefederal entity to pay for benefits, goods, orservices provided under the terms of the program,as of the federal entity's reporting date, whetheror not such amounts have been reported to thefederal entity.

Probable Future Outflow orOther Sacrifice of Resources

33 "Probable" refers to that which canreasonably be expected or is believed to be morelikely than not on the basis of available evidenceor logic. The probability of a future outflow orother sacrifice of resources is assessed on thebasis of current facts and circumstances. Thesecurrent facts and circumstances include the lawthat provides general authority for federal entityoperations and specific budget authority to fundprograms. If budget authority has not yet been


provided, a future outflow or other sacrifice ofresources might still meet the probability test if(1) it directly relates to ongoing entity opera-tions and (2) it is the type for which budgetauthority is routinely provided. Therefore, thedefinition applies both to liabilities covered bybudgetary resources and to liabilities not coveredby budgetary resources.[FN 24: See Statement ofFederal Financial Accounting Standards Number 1,"Accounting for Selected Assets and Liabilities",(March 30, 1993), app. A, p. 25.]

Measurability

34 "Measurability" means that an item has arelevant attribute that can be quantified inmonetary units with sufficient reliability to bereasonably estimable. Liabilities reported in thefinancial report are measured by differentattributes specified by various accountingstandards. Several different measurementattributes are used for different items in presentpractice (e.g., fair market value, current cost,present value, expected value, settlement value,and historical cost).

CONTINGENCIES

35 A contingency is an existing condition,situation, or set of circumstances involvinguncertainty as to possible gain or loss to anentity. The uncertainty will ultimately beresolved when one or more future events occur orfail to occur. Resolution of the uncertainty mayconfirm a gain (i.e., acquisition of an asset orreduction of a liability) or a loss (i.e., loss orimpairment of an asset or the incurrence of aliability).[FN 25: Contingencies are differentfrom "subsequent events" as used in theaccounting/audit literature. Subsequent eventsare events or transactions that occur subsequentto the Balance Sheet date, but prior to theissuance of the financial statements and auditor'sreport, that have a material effect on thefinancial statements and therefore requireadjustment or disclosure in the statements.]


36 This Statement does not deal with gaincontingencies or measurement of contingencies thatinvolve impairment of nonfinancial assets. When aloss contingency (i.e., contingent liability)exists, the likelihood that the future event orevents will confirm the loss or the incurrence ofa liability can range from probable to remote.The probability classifications are as follows:

-- Probable: The future confirming event orevents are more likely than not to occur.

-- Reasonably possible: The chance of thefuture confirming event or events occurring ismore than remote but less than probable.

-- Remote: The chance of the future event orevents occurring is slight.

37 The following are some examples of losscontingencies:

-- collectibility of receivables, -- pending or threatened litigation, and -- possible claims and assessments.

Criteria for Recognitionof a Contingent Liability

38 A contingent liability should be recognizedwhen all of these three conditions are met: [FN26: The unit of analysis for estimatingliabilities can vary according to the reportingentity and the nature of the transaction or event.The liability recognized may be the estimation ofan individual transaction or event; or a group oftransactions and events. For example, SFFASNumber 2, "applies to direct loans and loanguarantees on a group basis, such as a cohort or arisk category of loans and loan guarantees.Present value accounting does not apply to directloans or loan guarantees on an individual basis,except for a direct loan or loan guarantee thatconstitutes a cohort or a risk category."


Statement of Federal Financial AccountingStandards Number 2, "Accounting for Direct Loansand Loan Guarantees" p.9. See the standard onInsurance and Guarantees in this document for adescription of incurred but not reported (IBNR)claims.]

-- A past event or exchange transaction hasoccurred (e.g., a federal entity has breached acontract with a nonfederal entity).[FN 27: In thecase of government-acknowledged events giving riseto nonexchange or exchange transactions, theremust be a formal acceptance of financialresponsibility by the federal government, as whenthe Congress has appropriated or authorized (i.e.,through authorization legislation) resources.Furthermore, exchange transactions that arisefrom government-acknowledged events would berecognized as a liability when goods or servicesare provided. For nonexchange transactions, aliability would then be recognized at the pointthe unpaid amount is due. Therefore,government-acknowledged events do not meet thecriteria necessary to be recognized as acontingent liability.]

-- A future outflow or other sacrifice ofresources is probable (e.g., the nonfederal entityhas filed a legal claim against a federal entityfor breach of contract and the federal entity'smanagement believes the claim is more likely thannot to be settled in favor of the claimant).

-- The future outflow or sacrifice ofresources is measurable (e.g., the federalentity's management determines an estimatedsettlement amount).

39 The estimated liability may be a specificamount or a range of amounts. If some amountwithin the range is a better estimate than anyother amount within the range, that amount isrecognized. If no amount within the range is abetter estimate than any other amount, the minimumamount in the range is recognized and the rangeand a description of the nature of the contingency


should be disclosed.

Criteria for Disclosure of a Contingent Liability

40 A contingent liability should be disclosed ifany of the conditions for liability recognitionare not met and there is at least a reasonablepossibility that a loss or an additional loss mayhave been incurred. "Disclosure" in this contextrefers to reporting information in notes regardedas an integral part of the basic financialstatements.

41 Disclosure should include the nature of thecontingency and an estimate of the possibleliability, an estimate of the range of thepossible liability, or a statement that such anestimate cannot be made.

42 In some cases, contingencies may beidentified but the degree of uncertainty is sogreat that no reporting (i.e., recognition ordisclosure) is necessary in the general purposefederal financial reports. Specifically,contingencies classified as remote need not bereported in general purpose federal financialreports, though law may require such disclosuresin special purpose reports. If information aboutremote contingencies or related to remotecontingencies is included in general purposefederal financial reports (e.g., the total faceamount of insurance and guarantees in force), itshould be labeled in such a way to avoid themisleading inference that there is more than aremote chance of a loss of that amount.

CAPITAL LEASES

43 Capital leases are leases that transfersubstantially all the benefits and risks ofownership to the lessee. If, at its inception, alease meets one or more of the following fourcriteria, the lease should be classified as acapital lease by the lessee:

-- The lease transfers ownership of the


property to the lessee by the end of the leaseterm.

-- The lease contains an option to purchasethe leased property at a bargain price.

-- The lease term is equal to or greater than75 percent of the estimated economic life of theleased property.

-- The present value of rental and otherminimum lease payments, excluding that portion ofthe payments representing executory cost, equalsor exceeds 90 percent of the fair value of theleased property.

The last two criteria are not applicable when thebeginning of the lease term falls within the last25 percent of the total estimated economic life ofthe leased property. If a lease does not meet atleast one of the above criteria it should beclassified as an operating lease.44 The amount to be recorded by the lessee as aliability under a capital lease is the presentvalue of the rental and other minimum leasepayments during the lease term, excluding thatportion of the payments representing executorycost to be paid by the lessor.[FN 28: "The cost ofgeneral property, plant, and equipment acquiredunder a capital lease shall be equal to the amountrecognized as a liability for the capital lease atits inception." See SFFAS No. 6, Accounting forProperty, Plant, and Equipment.] However, if theamount so determined exceeds the fair value of theleased property at the inception of the lease, theamount recorded as the liability should be thefair value. If the portion of the minimum leasepayments representing executory cost is notdeterminable from the lease provisions, the amountshould be estimated.

45 The discount rate to be used in determiningthe present value of the minimum lease paymentsordinarily would be the lessee's incrementalborrowing rate unless (1) it is practicable forthe lessee to learn the implicit rate computed by


the lessor and (2) the implicit rate computed bythe lessor is less than the lessee's incrementalborrowing rate. If both these conditions are met,the lessee shall use the implicit rate. Thelessee's incremental borrowing rate shall be theTreasury borrowing rate for securities of similarmaturity to the term of the lease.

46 During the lease term, each minimum leasepayment should be allocated between a reduction ofthe obligation and interest expense so as toproduce a constant periodic rate of interest onthe remaining balance of the liability.[FN 29: OMBCircular No. A-11, "Preparation and Submission ofAnnual Budget Estimates," explains the measurementof budget authority, outlays, and debt for thebudget in the case of lease-purchases and othercapital leases. Circular A-94, "Guidelines andDiscount Rates for Benefit-Cost Analysis ofFederal Programs," provides the requirementsunder which a lease-purchase or other capitallease has to be justified and the analyticalmethods that need to be followed.]

FEDERAL DEBT AND RELATEDINTEREST COST

47 This standard applies to all securities orother debt instruments issued by the U.S. Treasuryor other federal agencies. It encompasses debtissued to the public and debt issued to federalaccounts by other federal accounts.[FN 30: Thisincludes but is not limited to debt issued by theU.S. Treasury to trust funds, agency borrowingsfrom Treasury, and trust fund borrowings fromother trust funds.]

48 Accounting for the federal debt shouldidentify the amount of the outstanding debtliability of the federal government at any giventime and the related interest cost for eachaccounting period. This entails valuingsecurities initially at their sales price orproceeds, ultimately at the amount paid to theholder at maturity, and in the intervening period


in a way that fairly expresses the federalgovernment's liability.

Accounting for Federal Debt Securities[FN 31:Figure 2 (available in Hard Copy only) listsvarious categories and examples of federal debtsecurities.]

49 Federal debt securities fall into two majorcategories for accounting purposes: fixed valuesecurities and variable value securities.

Fixed Value Securities

50 Fixed value securities have a known maturityor redemption value at the time of issue. Thesesecurities should be valued at their original face(par) value net of any unamortized discount orpremium. Securities sold at face (par) have nodiscount or premium and should be valued at face(par). Securities sold at a discount willincrease in value between sale and maturity;securities sold at a premium will decrease invalue. Amortization of the discount or premiummay follow the straight line method or theinterest method.[FN 32: For an explanation and anexample of the interest method of amortization,see Appendix B of SFFAS No. 1.] Either method isacceptable in the cases of

-- short-term securities that have a maturityof 1 year or less, and

-- longer-term securities for which theamount of amortization under the straight-linemethod would not be materially different from theamount of amortization under the interest method.

51 In all other cases, the interest method foramortizing any discount or premium should be used.

Variable Value Securities

52 Variable value securities have unknownredemption or maturity values at the time ofissue. Values of these securities can vary on the


basis of regulation or specific language in theoffering. These securities should be originallyvalued and periodically revalued at their currentvalue, on the basis of the regulations or offeringlanguage.

Related Interest Cost

53 The related interest cost of the federal debtinclude:

-- the accrued (prorated) share of thenominal interest incurred during the accountingperiod,

-- the amortization amounts of discount orpremium for each accounting period (based on thesame amortization method used to account for therelated debt liability) for fixed valuesecurities, and

-- the amount of change in the current valuefor the accounting period for variable valuesecurities.

Retirement Prior to Maturity

54 For those securities that are retired priorto the maturity date due to a call feature of thesecurity, or because they are eligible forredemption by the holder on demand, the differencebetween the reacquisition price and the netcarrying value of the extinguished debt should berecognized currently in the period of theextinguishment as losses or gains.

Old Currencies Issued by the Federal Government[FN33: Old currencies include National and FederalReserve Bank Notes, Old Demand Notes, Old Seriescurrency, and silver certificates classified aspublic debt pursuant to 31 U.S.C. 5119.]

55 Pursuant to federal law, old currenciesissued by the federal government and not yetredeemed or written off are identified as afederal debt liability at face value and do not


bear any interest.

**************FIGURE 2: VARIOUS CATEGORIES ANDEXAMPLES OF FEDERAL DEBT SECURITIES APPEARED HEREIN THE HARD COPY TEXT **************************[FN 34: These tables are intended to illustratecurrent practice only and are not to be consideredauthoritative.]

PENSIONS, OTHER RETIREMENT BENEFITS,AND OTHER POSTEMPLOYMENT BENEFITS

56 Employee benefits of federal civilian andmilitary personnel and veterans[FN 35: Veterans'compensation included in this category is ameasurable program benefit that directly relatesto a veteran's prior military service and is notthe type of benefit included in general fundbenefit programs. For example, compensatoryincome payments for injuries sustained in the lineof duty (i.e., VA disability compensationbenefits) are employee benefits, while entitlementbenefits (i.e., VA pension) are accounted for asgeneral fund benefits. (Also see Appendix A:Basis for Conclusions.)] include pensions andpostemployment and retirement benefits other thanpensions. Pension plans[FN 36: This standardaddresses "defined benefit plans," which definethe future benefits that will be paid in terms ofsuch factors as age, years of service, orcompensation. The amount of benefit depends on anumber of future events incorporated in the plan'sbenefit formula.] provide benefits upon retirementand may also provide benefits for death,disability, or other termination of employmentbefore retirement. Pension plans may also includebenefits to survivors and dependents, and they maycontain early retirement or other specialfeatures. The actuarially determined liabilityand expense of the plan, including all itsprovisions, is part of the pension plan'sliability and expense estimate.

57 In addition to or in lieu of pension


benefits, a liability for postemployment and otherretirement benefits may be incurred outside thepension plan. Postemployment benefits other thanpensions (OPEB) include all types of benefitsprovided to former or inactive (but not retired)employees, their beneficiaries, and covereddependents.[FN 37: Special termination benefits(such as specially authorized separation incentiveprograms) are considered other postemploymentbenefits and should be recognized as such.]Inactive employees are those who are not currentlyrendering services to their employers and who havenot been terminated, but who are not eligible foran immediate annuity, including those temporarilylaid off or disabled. OPEB include salarycontinuation, severance benefits, counseling andtraining, continuation of health care or otherbenefits, and unemployment and workers'compensation benefits paid by the employerentity.[FN 38: The terms "employer entity" and"administrative entity" are used in this documentto distinguish between entities that employfederal workers and thereby generate the employeecosts, including pension cost, and those that areresponsible for managing and/or accounting for thepension or the other employee plan. For example,entities that receive "salaries and expense"appropriations are employer entities, while theOffice of Personnel Management is anadministrative entity because it administers thecivilian retirement benefit plans.]

58 Retirement benefits other than pensions (ORB)are all forms of benefits to retirees or theirbeneficiaries provided outside the pension plan.Examples include health and life insurance.Retirement health care benefits are the primaryORB expense. They present unique measurementproblems.

59 Pension benefits, OPEB, and ORB are exchangetransactions because the employee performs servicein part to receive the deferred compensationprovided by the plans (such as future pension andmedical care benefits). For pension and otherretirement benefits, the expense is recognized at


the time the employees' services are rendered.For OPEB, the expense is recognized at the timethe accountable event occurs. Any part of thatcost unpaid at the end of the period is aliability.

60 This Statement is intended to specify theaccounting objectives. With regard to pensionsand ORB, if estimates, averages, or such devicescan reduce the cost of applying this Statement,their use is appropriate provided the results donot materially differ from a detailed applicationof the standard.

Pensions

61 Pension benefits include all retirement,disability, and survivor benefits financed througha pension plan, including unfunded pension plans.Federal civilian and military employees arecovered primarily under the following threedefined benefit retirement plans: Civil ServiceRetirement System (CSRS), Federal EmployeesRetirement System (FERS), and Military RetirementSystem (MRS). To the extent that federalemployees are covered by social insurance programs(such as Social Security), the taxes they pay tothe program and the benefits they will eventuallyreceive are to be accounted for on the same basisused to account for other program participants.However, the payments to social insurance plansthat agencies must make are operating costs.Similarly, to the extent that federal employeesare covered by defined contribution plans (i.e.,the Thrift Savings Plan, which is like a 401(k)plan), federal payments to the plan are expenses,but the plan itself is not covered under thisstandard.

62 This Statement establishes standards ofaccounting for pension expense and related pensionliability for federal government employers andadministrative agencies.

Accounting for the Pension Plan


63 This section covers federal pension plans.The entity that administers the plan (i.e., the"administrative entity") should account for andreport the plan in accordance with thisstandard.[FN 39: In addition to the requirementsof this standard, which deals with general purposefinancial reports, federal plans report annuallypursuant to P.L. 95-595, which calls forstatements of net assets available for benefits, astatement of accumulated benefits, and otherstatements.] A subsequent section covers federalemployer entities.

64 Attribution Methods--The "aggregate entry agenormal" actuarial cost method should be used tocalculate the pension expense, the liability forthe administrative entity financial statements,and the expense for the employer entity financialstatements. The aggregate entry age normal methodis one under which the actuarial present value ofprojected benefits is allocated on a level basisover the earnings or the service of the groupbetween entry age and assumed exit ages; and itshould be applied to pensions on the basis of alevel percentage of earnings. The portion of thisactuarial present value allocated to a valuationyear is called the "normal cost." The portion notprovided for at a valuation date by the actuarialpresent value of future normal cost is called the"actuarial accrued liability."[FN 40: Adapted fromActuarial Standards of Practice No.4, "MeasuringPension Obligations" (Jan. 1990), p. 31.] Theplan, however, may use other actuarial costmethods if it explains why aggregate entry agenormal is not used and if the results are notmaterially different.

65 Assumptions--For financial reports preparedfor the three primary federal plans (CSRS, FERS,and MRS), the best available actuarial estimatesof assumptions should be used to calculate thepension expense and liability. The selection ofall actuarial assumptions should be guided byActuarial Standards of Practice No. 4, "MeasuringPension Obligations," as revised from time to timeby the Actuarial Standards Board.[FN 41: The


Actuarial Standards Board is a board within theAmerican Academy of Actuaries that setsprofessional standards of actuarial practice.]Accordingly, actuarial assumptions should be onthe basis of the actual experience of the coveredgroup, to the extent that credible experience dataare available, but should emphasize expected long-term future trends rather than give undue weightto recent past experience. Although emphasisshould be given to the combined effect of allassumptions, the reasonableness of each actuarialassumption should be considered independently onthe basis of its own merits and its consistencywith each other assumption.

66 In addition to complying with the guidance inthe preceding paragraph, the interest rateassumption should be based on an estimated long-term investment yield for the plan, givingconsideration to the nature and the mix of currentand expected plan investments and the basis usedto determine the actuarial value of assets; or ifthe plan is not being funded, other long-termassumptions (for example, the long-term federalgovernment borrowing rate). The underlyinginflation rate and the other economic assumptionsshould be consistent. The rate used to discountthe pension obligation should be equal to thelong-term expected return on plan assets.

67 The administrative entity should disclose theassumptions used. Administrative entities areencouraged to consult with one another to achievethe maximum consistency among assumptions used forfinancial reports. Smaller federal administrativeentities may employ the assumptions used by any ofthe three primary plans where appropriate or theirown assumptions. If they use assumptions thatdiffer from all of the primary plans, a footnoteshould explain how and why the assumptions differfrom one of those plans.

68 Assets should be reported separately from thepension liability rather than reporting only a netliability. Assets of federal pension plans shouldbe carried at their acquisition cost, adjusted for


amortization, if appropriate. For investments inmarket-based and marketable securities, the marketvalue of the investment should be disclosed.[FN42: See SFFAS Number 1, "Accounting for SelectedAssets and Liabilities."]

69 Past Service Cost, Prior Service Cost, andActuarial Gains and Losses--Past service costsresult from retroactive benefits granted when anew plan is initiated. Prior service costs resultfrom retroactive benefits granted in a planamendment. A plan amendment may also reducebenefits attributed to prior service. Thisresults in a gain to the extent that previouslyrecognized benefits are reduced. As explained inthe next paragraph, the accounting for such gainsshould be consistent with accounting forretroactive benefit increases. Actuarial gainsand losses are changes in the balance of thepension liability that result from (1) deviationsbetween actual experience and the actuarialassumptions used or (2) changes in actuarialassumptions.

70 The administrative entity should recognizeall past and prior service costs (or gains)immediately, without amortization. Similarly, theadministrative entity should recognize allactuarial gains and losses immediately, withoutamortization.

71 Accounting by the Administrative Entity-- Theadministrative entity should account for andreport the pension liability in its financialreport, using the aggregate entry age normalactuarial method. The liability is the actuarial

present value of all future benefits, based onprojected salaries and total projected service,less the actuarial present value of future normalcost contributions that would be made for and bythe employees under the plan. Projected salariesshould reflect an estimate of the futurecompensation levels of the individual employeesinvolved, including future changes attributed tothe general price level, productivity, seniority,


promotion, and other factors.

72 The administrative entity should report apension expense for the net of the followingcomponents:

-- normal cost;

-- interest on the pension liability duringthe period;

-- prior (and past) service cost from planamendments (or the initiation of a new plan)during the period, if any; and

-- actuarial gains or losses during theperiod, if any.

The individual components should bedisclosed.

73 The administrative entity should reportrevenue for the sum of amounts received from theemployer entity representing contributions from:

-- the employer entity and

-- its employees.[FN 43: The administrativeentity may also receive financing from the GeneralFund to cover prior service or other cost forwhich contributions from employer entities are notprovided.]

The employer entity's contribution representsintragovernmental revenue.[FN 44:Intragovernmental revenue should be eliminated forgovernment-wide consolidated financialstatements.]

An illustration of the accounting for theadministrative entity (and the employer entity) isexplained in the following section entitled"Accounting Illustration."

Employer Entity Accounting


74 The federal employer entity should recognizea pension expense in its financial report thatequals the service cost[FN 45: "Service cost" isdefined as the actuarial present value of benefitsattributed by the pension plan's benefit formulato services rendered by employees during anaccounting period. The term is synonymous with"normal cost."] for its employees for theaccounting period, less the amount contributed bythe employees, if any. The measurement of theservice cost should require the use of the plan'sactuarial cost method and assumptions, andtherefore the factor to be applied by the employerentities must be provided by the plan and/or theadministrative entity.

75 The employer entity's pension expense shouldbe balanced by: (a) a decrease to its "fundbalance with Treasury" for the amount of itscontribution to the pension plan, if any; and ifthis does not equal the full expense, by (b) anincrease to an account representing anintragovernmental imputed financing sourceentitled, for example, "imputed financing -expenses paid by other agencies." The latterrepresents the amount being financed directlythrough the pension plan's administrative entity.

76 In special instances when an employer entityis also the administrative entity, that is, whenthere is no separate pension plan (e.g., the CoastGuard), the employer entity should report theliability and recognize the pension expense forall components of cost. The liability and theexpense should be accounted for as described inthe preceding section for the administrativeentity without reference to transactions withexternal employer entities.

Accounting Illustration

77 Tables 1-4 provide an example in which theemployer entity recognizes an "employer's pensionexpense" in an amount equal to the service costattributable to its employees during the


accounting period, less the employees' owncontributions. The expense in this example ismore than the contribution that the employerentity is required by law to pay. The differencebetween the employer's pension expense and theemployer's contribution is credited to theemployer entity as a financing source ("imputedfinancing-expenses paid by other entities"). Theemployer entity transfers its contribution andthat of its employees to the administrativeentity.

78 The administrative entity recognizes revenuefor: (1) contributions from the employer entity,(2) contributions from the employees, and (3)interest on the plan's investments. Theadministrative entity recognizes expense for thenet of the pension cost components.

Assumptions are as follows:

-- Total normal cost of employees for theaccounting period is $160,000.

-- The employer's pension expense is$100,000. The employer entity would calculate itspension expense on the basis of informationreceived from the plan and/or the administrativeentity. Its pension expense is equal to its shareof the service cost of its employees' pensions.

-- According to current law, the employerentity is authorized in its appropriation to pay$60,000 for employee pensions.

-- The employees contribute $60,000 to thepension fund.

-- No general fund appropriations madedirectly to the administrative agency are involvedin these transactions, as they could be underactual operations.

Entry #1 -- Employer entity's entry to recordpension expense:


DR. Employer's Pension Expense $100,000 CR. Appropriations Used $60,000 CR. Imputed Financing - Expenses Paid by Other Entities 40,000

***************Table 1Employer Entity's Other Financing Sources as TheyShould Appear on Its Statement of Changes in NetPosition

FINANCING SOURCES:[FN 46: SFFAC No. 2, "Entity andDisplay" presents a change in the way revenue andother financing sources are reported. Thisillustration reflects the new concepts.]

Appropriations Used..........$60,000 Imputed financing ..............$40,000

Note: Imputed financing covers the differencebetween (1) the employer entity's contributiontransferred to the administrative entity pursuantto law (exclusive of the employees' contributions)and (2) the employer's pension expense calculatedon the basis of information received from theadministrative entity--as shown immediately below.

Employer Entity's Cost as It Should Appear on theStatement of Net Cost

COST :

Employer's pension cost....$ 100,000

Note: This is the employer entity's service costof employee pensions. The employer entity wouldcalculate this amount using factors provided bythe plan and/or the administrative entity. Alsoto be transferred to the administrative entity isthe amount withheld from employees' wages, ascalled for under the terms of the plan. Theemployees' contribution is not an expense of theemployer entity.***************


**Note: The above table and those that follow inthe sections on pensions and ORB are presented forillustrative purposes only; the responsibility fordefining the form and content of a financialstatement prepared pursuant to the ChiefFinancial Officers Act, as amended, is theresponsibility of the Office of Management andBudget.

Entry #2 -- Administrative entity's entry torecord revenue received from employer entity:

DR. Fund Balance with Treasury $120,000 CR. Retirement Program Revenue - Contribution Received from Employer Entity $60,000 CR. Retirement Program Revenue - Contribution Received from Employees $60,000

Entry #3 -- Administrative entity's entry torecord revenue from interest on investments inTreasury securities:

DR. Fund Balance with Treasury $XXX,XXX CR. Interest Revenue $XXX,XXX

***************Table 2

Administrative Entity's Revenue as It ShouldAppear on the Statement of Net Cost

LESS OTHER EARNED REVENUES:

Contributions received from employer entities $ 60,000 Contributions received from employees 60,000 Interest on investments XX,XXX

Total other earned revenues $ XXX,XXX


Note: Contributions are amounts transferred tothe administrative entity from the employer entityrepresenting its contribution--and that of itsemployees--for the employees' pensions.***************

Entry # 4 -- Administrative entity's entry torecord its pension expense:

DR. Pension Expense $XXX,XXX CR. Pension Liability $XXX,XXX

***************Table 3

Administrative Entity's Pension Expense

Normal cost ......................... $160,000 Interest on pension liability ............ XXX Prior serv. costs (gains) (if any) ....... XXX Actuarial gains(losses) (if any) ......... XXX

Total pension expense ...........$ XXX,XXX

**Note: The $160,000 represents 100 percent ofthe normal cost--as calculated by plan actuaries--for the one employer entity in this example.According to law, $60,000 of this amount is to becontributed by the employer entity and $60,000 isto be contributed by the employees themselves.The remaining $40,000 is a liability of thepension plan (covered by future financingsources). The pension expense is reported on theStatement of Net Cost in accordance with paragraph72.***************

***************Table 4

Administrative Entity's Pension Liability:

Beginning balance $ XX,XXX,XXX Add: additional pension expense


incurred (as calculated in table 3) XXX,XXX Less: payments made to beneficiaries XXX,XXX

Ending liability balance $ XX,XXX,XXX

Note: The liability balance should be reported onthe administrative entity's Balance Sheet.***************

Other Retirement Benefits (ORB)

79 ORB include all retirement benefits otherthan pension plan benefits.[FN 47: See Appendix A:Basis for Conclusions, for a discussion ofreporting medical costs for veterans.] ORB areprovided outside the pension plan by an employerto a former employee or the employee's beneficiaryupon retirement. The predominant ORB in thefederal government is retirement health carebenefits, and they are the focus of thissection.[FN 48: Accounting for life insurance isdescribed in a separate section of the liabilitystandard. However, to the extent that premiumspaid by covered individuals and employer entitiesdo not fully cover the retirement life insurancecost of employees, the employer entities wouldaccount for the additional cost as described inthis section.]

80 Future health care benefits present uniquemeasurement problems. They are more uncertainthan pensions since they depend on the changingpatterns of health care delivery and utilization,on the price trends for medical care, and on thebenefits provided by social insurance programslike Medicare (part A). Also, medical plans donot vest like pensions in which, after a fixednumber of years of service, an employee has aright to receive payment. To receive ORB benefitsthe employee must retire with health care benefitsprovided by the organization.


81 This Statement establishes standards ofaccounting for ORB expense and related ORBliability for federal government employers andadministrative agencies.

Accounting for the ORB Plan

82 Attribution Method--The aggregate entry agenormal actuarial cost method should be used tocalculate the ORB expense and liability for theadministrative entity's financial statements, andthe expense for the employer entity's financialstatements. As indicated in the pension section,aggregate entry age normal is a method under whichthe actuarial present value of projected benefitsis allocated on a level basis over the earnings orthe service of the group between entry age andassumed exit ages. It should be applied to ORB onthe basis of service rendered by each employee.The portion of this actuarial present valueallocated to a valuation year is called the normalcost. The portion not provided for at a valuationdate by the actuarial present value of futurenormal cost contributions is called the actuarialaccrued liability.[FN 49: Adapted from ActuarialStandards of Practice No. 4, p. 31. Also seeActuarial Standard of Practice No. 6 "Measuringand Allocating Actuarial Present Values of RetireeHealth Care and Death Benefits," ActuarialStandards Board (1988).] Unlike federal pensions,retiree health care benefits do not depend onfuture salary levels of individual employees butrather are allocable to each employee on a perperson basis. Plans may use other actuarial costmethods if they explain why aggregate entry agenormal is not used and if the results are notmaterially different.

83 Assumptions--Amounts calculated for financialreports prepared for ORB plans should reflect (1)general actuarial and economic assumptions thatare consistent with those used for pensions and(2) a health care cost trend assumption that isconsistent with Medicare projections or otherauthoritative sources appropriate for thepopulation covered by the plan. The rate used to


discount projected benefits should be equal to thelong-term expected return on plan assets if theplan is being funded or on other long-termassumptions (for example, the long-term federalgovernment borrowing rate) for unfunded plans.The administrative entity should disclose theassumptions used.

84 The accrual period should be based onexpected retirement age rather than the age whenthe employee first becomes eligible.

85 Assets should be reported separately from theORB liability rather than merely reporting the netliability. Assets of federal ORB plans should becarried at their acquisition cost, adjusted foramortization, if appropriate.[FN 50: See SFFAS No.1, "Accounting for Selected Assets andLiabilities."] For investments in market-based andmarketable securities, the market value of theinvestment should be disclosed.

86 Past Service Cost, Prior Service Cost, andActuarial Gains and Losses--The standard for ORBis the same as that for pensions. Past servicecosts result from retroactive benefits grantedwhen a new plan is initiated. Prior service costsresult from retroactive benefits granted in a planamendment. A plan amendment may also reducebenefits attributed to prior service resulting ina gain to the plan to the extent that previouslyrecognized benefits are reduced. The accountingfor such gains should be consistent withaccounting for retroactive benefit increases.Actuarial gains and losses are changes in thebalance of the ORB liability that result from (1)deviations between actual experience and theactuarial assumptions used or (2) changes inactuarial assumptions.

87 The administrative entity should recognizeall past and prior service costs (or gains)immediately, without amortization. Similarly, theadministrative entity should recognize allactuarial gains and losses immediately, withoutamortization.


88 Accounting for the ORB Plan--The ORB planshould be accounted for in a way that is verysimilar to that described above for pensions. Theadministrative entity should account for andreport the ORB liability in its financial report,using the aggregate entry age normal method. Theliability is the actuarial present value of allfuture benefits less the actuarial present valueof future normal cost contributions that would bemade for and by the employees under the plan. Theadministrative entity should report an ORB expensefor the net of the following components:

-- normal cost,

-- interest on the ORB liability during theperiod,

-- prior (and past) service costs from planamendments (or the initiation of a new plan)during the period, if any,

-- any gains/losses due to a change in themedical inflation rate assumption; and

-- other actuarial gains or losses during theperiod, if any.

The individual components should bedisclosed.

89 The administrative entity should reportrevenue for the sum of amounts received, if any,from the employer entity representingcontributions from:

-- the employer entity and

-- its employees.

The employer entity's contribution representsintragovernmental revenue.[FN 51:Intragovernmental revenue should be eliminated forgovernment-wide consolidated financialstatements.] An illustration of the accounting


for the administrative entity (and employerentity) is provided in the following sectionentitled "Accounting Illustration".

Employer Entity Accounting

90 The federal employer entity should accountfor and report the ORB expense in its financialreport in a manner similar to that used forpensions. The employer's ORB expense should berecognized in an amount equal to the total servicecost[FN 52: "Service cost" is defined as theactuarial present value of benefits attributed toservices rendered by employees during anaccounting period. The term is synonymous with"normal cost".] for its employees for theaccounting period, less the amount contributed byits employees, if any. The measurement of theservice cost requires use of the plan's actuarialcost method and assumptions. The cost factorshould be provided to the agencies on a peremployee basis by the administrative entity and/orthe plan.

91 The employer entity's ORB expense should bebalanced by (a) a decrease to the employerentity's "fund balance with Treasury" for theamount of its contributions to the ORB plan, ifany; and, if this does not equal the full expense,(b) by an increase to an account representing anintragovernmental financing source entitled, forexample, "imputed financing - expenses paid byother entities." The latter represents the amountbeing financed directly through the ORB plan.

92 In special instances when an employer entityis also the administrative entity, the employerentity should report the liability and recognizethe ORB expense for all components of cost. Forexample, the entity is paying its retirees' ORB ona pay-as-you-go basis. The liability and theexpense should be accounted for as described inthe preceding section for the administrativeentity accounting without reference totransactions with external employer entities.


Accounting Illustration

93 Tables 5-8 provide an example where theemployer entity recognizes an "employer's ORBexpense" in an amount equal to the service costattributable to its employees during theaccounting period. In this example, neither theemployer entity nor its employees contribute tothe plan. The employer's ORB expense is offset bya credit to the employer entity as a financingsource ("imputed financing-expenses paid by otherentities"). The administrative entity recognizesa revenue and other financing source forcontributions from the General Fund. Theadministrative entity recognizes an expense forthe total ORB expense.

Assumptions are as follows:

-- Total normal cost of employees for theaccounting period is $10,000.[FN 53: This is theamount attributable to the government for itsshare of future medical care costs for futureretirees. Although this simplified illustrationdoes not show contributions other than those fromthe General Fund, current retirees pay premiumsfor their health insurance that partially defraythe cost of the program. Federal civilianretirees pay approximately 25-30 percent of thetotal health benefit premium.]

-- The employer's ORB expense is $10,000.The employer entity should calculate its expenseon the basis of factors received from the planand/or the administering entity. For example, theplan-supplied factor is $100 per employee (orfull-time equivalent); if the employer has 100employees, the expense would be $10,000. (Theemployer's ORB expense equals the service cost ofits employees' retirement health care.)

-- The employer and employees do not makecontributions to a fund. The cost of retirementhealth care is paid for by General Fundappropriations directly to the administrativeentity on a pay-as-you-go basis.


Entry #5 -- Employer entity's entry to recordORB expense:

DR. Employer's ORB Expense $10,000 CR. Imputed Financing-Expenses Paid by Other Entities $10,000

***************Table 5

Employer Entity's Other Financing Sources as TheyShould Appear on the Statement of Changes in NetPosition

FINANCING SOURCES: Imputed financing Expenses paid by otherentities ................................ $10,000

Note: Imputed financing "Expenses paid by otherentities" covers the annual expense for theemployer entity's employees as shown immediatelybelow.

Employer Entity's Cost as It Should Appear on theStatement of Net Cost

COST : Employer's ORB cost ........$ 10,000

Note: This is the annual ORB service cost of theemployer entity's employees. The employer entitywould calculate this amount using factors providedby the administrative entity.***************

***************Table 6

Administrative Entity's Other Financing Sources asIt Should Appear on the Statement of Changes inNet Position

FINANCING SOURCES:

Appropriations used......... $ XX,XXX


Note: Since, in this example, contributions arenot required from the employer entity or itsemployees, all benefits must be paid withappropriations from the General Fund.***************Entry #6 -- Administrative entity's entry torecord its ORB expense.

DR. ORB Expense $XX,XXX CR. ORB Liability $XX,XXX

***************Table 7

Administrative Entity's ORB Expense

Normal cost ......................... $ 10,000 Interest on ORB liability ............. XX,XXX Prior service costs (gains) (if any) ...... XX Actuarial gains (losses) (if any) ......... XX

Total ORB expense ............... $ XX,XXX

Note: The $10,000 represents 100% of the servicecost attributable to the employer entity in thisexample, as calculated by plan actuaries. The ORBexpense (as calculated above) would be reported onthe Statement of Net Cost in accordance withparagraph 88.***************

***************Table 8

Administrative Entity's ORB Liability

Beginning balance ................ $ X,XXX,XXX Add: additional ORB expense incurred (as calculated in table 7) ............................. XX,XXX Less: payments made on behalf of beneficiaries ............. XX,XXX

Ending liability balance...... $ X,XXX,XXX


Note: The liability balance should be reported onthe administrative entity's Balance Sheet.***************

Other Postemployment Benefits (OPEB)

94 OPEB are provided to former or inactiveemployees, their beneficiaries, and covereddependents outside pension or ORB plans. Inactiveemployees are those who are not currentlyrendering services to the employer but who havenot been terminated, including those temporarilylaid off or disabled. Postemployment benefits caninclude salary continuation, severance benefits,counseling and training, continuation of healthcare or other benefits, and unemployment, workers'compensation, and veterans' disabilitycompensation benefits paid by the employer entity.

95 The employer entity should recognize anexpense and a liability for OPEB when a futureoutflow or other sacrifice of resources isprobable and measurable on the basis of eventsoccurring on or before the reporting date. Forexample, a reduction in force may require anemployer entity to make severance payments,unemployment reimbursements, or other payments infuture periods. Similarly, an injury on the jobmay require the employer entity to make short- orlong-term reimbursements to the federal workers'compensation program. A long-term OPEB liabilityshould be measured at the present value of futurepayments. This will require the employer entitiesto estimate the amount and timing of futurepayments, and to discount the future outflow usingthe Treasury borrowing rate for securities ofsimilar maturity to the period over which thepayments are to be made.

96 Most OPEB liabilities should be short-termbecause the benefits will be paid in the nearfuture. Some OPEB, however, could be longer term.


For example, a liability for workers' compensationor veterans' disability compensation might belong-term for some injuries since federal employerentities might be required to reimburse theprogram for many years.[FN 54: Both the federalemployee unemployment program and the federalworkers' compensation program are financed bydirect reimbursements from federal employers.]Also, certain specially authorized separationincentive programs could provide for payments thatextend over many future years.

INSURANCE AND GUARANTEES

Nature of Federal Insuranceand Guarantee Programs[FN 55: In the federalgovernment, the aspects of insurance andguarantees are frequently commingled within thesame program. Therefore, this Statement treatsthe terms as a single type of activity.]

97 Insurance and guarantee programs are federalprograms that provide protection to individuals orentities against specified risks. Many of theseprograms were established to assume risks thatprivate sector entities are unable or unwilling toassume [at least at prices that beneficiaries ofthe program can afford (in some cases) or want topay ( in other cases)] or to subsidize theprovision of insurance to achieve socialobjectives. Program participants pay fees orpremiums for specific services. These funds arecommonly held in revolving funds within thefederal government; losses sustained byparticipants are paid from these funds. Many ofthese programs receive appropriations to payexcess claims and/or have authority to borrow fromthe Treasury.

98 For accounting purposes, private sectorinsurance and guarantee contracts are customarilydivided into two types. The first type providesinsurance protection for a fixed period. Theinsurer may cancel the coverage or adjust the


provisions of coverage at the end of any coverageperiod, for example, by adjusting the amount ofpremiums charged or changing the conditions underwhich coverage is provided. Most propertyinsurance and health insurance offered by privateinsurers is of this type.

99 The second type of insurance or guaranteecontract is one in which the insurer cannot cancelthe insurance or the insured is guaranteed theability to renew it. The insurer must providecoverage for an extended period until the insuredevent occurs or can no longer occur, or when theinsured party allows the policy to lapse.Examples of this type of insurance offered byprivate insurers include whole and guaranteedrenewable term life insurance, annuities, andtitle insurance.

100 Federal programs provide protection againstmany types of risk for individuals and entities.These include life insurance; medical insurance;and insurance against damage to property (homes,crops, and airplanes) or other assets (depositsand pension benefits) caused by perils such asflooding and other natural disasters, war-risk,and insolvency.

101 For federal insurance and guarantee programs,there often is no explicit contract. For example,the federal government, acting through the PensionBenefit Guaranty Corporation (PBGC), functions asan insurer of pension benefits, but the "contract"with employers and pension plans is implicit infederal law, not explicit in contracts betweenPBGC and employers. Moreover, the PBGC itself hasno power to set premiums or to change the terms ofcoverage, though it may recommend changes to theCongress. The Congress has occasionally raisedpremiums and changed other factors, such aspension plan funding requirements, in an effort toachieve the statutory intent that the program beself-financing without appropriations from generalrevenue.[FN 56: Further details on PBGC may befound in "Controlling Losses of the PensionBenefit Guaranty Corporation", Congressional


Budget Office, January 1993.] Companies withdefined benefit pension plans must participate,but may (and sometimes do) elect to terminatetheir defined benefit pension plans.

102 Federal insurance programs also differ fromprivate insurance in that they are not subject tothe same market forces (e.g., competition forbusiness and for capital) and regulatoryrequirements (e.g., for capitalization) that applyto privately owned insurers. In particular,federal insurance, unlike private insurance, isnot extended with the intent of earning a profit.Some programs operate deliberately at a loss, aswhen disabled veterans are offered life insuranceat premiums set for healthy participants. Otherprograms offer insurance covering catastrophic orsystemic risks, where large losses can occur allat once, as in war-risk or deposit insurance. Atmost, federal insurance programs are expected justto meet anticipated costs, leaving them vulnerableto unfavorable surprises.

103 For this reason, the issue in accounting forfederal insurance and guarantee programs is whento recognize net expected losses. In thisrespect, federal insurance programs are similar tofederal credit programs. The federal governmentextends credit on terms and conditions designed tosubsidize particular borrowers or encourageparticular activities for social policy reasons.As soon as a federal direct loan or loan guaranteeis obligated, the federal government is committedto bear whatever loss, through defaults orinterest subsidies, is inherent in the terms andthe conditions under which the credit is extended.The government is likewise committed when federalinsurance is extended to additional policyholders,either for an additional fixed period, or to coveradditional amounts of assets.

Accounting for Liabilities of FederalInsurance and Guarantee Programs

104 All federal insurance and guarantee programs


(except social insurance and loan guaranteeprograms[FN 57: Social insurance is considered tobe a different type of program not included withininsurance and guarantee programs. See socialinsurance discussion in the FASAB ED,"Supplementary Stewardship Reporting". Accountingfor all federal loan guarantee programs shouldfollow the Statement of Federal FinancialAccounting Standards Number 2, "Accounting forDirect Loans and Loan Guarantees" (August 23,1993).]) should recognize a liability for unpaidclaims incurred, resulting from insured eventsthat have occurred as of the reporting date. Thestandard requires recognition of the liabilitythat is known with certainty plus an accrual for acontingent liability recognized when an existingcondition, situation, or set of circumstancesinvolving uncertainty as to possible loss existsand the uncertainty will ultimately be resolvedwhen one or more probable future events occur orfail to occur; a future outflow or other sacrificeof resources is probable; and the future outflowor sacrifice of resources is measurable.Insurance and guarantee programs should recognizeas an expense all claims incurred during theperiod, including, when appropriate, those not yetreported and contingencies that meet the criteriafor recognition. Life insurance programs shouldrecognize a liability for future policy benefits(a liability to current policyholders that relatesto insured events, such as death or disability) inaddition to the liability for unpaid claimsincurred. (See Contingencies section for thecriteria for disclosure of a contingentliability.)

105 Risk assumed information is important for allfederal insurance and guarantee programs (exceptsocial insurance, life insurance and loanguarantee programs) and will be considered in thecontext of the Stewardship reporting. Riskassumed is generally measured by the present valueof unpaid expected losses net of associatedpremiums, based on the risk inherent in theinsurance or guarantee coverage in force.


Additional Disclosures for Insuranceand Guarantee Programs Administeredby Government Corporations

106 When financial information pursuant to FASB'sstandards on federal insurance and guaranteeprograms conducted by government corporations isincorporated in general purpose financial reportsof a larger federal reporting entity, the entityshould report as RSSI what amounts and periodicchange in those amounts would be reported underthe "risk assumed" approach referred to in thissection (see par. 105). In other words, inaddition to the liability for unpaid claims frominsured events that have already occurred(including any contingent liability that meetscriteria for recognition), such reporting entitiesshould also report as RSSI risk assumedinformation.

Illustrations of theApplication of the Standard

107 Table 9 [**Availiable in Hard Copy Only**]illustrates the application of the liabilityrecognition, disclosure, and supplementaryreporting standards for six federal insurance andguarantee programs. Two of these, flood and cropinsurance, offer fixed period annual insurance. Athird, deposit insurance, also can be said tooffer fixed period annual insurance, though inpractice it is continually renewed at the optionof the insurer.[FN 58: In effect, FDIC's optionsare to renew the insurance coverage or to assumelosses of the institution; only Congress canreduce or eliminate the deposit insuranceprogram.] A fourth program listed, overseasprivate investment insurance, offers a fixedperiod multi-year written contract. The fifthprogram, life insurance, offers coverage that inpractice is noncancelable by the insurer andguaranteed renewable by the insured, continuinguntil the insured event has occurred or the policyis cancelled by the insured. Finally, the pensionbenefit guarantee program is included as anexample of noncancelable insurance. Pension


insurance is characterized here as noncancelablewith respect to vested guaranteed benefits earnedby covered employees to date, on the assumptionthat this coverage would remain in effect even ifthe Congress ended the program.

108 The column numbered (3) in the table showsthe point at which the standard requires aliability to be recognized for insurance andguarantee programs except life insurance. Column(3) recognizes all unpaid claims and expectedclaims resulting from insured events that havealready occurred, whether floods, crop damage,overseas investment losses, bank closures andinsolvencies, deaths, or pension planterminations. The liability for unpaid claims isthe estimated amount needed to settle claimsrelating to insured events that have occurred onor before the reporting date. This liabilityincludes a contingent liability recognized when anexisting condition, situation, or set ofcircumstances involving uncertainty as to possibleloss exists and the uncertainty will ultimately beresolved when one or more probable future eventsoccur or fail to occur; a future outflow or othersacrifice of resources is probable; and the futureoutflow or sacrifice of resources is measurable.

109 The liability at the end of any period shouldbe the expected unpaid net loss inherent ininsured events that have occurred, including anyclaims --both claims reported and whenappropriate, claims incurred but not reported(IBNR)-- and any contingent liabilities that meetthe criteria for recognition. When payments andlosses extend beyond the current year, net lossesshould be calculated on a present value basis toreflect the time value of money. The expense forclaims incurred in the reporting period should berecognized in that period. Changes in estimatesof claim cost resulting from the present valuecalculations, the continuous review process, anddifferences between estimates and actual paymentsfor claims should be recognized as charges againstoperations of the period in which the estimatesare changed or payments are made.


110 Liability recognition for life insuranceprograms spans over columns (3) and (4). Thecolumn numbered (4) in the table shows the pointat which the standard requires liabilityrecognition for life insurance and supplementaryreporting for other insurance and guaranteeprograms. The supplementary reported amountsrepresent the present value of unpaid expectedlosses based on the risk assumed as a result ofinsurance coverage net of associated premiums.

********** TABLE 9 : "LIABILITY RECOGNITION,SUPPLEMENTARY INFORMATION AND DISCLOSURE FORFEDERAL INSURANCE AND GUARANTEE PROGRAMS"APPEARED HERE IN THE HARD COPY TEXT **********

111 Insurance programs are on-going and may beviewed as having long term characteristics. Thus,from a broader, longer term perspective, theliability to be recognized (column 3), and theamount to be reported as supplementary information(column 4) may be conceptually different andmaterially different from each other. From thebroader perspective column (4) could be a longerterm measure and a probabilistic estimate offuture costs of these programs.

112 For noncancelable or guaranteed renewableinsurance also, a difference arises betweencolumns (3) and (4). Thus, for pensionguarantees, column (3) shows the net present valueof losses arising from plans that have alreadybeen terminated or that are more likely than notto be terminated. This is the amount to berecognized as a liability. Column (4) shows thenet present value of the expected loss inherent inthe risk assumed as a result of coverage on theguaranteed and vested benefit amounts. Thisnumber should be reported as supplementaryinformation. It will generally be larger than theliability because it includes a provision for theadditional losses that are expected to arisebecause some plan sponsors currently in good


financial condition will in the future facebankruptcy with pension assets too small to coverthe vested benefits that were guaranteed.

113 The liability for life insurance includesboth the liability for unpaid claims, includingIBNR (i.e., column 3), and a liability for netfuture policy benefit outflows (i.e., column 4).The liability for future policy benefitsrepresents the expected present value of futureoutflows to be paid to, or on behalf of, existingpolicyholders, less the expected present value offuture net premiums to be collected from thosepolicyholders. The liability is estimated usingappropriate financial or actuarial methods thatinclude assumptions, such as estimates of expectedinvestment yield, mortality, morbidity,terminations, and expenses, applicable at the timethe insurance contracts are made and in accordancewith existing law and related policy (see specificwhole life insurance standard below). Changes inthe liability for future net policy benefitoutflows that result from periodic re-estimationswould be recognized as expense in the period inwhich the changes occur. The effects of changesin relevant law or policy would be recognized whenthose changes occur.

114 The assessments of losses expected based onthe risk assumed may be made by appropriateactuarial or financial methods that includeinformation and assumptions applicable to theeconomic, legal, and policy environment in forceat the time the assessments are made. Since allfuture events are uncertain, indicators of therange of uncertainty around expected estimates,including indicators of the sensitivity of theestimates to changes in major assumptions, shouldalso be reported.

Whole Life Policies

115 Some VA life insurance programs are wholelife policies.[FN 59: Whole life policiesprovide insurance over the insured's entire lifeand the proceeds (face amount) are paid only upon


death of the insured. A level premium is usuallypaid for policies of this type. The premium maybe paid annually or more frequently. ] Theseprograms operate in a manner similar to privatesector mutual life insurance enterprises,[FN 60:A mutual company is an incorporated entity withoutprivate ownership interests which operates for thebenefit of its policyholders and theirbeneficiaries. With limited exceptions, mutualcompanies issue only participating policies. In amutual company, participating policyholders havethe right to vote for members of the company'sboard of directors or trustees. In some states,the insurance laws provide that upon liquidationof a mutual insurance company, the net assets aredistributed among the existing policyholders ofthe company, and the prior policyholders have noclaim against such assets.] except that theregulations and market forces that control theprivate sector are different for these federalprograms. VA life insurance policyholders areissued participating policies, and a portion ofthe earnings from those policies is returned topolicyholders in the form of dividends. Thefollowing paragraphs specifically address theaccounting required for federal whole lifeinsurance programs.

116 The premiums collected by the insurer areused to pay benefits and other cost, and thebalance is usually invested to yield additionalincome. These assets would be fund balances withTreasury or investments. Encompassed in theliability (also referred to as policy reserves) iscash surrender value and the liability for futurepolicy benefits. The cash surrender value is theportion of premiums paid or other amountrecoverable on an insurance policy if immediatelycanceled. The liability for future policybenefits is the present value of future outflowsto be paid to (or in behalf of) policyholders,less the present value of future related premiums.In general, for whole life policies, the liabilityfor future policy benefits should be no less thanthe cash surrender value that accrues to thebenefit of policyholders.


Accounting for Liabilities of Federal WholeLife Insurance Programs

117 All federal reporting entities with wholelife insurance programs should follow thestandards as prescribed in the private sectorstandards (and as these private sector standardsare amended) when reporting the liability forfuture policy benefits, in addition to therequired disclosures described below. [FN 61: Theapplicable private sector standards are asfollows, FASB SFAS 60 "Accounting and Reporting byInsurance Enterprises," FASB SFAS 97 "Accountingand Reporting by Insurance Enterprises for CertainLong- Duration Contracts and for Realized Gainsand Losses from the Sale of Investments," and FASBSFAS 120 "Accounting and Reporting by Mutual LifeInsurance Enterprises and by Insurance Enterprisesfor Certain Long-Duration Participating Contracts"and AICPA Statement of Position (SOP) 95-1"Accounting for Certain Insurance Activities ofMutual Life Insurance Enterprises."

For those federal entities with "mutualenterprise-type" whole life insurance programs,FASB SFAS 120 should be followed. SFAS 120 statesthat mutual life insurance enterprises shall applySFAS 60 or 97, as appropriate, to participatinglife insurance contracts unless those contractsmeet both of the following conditions:

-- The contracts are long-duration participatingcontracts that are expected to pay dividends topolicyholders based on actual experience of theinsurer.

-- Annual policyholder dividends are paid in amanner that identifies divisible surplus anddistributes that surplus in approximately the sameproportion as the contracts are considered to havecontributed to divisible surplus (commonlyreferred to in actuarial literature as thecontribution principle).

If the participating life insurance contracts meet


the above conditions SOP 95-1 should be followed.]

118 A liability for future policy benefitsrelating to participating life insurance contractsshould be equal to the sum of:

a. the net level premium reserve for deathand endowment policy benefits,

b. the liability for terminal dividends, and

c. any premium deficiency.[FN 62: Theliability for future policy benefits is consistentwith the liability required by SOP 95-1. Netlevel premium reserve is the excess, if any, ofthe present value of future guaranteed deathendowment benefits over the present value offuture net premiums. The net level premiumreserve should be calculated based on the dividendfund interest rate, if determinable, and mortalityrates guaranteed in calculating the cash surrendervalues described in the contracts. The dividendfund interest rate is the interest rate determinedat policy issuance used to determine the amount ofthe dividend fund. It is the rate used to creditinterest to the dividend fund, and against whichexperience is measured to determine the amount ofthe interest portion of dividends paid toindividual policyholders. Terminal dividends aredividends to policyholders calculated and paidupon termination of a contract, such as on death,surrender, or maturity. If the payment ofterminal dividends is probable and the amount canbe reasonably estimated, the liability should berecognized. (AICPA SOP 95-1, Glossary, p. 33)]

119 An assessment should be made to compare theliability for future policy benefits usingactuarial assumptions applicable at the time thecontract is made (contract assumptions) with theliability for future policy benefits usingassumptions that consider current economicconditions and experience (current conditions).Actual mortality, morbidity, and termination ratesshould be used when determining experience. For


economic conditions, the nature and the mix ofcurrent and expected investments should beconsidered with expected long-term yields.

120 A premium deficiency occurs if the liabilityfor future policy benefits using currentconditions exceeds the liability for future policybenefits using contract conditions; the differenceshould be recognized as a charge to operations inthe current period.

Additional Whole Life Insurance Disclosure

121 All components of the liability for futurepolicy benefits (i.e., the net level premiumreserve for death and endowment policy and theliability for terminal dividends) should beseparately disclosed in a footnote with adescription of each amount and an explanation ofits projected use and any other potential uses(e.g., reducing premiums, determining anddeclaring dividends available, and/or reducingfederal support in the form of appropriationsrelated to administrative cost or subsidies).

**************************************************APPENDIX A: BASIS FOR CONCLUSIONS**************************************************

122 This appendix summarizes considerationsdeemed significant by the Board in reaching theconclusions in this Statement. It includesreasons for accepting certain approaches andrejecting others. Individual members gave greaterweight to some factors than to others.

123 This Statement addresses recognition andmeasurement of liabilities in the general purposefinancial reports of federal reporting entities.The unique circumstances of the federalgovernment, most notably its role as the vehiclethrough which citizens express their sovereignpower, meant that the Board had to resolve some


new issues in order to define exactly how to applyaccrual concepts in federal financial reports.

124 The Board's deliberations on liabilities werebased on certain ideas about the distinctionbetween exchange and nonexchange transactions, theimportance of reporting cost of services providedby the federal government, and the impact ofinformation on decisionmakers. These ideas areexplained in the following paragraphs.

125 Many users of federal financial reports arefamiliar with accounting concepts and standardspublished by the Financial Accounting StandardsBoard (FASB) for private sector entities, and theGovernmental Accounting Standards Board (GASB) forstate and local government entities. Because suchusers might assume that identical concepts andstandards are used by the federal government ifdifferences are not explained clearly, thisappendix compares certain concepts underlying thefederal standard with concepts that governrecognition and measurement of liabilities infinancial reports of private sector entities andstate and local governments in the United States.Finally, this appendix also explains the basis forspecific conclusions regarding social insurance,contingencies, federal employee pensions, otherretirement benefits, other postemploymentbenefits, and insurance and guarantee programs.

EXCHANGE AND NONEXCHANGE TRANSACTIONS

126 As noted in SFFAC No. 1, "Objectives ofFederal Financial Reporting": "The accountingprocess begins with recording information abouttransactions between the government (or one of itscomponent entities) and other entities, that is,inflows and outflows of resources or promises toprovide them."[FN 63: P. 53, paragraph (16c).]In some transactions, consideration of value isexchanged: there is a reciprocal or two-way flow.Other transactions, such as grants and othertransfer payments are nonexchange transactions(i.e., there is a nonreciprocal transaction--


normally a one-way flow).

127 The federal government is the vehicle throughwhich citizens of the nation exercise theirsovereign power. In this role, the federalgovernment is responsible for taking collectiveaction at the national level "to promote thegeneral welfare. "Thus the government undertakesmany programs that do not involve reciprocaltransfers between the government as an entity andits counterparties. Examples include disasterrelief, grants to state and local governments,subsidies, and other transfer programs forindividuals. The federal government has apropensity to assume such burdens because it isthe agent by which the society, through itselected officials, accomplishes transfers betweengroups of citizens to enhance their well-being.

128 A taxpayer or a donor may, in fact, receive abenefit of some sort, such as the opportunity tolive in a safe, secure environment; to improveone's standard of living; and to receive specificbenefits, such as visits to national parks andtravel over highways. But it is not ordinarilysaid that the benefit to the individual taxpayeror donor is of value comparable to that of theconsideration given. Therefore, these areclassified as nonexchange transactions. For thisStatement, the significance of the distinctionbetween exchange and nonexchange transactionsarises from the nature of the obligation that iscreated when one party to a transaction provides aproduct or service to the other party in returnfor a promise that something of value will beexchanged for it.

129 Obligations become legally enforceable claimsagainst the federal government in different waysand at different points within transaction cyclesthat relate to various programs. An importantfactor in distinguishing between various programsis whether an exchange is involved. For example,the federal government may not contract for andreceive goods or services and then arbitrarilydecide not to honor the contract. Similarly,


under existing law, the federal government may befinancially responsible for certain damage andinjury it causes.

130 In other cases, the obligation may be more amatter of what is perceived as equitable and goodpublic policy than a legally enforceable claim.Although there may be a high probability that agrant, a subsidy, or an income transfer will bemade or will continue in future years, therecipients of such grants, subsidies, or transfersdo not have a right to receive such payments inthe future from the federal government as do thosewho receive payments in exchange for service theyhave performed.

131 However, it is possible to make meaningfulestimates of the future amounts required tocontinue present policies regarding such programs.These estimates are relevant to certain decisionsand should be disclosed or otherwise reported, asdiscussed further in "Supplementary StewardshipReporting." In the context of the Board'sdefinition, however, estimates of futurenonexchange payments should not be recognized as acurrent period liability. On the other hand, anypayments due as a result of past events but unpaidat the end of the period constitute a liability.

132 In the case of federal liabilities, somefuture outflows of resources are so likely thatthey should be recognized as accountingliabilities in general purpose federal financialreports before all the other events necessary tocreate a legally enforceable claim against thegovernment exists.[FN 64: Notwithstanding anexpectation that the appropriations will be made,whether they in fact will be made is completely atthe discretion of the Congress.] Two importantexamples of such substantive accountingliabilities are the pensions and retirement healthcare promised federal workers in return for theirservice.

133 An exchange can in substance be said to haveoccurred in such cases, even if the government has


not yet made an outlay of cash or other financialresources. Service has been exchanged for apromise of future payment or health care. Suchcharges are properly assignable to the currentperiod in financial reports. This exchangeimplies, for example, that general purpose federalfinancial reports should recognize the financialeffects of the promise to provide health care toretired federal workers as that obligation accruesduring their years of service, regardless ofwhether the budget includes a provision for thisitem. This is true even though unfundedliabilities of the federal government reported onthe financial statements cannot be liquidatedwithout the enactment of an appropriation. Also,as a sovereign entity, the payment of allliabilities other than for contracts can beabrogated by the federal government.

CONCLUSION ON SOCIAL INSURANCE

134 The recognition, measurement and display ofobligations for social insurance programspresented the Board with significant theoreticaland practical problems. From the theoreticalperspective, the Board considered whether socialinsurance programs resulted in exchange ornonexchange transactions, or whether theycontained both exchange and nonexchange features.The Board also considered the problems ofarticulation between the operating statement andthe Balance Sheet, specifically whether theprocess of reporting a year-to-year change in aBalance Sheet liability might affect theusefulness of an operating statement measure ofperformance. Finally, the Board considered thedifficulty of determining an appropriate measureof the obligation assumed, whether such a measurewere to be presented on the face of the BalanceSheet or in the notes.

135 In the exposure draft "Accounting forLiabilities of the Federal Government", themajority of the Board concluded that socialinsurance programs were entitlement programsdeveloped to carry out the sovereign


responsibilities of the government, financedprimarily by compulsory earmarked taxes. TheBoard favored characterizing social insuranceobligations as nonexchange transactions, andlimiting recognition of a liability to any unpaidamounts due as of the reporting date. Asignificant majority of the respondents, however,agreed with an alternative view, which expressedthe notion that social insurance programscontained both exchange and nonexchange features,and that there was a need for recognizing aliability at least equal to the present value offuture payments due to recipients currentlyeligible for benefits.

136 Upon reconsideration of the issues, the Boardconcluded that the most appropriate approach fromboth the Balance Sheet and Statement of Net Costperspectives would be: (1) to include a line itementitled "social insurance obligations" in aseparate section of the Balance Sheet followingthe liability section and before the equitysection; (2) to make note disclosure ofsupplementary data resulting from severalapproaches for measuring the obligation, and (3)to report the annual financial outflows of currentfinancial resources on the Statement of Net Cost.The Board also decided that, given the sensitivityand magnitude of social insurance, this newposition should receive additional exposure, toallow users to review it and comment. The Boardfelt that the concepts and alternatives had notyet been presented to the user community insufficient detail. Hence, the discussion ofsocial insurance has been withdrawn from theliability standard and consolidated in"Supplementary Stewardship Reporting."

IMPACT OF COMMUNICATING INFORMATIONIN GENERAL PURPOSE FEDERALFINANCIAL REPORTS

137 FASAB recognizes that extensive informationabout probable and possible future federal outlaysis available now in many special purpose reportson various federal programs. In that sense, the


financial reports prepared pursuant to thisStatement are not likely to reveal informationthat is new in an absolute sense. Analystsworking for the various executive agencies,congressional committees, private interest groups,"think tanks" and universities are, collectively,aware of this information and much more.Nevertheless, the Board believes that presentingliabilities and stewardship responsibilities inthe general purpose federal financial reports canbe valuable in several ways. There are at leastfour reasons for this belief.

138 First, analysts typically know a lot aboutcertain programs, but only those programs.Currently it is difficult, if not impossible, toassemble comprehensive information prepared on acomparable basis for the federal government as awhole. In many cases, this is also true forsignificant component units. General purposefederal financial reports attempt to provide a wayof presenting comprehensive information.

139 Second, much of this information has noimpact on individual decisionmakers, such asprogram managers, unless it is conveyed in a waythat facilitates, or even requires, suitableattention to it. For example, information aboutfederal pension plans and retirement benefitsconveyed in an actuarial report or in thenarrative section of the "Budget of the UnitedStates Government" may have an impact on certaincongressional decisions, but is unlikely toinfluence managers' decisions about whether to usefederal employees, invest in labor-savingequipment, or contract out to accomplish a giventask. If the information is to have such animpact, it must be reported in a way more directlyassociated with the activities the manager isresponsible for. Associating the expenses andliabilities reported in the general purposefederal financial report with the outputs ofresponsibility centers is able to accomplish thisdirect association.

140 Third, the mere requirement to assemble and


report these data will, in some cases, affectfederal managers, who, like everyone, tend tomanage what they measure. Some observers believe,for example, that the prospect of having to complywith FASB's Statement 106, "Employers' Accountingfor Postretirement Benefits Other Than Pensions,"caused corporate managers and others to focusincreased attention on the need to manage the costof promises they had made to provide health careto retirees, even before the statement becameeffective.

141 Fourth, financial reports prepared andaudited pursuant to federal accounting standardsmay reasonably be expected to possess a certaincredibility and to command a certain amount ofattention from various users, sufficient to affectdecisions about federal government public policy.They will provide a source of information thatshould complement what is provided by the "Budgetof the United States Government." An importantcollateral benefit arises from the processes ofpreparing, auditing, and publishing annualfinancial statements. Experience demonstratesthat these processes improve the reliability ofinformation and of control systems, therebyenhancing both decisionmaking and accountabilityin general.

RELATIONSHIP TO LIABILITYRECOGNITION PRINCIPLES USEDBY NONFEDERAL ENTITIES

142 FASB defines the basic principles that governliability recognition by private sector entitiesin the United States.[FN 65: The GovernmentalAccounting Standards Board (GASB) has notpublished a concept statement on financialstatement elements as FASB has done in ConceptStatement Number 6 and has not defined "liability"per se. In the current state and localgovernmental accounting model, a fund liability is"the amount left unpaid at the end of thereporting period that normally would be liquidatedwith expendable available financial resources.The remainder of the liability should be reported


in the General Long-Term Debt Account Group(GLTDAG)." National Council on GovernmentAccounting Statement (NCGAS) Number 4, par. 17.(See GASB "Codification of Governmental Accountingand Financial Reporting Standards", section1500.)] Government corporations follow thosestandards in their separately issued financialstatements. Probably most readers of thisStatement are familiar with these principles.Probably most users of federal financial reportsare accustomed to seeing other financial reportsprepared according to these principles.

143 FASAB's principle for liability recognitiondiffers from FASB's. The difference can be seenas a modification made necessary by the sovereignnature of the federal government. FASABcontemplates a liability standard within thecontext of a reporting model that provides muchgreater emphasis on publicly reporting certainstewardship responsibilities than does thereporting model used by private sectororganizations. This kind of reporting model isnecessary because of the federal government'sresponsibility for the general welfare of thenation and its resulting willingness to take onobligations.

CONCLUSION ON CONTINGENCIES

144 In the Exposure Draft the Board asked thefollowing question. "When an estimated[contingent] liability is a range of amounts andno amount within the range is a better estimatethan any other amount, should either the midpointor, alternatively, the 'expected value' (as theterm is used in statistics) be recognized as aliability instead of the minimum amount?" Themajority of respondents preferred the expectedvalue and the second preference was the minimumamount.

145 The Board further considered all of theoptions. Based on the Board discussions it wasnoted that it would be difficult to use "expectedvalue" to pinpoint an estimate within a range.


The expected value method would assign aprobability percentage to each of the numberswithin the range, but these probabilities wouldusually be difficult to estimate.146 After much discussion the majority of theBoard preferred the minimum amount because of itsestablished use in other accounting standards.The Board decided that liabilities arising fromnonexchange transactions would be recognized forany unpaid amounts due as of the reporting date.This includes amounts payable from the federalentity to pay for benefits, goods, or services[FN66: Goods or services may be provided under theterms of the program in the form of, for example,contractors providing a service for the governmenton the behalf of disaster relief beneficiaries.]provided under the terms of the program, as of thefederal entity's reporting date, whether or notsuch amounts have been reported to the federalentity (for example, estimated Medicaid paymentsdue to health providers that will be financed by

the federal entity but have not yet been reportedto the federal entity).

147 In the case of government-acknowledged eventsgiving rise to nonexchange or exchangetransactions, there must be a formal acceptance offinancial responsibility by the federalgovernment, as when the Congress has appropriatedor authorized (i.e., through authorizationlegislation) resources. Furthermore, exchangetransactions that arise from government-acknowledged events would be recognized as aliability when goods or services are provided.For nonexchange transactions a liability wouldthen be recognized at the point the amount is due.Therefore, government-acknowledged events do notmeet the recognition criteria necessary to berecognized as a contingent liability. Thegovernment is acting in its sovereign capacitywhen it assumes financial responsibility and makesincome transfer payments or provides othernonexchange benefits. The Board does not believethat accounting recognition should anticipatesovereign actions in advance of occurrence.


CONCLUSION ON PENSIONS,OTHER RETIREMENT BENEFITS ANDOTHER POSTEMPLOYMENT BENEFITS

Pensions - Projected Salary Levels

148 A primary objective for federal financialreporting is to measure accurately the full costof employer entity services to the public. Themethods used to account for pensions, ORB, andOPEB in general purpose financial reports shouldaccurately measure the full cost of an employerentity's services. Since federal pension benefitsare based on final salaries, whatever method isused for the annual cost and accrued liability offederal pensions must include projected futuresalaries that reflect an estimate of thecompensation levels of the individual employeesinvolved (including future changes attributable tothe general price level, seniority, promotion, andother factors). They are part of the obligationthat the federal government is incurring.

Accounting for the Pension Plan

Attribution Methods

149 The major federal pension plans use anactuarial cost method for funding purposes knownas aggregate entry age normal (AEAN). Variousactuarial cost methods exist. All the methodsregarded as acceptable methods for advance fundingof private pension plans recognize the cost of anemployee's pension benefits during the employee'syears of service, but the different actuarialmethods recognize the cost in different patternsover time. The AEAN method is intended to producea periodic pension cost that is a level percent ofpayroll.

150 That is, AEAN is a method under which thepresent value of projected benefits of eachemployee is allocated on a level basis (such as aconstant percentage of salary) over the service ofthe employee between entry age and assumed exit


age. The portion of this present value allocatedto each year is called the normal cost. Theportion of this present value not provided for ata valuation date by the present value of futurenormal cost is called the actuarial accruedliability.

151 FASAB considered the method used by theFinancial Accounting Standards Board in Statementof Financial Accounting Standards (SFAS) No. 87,"Employer Accounting for Pensions" (the projectedunit credit, or PUC), as well as AEAN. FASBconcluded that PUC gave a better measure of theemployer's obligation for the benefits earned bythe employees at a particular point in time. Ittherefore said that PUC provides a better measureof the value of the benefits that accrue duringthe year. However, FASAB heard testimony from anOPM actuary that results from these two methodswere similar for federal plans. FASAB concludedthat AEAN is a sound measure of the accruingexpense.

152 FASAB concluded that any method of assigningthe value of benefits that are earned over theentire career to particular years of serviceinvolves a process of estimation. It is, ofcourse, reasonable to assume that the benefitsaccrue in some sort of systematic and uniformfashion and not, for example, all at once when theemployee becomes eligible. Assuming that thebenefits accrue as a uniform percentage of salaryeach year (as is done with AEAN for pensions) is areasonable approach. AEAN is particularly usefulwithin an organization when measuring costs overtime because it provides that a dollar of salaryalways equals a fixed percent of pension,regardless of the year involved. Thus, inflationis factored into the calculation automatically.

153 FASAB specified the AEAN for several reasons.First, as stated, AEAN is a reasonable andsystematic way of allocating costs evenly over theservice lives of employees. Second, the majorfederal retirement systems [the MilitaryRetirement System (MRS), the Civil Service


Retirement System (CSRS), and the FederalEmployees Retirement System (FERS)] use AEAN, andin two cases (FERS and MRS) charge "full cost" inthe budget under a statutory requirement.[FN 67:The CSRS statute calls for procedures that aregenerally construed as entry age normal. "Fullcost," of course, depends on the method selected.For example, prior service cost is amortized inFERS over 30 years pursuant to the funding method;it would be recognized over a shorter period(years of expected future service of the group or15 years) under SFAS 87. It should be recognizedin full immediately under the terms of thisstandard, but only in financial reports of theagency that administers the pension plan and inthe consolidated financial statements of theUnited States, not in the employer agency'sfinancial statements. Thus, "full cost" in thissentence must be read in a generic way, that is,as a statement of the general intent underlyingthe law.] Finally, exact comparability withprivate-sector entities is not relevant. Minordifferences in the size of the pension liabilityand expense calculated pursuant to this Statementand SFAS 87 clearly would not have a materialimpact on investor's assessment of the credit-worthiness of the U. S. government.

154 Since there are several acceptableattribution methods and several small pensionplans in addition to the three major plans, FASABdecided that the use of methods other than AEANwas permitted provided the results were notmaterially different from those of AEAN. Amaterial difference between the expenses and theliabilities for federal plans based solely on thechoice of attribution method would destroy thecomparability and impair the usefulness of theinformation for users other than investors.

155 FASAB recognizes also that other attributionmethods might be useful for other purposes. Forexample, a method that calculates the vestedbenefits accrued by employees to date, at currentsalary levels, would be useful as a measure of theaccumulated amount the plan would owe if it were


to terminate. Such calculations would be forspecial purpose reports not covered by thisStatement.

Assumptions

156 There are three objectives for actuarialassumptions. First, FASAB considers it extremelyuseful to have consistent assumptions amongaccounting, budgeting, and actuarial statements tothe extent it is possible to do so while attainingthe objectives of federal financial reporting.

157 Second, assumptions ought to be consistentacross federal employee retirement systems.Assumptions need not be identical because theconditions facing each plan may objectivelydiffer, but they should be rationally related(thus, the standard calls for financial reports tobe prepared on the basis of the best availableestimates for actuarial assumptions). Also, thestandard allows the smaller plans to use theassumptions provided by any of the three primaryplans or to use their own assumptions if theyexplain how and why they are different from one ofthe major plans.

158 Third, assumptions ought to reflect theunderlying economic substance of the transaction.They should reflect the entity's past experienceand current expectations regarding cost trends.They should reflect the similarities of anddifferences between two sets of economic phenomenarather than forcing artificial uniformity.

159 FASAB concluded also that the discount rateshould reflect the long-term expected return onplan assets rather than a current market rate ondebt of comparable maturity (the discount ratecalled for by SFAS 87). The long-term expectedrate reduces volatility, reflects the actualexperience and expectations of the primary federalplans, and is consistent with the assumptions usedin the budget. The Governmental AccountingStandards Board uses a similar approach for thediscount rate for state and local government


pensions for similar reasons.

Prior Service Cost

160 Prior service costs (or gains) are the costs(or gains) of retroactive benefits granted (orreduced) in a plan amendment. Under the currentbudgetary system, prior service costs are fundedin the budget through General Fund appropriationsover 30 years. The employer entities under MRSand FERS--which are intended to be fully funded--are not charged in their budgets for prior servicecost (nor are they credited for gains), but ratherthe General Fund is charged for these costs. [FN68: CSRS also receives General Fund appropriationsfor this purpose, but the appropriations are basedon statutory provisions and are less than theywould be under a fully funded approach. Becauseof this, the CSRS funding approach is not beingused as an example of budgetary treatment to becontrasted with the accounting treatment.]

161 As stated in the Statement, FASAB believesthat prior service costs, interest on the pension(or ORB) liability, and actuarial gains and lossesare expenses of the federal government as a wholeand are best accounted for by the administrativeentity. Some respondents did not agree thatemployer entities should recognize only the"normal" or "service" cost element. Therespondents suggested that the employer entityshould recognize all elements of the pension (orORB) expense: service costs, prior service costs,actuarial gains and losses, and interest on thepension liability. In general, these respondentsbelieve that the full cost of products andservices produced by the employer entity includesthese elements, and that the full cost thusdefined is relevant to various decisions such ascomparing the cost of outputs and services withalternative providers.

162 The Board considered these views, but itcontinues to believe that employer componententities of the U. S. Government should usuallyrecognize only the service cost element of pension


(and ORB) expense in their general purposefinancial reports. (Exceptions will arise incases such as the Coast Guard, where the employerentity is also the administrative entity for theplan). The Board is aware that its approach mayappear to differ from the approaches taken by FASBand GASB in this regard. However, neither ofthose Boards focused, in their standards onpensions and other retirement benefits, onreporting by component entities of a largerreporting entity comparable to the Government ofthe United States. All elements of pension (andORB) expense should be recognized in theconsolidated financial statements of the UnitedStates Government; however, the Board believesthat prior service cost and other non-service costare not useful for most managerial or policydecisions at the program level. They are sunkcosts (or sunk gains) attributable to servicesrendered in prior years, or otherwise are notunder the control of program management. FASABcontinues to believe that having non-serviceelements of cost reported by the administrativeentity best reflects the federal environment andorganizational structure.

163 The Board recognizes that some analystsmight, for some purposes, want to consider analternative measure of compensation cost, e.g.,one that includes interest on the part of thepension (or ORB) liability that relates to currentworkers, or one that recognizes some non-servicecosts over the workers' years of expected service.Special analyses and reports will always benecessary for special purposes. General purposefinancial reports must, by definition, focus onthe most common needs of users of those reports.

164 For similar reasons, FASAB also continues tobelieve that prior service costs (or gains) shouldbe recognized immediately, without amortization,by the administrative entity, and in federalgovernment-wide financial reports. FASAB sees nobenefit to delaying recognition of a cost and aliability or to reducing volatility in the generalpurpose financial report of the administrative


entity. FASAB was not persuaded that the benefit(or the cost) derived in future periods fromincreased (or deceased) pension benefits wassufficiently tangible in the federal context towarrant delayed recognition by means ofamortization over future periods. Examples ofplausible future benefits or costs would be,increased (decreased) employee productivity orreduced (increased) turnover.

165 FASAB recognizes that, for funding purposes,prior service costs for CSRS, FERS, and MRS areamortized through appropriations over a number ofyears. Funding decisions, however, should not bedeterminative for accounting recognition of cost.Deciding when and how to fund an obligation is notan accounting issue.

Actuarial Gains and Losses

166 Actuarial gains and losses result from (1)deviations between actual experience and theactuarial assumptions used and (2) changes inactuarial assumptions. Actuarial assumptions areessentially long-range estimates about futureevents and necessarily vary from actualexperience.

167 Actuarial gains and losses and prior servicecosts (or gains) have similar characteristics.They are both determined after the accountingperiod in question has concluded, and both relateto the past (either prior service or priorexperience). The difference between actuarialgains and losses and prior service costs (orgains) is that the former are the normal result ofactuarial estimation and may occur annually, whileprior service costs are incurred only when theplan is amended. Also, actuarial gains and lossesmay tend to even out over time, unlike priorservice costs.

168 FASAB concluded that actuarial gains andlosses should receive the same treatment as priorservice costs (or gains). They should be chargedto the administrative entity. The employer


entities should recognize an expense only for theservice cost[FN 69: "Service cost" is defined asthe actuarial present value of benefits attributedby the plan's benefits formula to servicesrendered by employees during an accounting period.The term is synonymous with "normal cost".] oftheir employees for the period less the amountcontributed by the employees, if any. Like priorservice costs, the actuarial losses are sunk costs(or sunk gains) attributable to services renderedin prior years and therefore should be excludedfrom data used for managerial or policy decisions.

169 For the same reasons as were given for priorservice costs, actuarial gains and losses shouldbe recognized immediately by the administrativeentity. There is no benefit in delayingrecognition or reducing volatility in the costmeasures and the financial reports of theadministrative entity.

Recognition and Measurement

170 The Board's conclusions discussed immediatelyabove are reflected in the accounting treatment ofpensions. The employer entity should recognize anannual pension expense as a cost of operations.When the employer entity's contributions are lessthan its pension expense, the employer entityshould recognize an imputed financing source forthe expenses paid by other entities. To the extentthat it receives contributions from the employerentity, the administrative entity should recognizean intragovernmental revenue.

171 These transactions are intragovernmental.For purposes of federal government-wideconsolidated financial reports, the employer'spension expense should be offset against (1) theadministrative entity's contributions receivedfrom employer entities and (2) the employerentity's imputed financing source, if applicable.

172 The administrative entity should report thepension liability. An increase in the liability


during the accounting period is an expense to theadministrative entity. The liability is increasedby the net total of the pension cost components[normal cost, interest on the pension obligation,prior service costs (gains), and actuarial gains(losses)]. Thus, the administrative entity shouldbe providing information not only about theactuarial liability but also about therelationship between the full cost and the revenuefrom employees, employer entities, interest, andTreasury contributions.

173 Recognizing the pension cost components inthe administrative entity and also the normal costin the employer entities accomplishes twoobjectives. First, the full cost and actuarialliability are summarized and presented in oneplace, i.e., in the administrative entity'soperating results and Balance Sheet. Second, eachemployer entity reports its respective normal costas a cost of providing service. This is essentialto report properly the cost of delivering federalgovernment services. These entries are eliminatedduring consolidation for federal government-widefinancial statements and, thus, no double countingoccurs.

Other Retirement Benefits

174 FASAB concluded that ORB are similar topension benefits and should be accounted for in asimilar way unless differences in substancedictate otherwise. The predominant otherretirement benefit in the federal government ishealth care benefits for retirees. These arelong-term and require actuarial estimation.

175 FASAB recognizes that future health carebenefits present unique measurement problems.They are more uncertain than pensions since theydepend on the changing patterns of health caredelivery and utilization, on the price trends formedical care, and on the benefits provided bysocial insurance programs like Medicare.

176 Also, some federal retiree health benefits


are provided directly in federal governmenthospitals and domiciliary facilities. Theliability in these cases also depends on theamount that the Congress will appropriate in thefuture to pay for the benefits, so the expense andliability are more difficult to measure.Notwithstanding the measurement difficulties,because of the importance of approximating thecost of services rendered at the time the serviceis rendered, FASAB believes that in most cases,the ORB costs and liabilities should be measuredfor federal programs. However, as noted in thediscussion starting with paragraph 182, VA medicalcare cost would be recognized in the periodmedical care service is rendered.

ACCOUNTING FOR THE OTHER RETIREMENTBENEFITS PLAN

Attribution Method

177 Unlike the situation regarding federalpension plans, there is no established attributionmethod for federal retirement medical care.Although there are current proposals to do so, thecosts are not currently being funded.

178 For retirement health care, FASAB found nocompelling reason to prefer an approach other thanthe aggregate entry age normal used for pensions.The employer's service cost however, should becalculated differently for health care than forpensions. For the pensions, costs are calculatedas a percent of payroll, but retirement healthcare benefits are paid for each individual retireeregardless of prior salary. Cost, therefore,should be calculated on a per person basis becausethat accurately represents how the cost isincurred.

Assumptions

179 Although the general assumptions employed forORB should be the same as those for pensions, thehealth care cost trend assumption is unique. Thestandard gives general guidance regarding the use


of "Medicare projections or other authoritativesources" for the trend assumption in order toachieve consistency and set broad guidelines forthe estimates. The health care cost assumptionshould reflect these sources adjusted for anyfactors unique to the organization.

Other Postemployment Benefits

180 OPEB represent operating expenses of thefederal employer entity. Some might argue thatOPEB, like pensions and ORB, should be accrued asemployees perform services, as a cost ofoperations, because (1) they believe the event isoccurring as the employees perform service, (2)future OPEB payments are probable, and (3) theycan be measured. FASAB was not persuaded thatthere was an adequate nexus between these cost andthe employee's daily, ongoing service; or thatthese costs were sufficiently probable at thatpoint to warrant accrual.

181 FASAB believes that an accrual based on theoccurrence of an actual event, such as a job-related injury or a decision to reduce theentity's workforce generally, is a reasonableapproach. Such an event makes the future outflowof resources probable and measurable, may involvelong-term accruals in some cases, and provides anaccurate measure of expense in a way that is theleast burdensome to the reporting entities. [FN70: The federal workers' compensation andunemployment insurance programs are different fromthe programs applicable to nonfederal workers.The benefits for federal employees under theseprograms are financed by direct reimbursement fromemployer entities. Usually the reimbursementperiod for workers' and unemployment compensationis short-term, but under certain conditions,workers' compensation may extend for many years.]

VA MEDICAL CARE COST

182 Although it might appear that medicalbenefits provided by the Department of VeteransAffairs should be treated like other retirement or


medical benefits, there are significantdifferences between the two. Most often retireemedical benefits are provided through a healthinsurance provider, which receives premiumpayments from the former employer. But, with VAmedical benefits, the former employer (thegovernment) provides the medical services throughVA facilities to veterans on an "as needed" and an"as available" basis versus payment of healthinsurance premiums for each veteran.

183 Eligibility for VA hospital care and nursing-home care is divided into mandatory anddiscretionary categories. VA must providehospital care to veterans with service-connecteddisabilities and others in the mandatory category.Hospital care is considered discretionary if theveteran has income above a specified limit and anon-service-connected injury. Veterans in thediscretionary category may be required to pay feesto receive VA hospital care. In addition, VAmedical care is financed by annual appropriations.The entitlement to receive care does not guaranteeany particular level of care. The Congressdecides annually how adequately VA medical carewill be funded.

184 The Board believes that VA medical benefits,for both mandatory and discretionary programs, arebest measured by the annual cost incurred ratherthan by actuarially determined charges during theveteran's military service. Medical care forveterans does not satisfy the probability orreasonably measurable criteria in this standard atearlier dates, and therefore future medicalbenefits do not constitute a long-term liabilityto be recognized in the Balance Sheet. The Boardbelieves VA medical benefit liability and relatedexpenses should be recognized in the periodmedical care service is rendered. The entityshould consider, however, what disclosures wouldbe appropriate for these costs under thecontingency standard.

CONCLUSION ON INSURANCE AND GUARANTEES


185 The Board considered two possible bases forrecognizing the liability of federal insuranceprograms. One would recognize as a liability theunpaid expected present value (PV) cost of insuredevents that had occurred. The second wouldrecognize as a liability the unpaid expected PVcost of risks that had been assumed (i.e., theunpaid expected PV cost inherent in insuranceextended or in force). This second approach wouldbe similar to that taken by the Congress inbudgeting for direct loans and loan guarantees andby FASAB in accounting for these transactions.(See Statement of Federal Financial AccountingStandards Number 2, "Accounting for Direct Loansand Loan Guarantees").

186 Several Board members believe that thissecond approach has merit from a conceptualstandpoint. However, the Board has concerns aboutthe measurability of the risk assumed,particularly in the context of pension guarantees.There may also be some question as to the exactnature or categorization of some assumed risks inthe absence of written contracts. The Boardconcluded that it would continue the traditionalpractice of recognizing the effect of events thathad occurred on the face of the financialstatements. However, it also decided to requirereporting as RSSI the estimated PV cost of therisk assumed for all programs, except socialinsurance, life insurance, and loan guaranteeprograms.

187 Accrual accounting for insurance programsattempts to report the expenses of operations foreach period and the unpaid liability at the end ofthe period. Projections of future claims,including renewed, expanded, and new business,also provide important information for policydecisions about what rates should be charged tocover all expected future losses, what additionalinsurance should be extended, and similardecisions. Management of reporting entities maywish to include such projections in financialreports as other accompanying information, and maydo so on a voluntary basis, but the Board is not


presently making any specific recommendationsabout this, beyond those required by thisStatement and those to be further considered in"Supplementary Stewardship Reporting."

188 During the Exposure Draft stage of theLiability Standard, the Board asked respondentswhether the Standard provided sufficient guidanceon how the risk assumed amount should be measured.Two of the fifty five respondents asked foradditional guidance but did not mentionmeasurement possibilities.

189 At the discussion stages of the finalStatement the Board contemplated two possiblemeasurement perspectives for reporting the riskassumed. The Statement requires that all federalinsurance programs (except social insurance, lifeinsurance, and loan guarantee programs) report therisk assumed amount as supplementary information.The risk assumed calculation as presented in theExposure Draft measured the cost of the coverageoutstanding during the reporting year. For annualterm insurance programs, under this approach therisk assumed amount might not be significantlydifferent from the sum of recognized liabilitiesand contingent liabilities reported on the BalanceSheet. However, the Board believes that requiringdisclosure or supplementary reporting of a riskassumed number that is similar in concept andamount to the liability recognized could beconfusing and would not add informational value.

190 In the second perspective, the risk assumedamount would be a broader and longer term measureof the government's potential cost for on-goinginsurance programs. Under some measures, thissecond approach to risk assumed could be regardedas an indicator of the "fair" or "full cost"premium that should be charged if taxpayers arenot to subsidize the program. This measure wouldbe a probabilistic estimate of the expected costunder certain assumed economic factors. The Boardfound merits in this calculation, and believes itcan provide important additional informationbeyond that contained in the accrual. Although


they believe the measure to be important,proponents of this approach acknowledge that themeasure may be difficult to measure precisely.Accordingly, they would treat it as RSSI. TheBoard currently has a project at the ExposureDraft stage, "Supplementary StewardshipReporting", that will provide further details onthe measurement and reporting of "risk assumed" inits final statement.

191 The Board also considered the liabilityrecognition of whole life insurance programs. Thefederal government has a small number of wholelife insurance programs that are administered byfederal entities. The most significant programs(mutual enterprise-type whole life insurance) arethrough the Department of Veteran Affairs (VA).

192 At the time the exposure draft on liabilitieswas issued, there were no established accountingstandards for mutual enterprise-type whole lifeinsurance within the federal government, state andlocal government, or the private sector.Therefore VA followed the statutory requirementsfor accounting purposes as well as statutoryinsurance reporting.

193 In January 1995, the FASB and AICPA issued astandard and a statement of position,respectively, that specified accounting for mutualwhole life insurance enterprises. Due to thesimilarities between the federal programs and theinsurance enterprises covered in the FASB andAICPA documents, the Board decided that theprivate sector standards would be appropriate forthe applicable federal programs. Therefore theBoard concluded that federal entities with wholelife insurance programs would follow the standardsas prescribed in the private sector standards (andas these private sector standards are amended)when reporting the liability for future policybenefits, along with the additional disclosuresprescribed by this Statement. The Board furtherconcluded that disclosure of the components of theliability was necessary to adequately inform thefinancial statement users of the projected use and


any other potential uses of the liabilitycomponents and associated assets.

**************************************************APPENDIX B: LIABILITY RECOGNITION AND MEASUREMENTMATRIX**************************************************

********** APPENDIX B: "LIABILITY RECOGNITION ANDMEASUREMENT MATRIX APPEARED HERE IN THE HARD COPYTEXT **********

**************************************************GLOSSARY**************************************************

Actuarial cost methods - A recognized actuarialtechnique used for establishing the amount and theincidence of employer contributions or accountingcharges for pension costs under a pension plan.

Actuarial liability - A liability based onstatistical calculations and actuarial assumptions(actuarial assumptions are conditions used toresolve uncertainties in the absence ofinformation concerning future events affectinginsurance, pension expenses, etc.). (Adapted from"Webster's Ninth New Collegiate Dictionary" and"Kohler's Dictionary for Accountants" sixthedition, [Cooper & Ijiri])

Actuarial present value - The value of an amountor series of amounts payable or receivable atvarious times, determined as of a given date bythe application of a particular set of actuarialassumptions. (Actuarial Standards of Practice No.4)

Aggregate entry age normal - A system of applyingthe entry age normal actuarial cost methodologyusing aggregate population models or groupsinstead of applying it individual by individual.


Attribution - The process of assigning pensionbenefits or costs to periods of employee service.[SFAS 87]

Budget Authority - The authority provided byfederal law to incur financial obligations, asfollows:

-- Provisions of law that make fundsavailable for obligation and expenditure (otherthan borrowing authority), including the authorityto obligate and expend the proceeds of offsettingreceipts and collections.

-- Borrowing authority or authority toborrow and obligate and expend the borrowed funds,including issuance of promissory notes or othermonetary credits.

-- Contract authority, or the making of fundsavailable for obligation but not for expenditure.(Statutory authority under which contracts orother obligations may be entered into before anappropriation for the payment of such obligations.The later appropriation provides cash to liquidatesuch obligations. See OMB Circular A-34.)

-- Offsetting receipts and collections asnegative budget authority and the reductionthereof as positive budget authority. (OmnibusBudget Reconciliation Act of 1990 [Pub. L. 101-508], sec. 13211)

Budget authority may be classified by period ofavailability (1-year, multiple-year, and no-year),by nature of authority (current or permanent), bythe manner of determining the amount available(definite or indefinite), or as gross (withoutreduction of offsetting collections) and net (withreductions of offsetting collections). (SFFASNumber 1, "Accounting for Selected Assets andLiabilities")

Capital leases - Leases that transfersubstantially all the benefits and risks ofownership to the lessee.


Contingency - An existing condition, situation, orset of circumstances involving uncertainty as topossible gain or loss to an entity that willultimately be resolved when one or more futureevents occur or fail to occur.

Discount rate - The interest rate used to adjustfor the time value of money.

Dividend fund interest rate - The interest ratedetermined at policy issuance used to determinethe amount of the dividend fund. It is the rateused to credit interest to the dividend fund, andagainst which experience is measured to determinethe amount of the interest portion of dividendspaid to individual policyholders. [AICPA SOP 95-1, Glossary, p. 33]

Earmarked taxes -Taxes levied by the federalgovernment to finance a specific federal program.

Entitlement program - A program in which thefederal government becomes automatically obligatedto provide benefits to members of a specific groupwho meet the requirements established by law.

Entitlement period - The period (such as, monthly)for which benefits become due.

Entry age normal actuarial method - A method underwhich the actuarial present value of projectedbenefits of each employee is allocated on a levelbasis over the earnings or the service of theemployee between entry age and assumed exit age.The portion of this actuarial present valueallocated to a valuation year is called the normalcost. The portion of this present value notprovided for at a valuation date by the presentvalue of future normal cost is called theactuarial accrued liability. The assumption ismade under this method that every employee enteredthe plan (entry age) at the time of initialemployment or at the earliest eligibility date, ifthe plan had been in existence, and thatcontributions have been made from the entry age to


the date of the actuarial valuation. The term"aggregate entry age normal" refers to an approachwhereby costs are determined for the group as awhole rather than for each individual participantseparately.

Event - A happening of consequence to an entity.It may be an internal event that occurs within anentity, such as the transforming of raw materialsinto a product. Or it may be an external eventthat involves interaction between an entity andits environment, such as a transaction withanother entity, an act of nature, theft,vandalism, a tort caused by negligence, or anaccident. (Adapted from FASB Statement ofFinancial Accounting Concepts No. 6, "Elements ofFinancial Statements")

Exchange transaction - A transaction that ariseswhen each party to the transaction sacrificesvalue and receives value in return.

Executory contract - A contract which has not beenperformed by all parties to it. (Trascona, JosephL., "Business Law", William C. Brown C.Publishers, 1981)

Executory costs - Those costs such as insurance,maintenance, and taxes incurred for leasedproperty, whether paid by the lessor or lessee.(SFAS #13)

Expected value - A statistical measurementattribute that is the sum of the products of eachpotential outcome multiplied by the probability ofthat potential outcome.

Fixed value securities - Securities that have aknown maturity or redemption value at the time ofissue.

Government-acknowledged events - Events that arenot a liability in themselves, but are thoseevents that are "of financial consequence" to thefederal government because it chooses to respondto the event.


Government-related events - Nontransaction-basedevents that involve interaction between federalentities and their environment.

Insurance and guarantee programs - Federalgovernment programs that provide protection toindividuals or entities against specified risks.Because the federal government frequentlycommingles aspects of insurance and guaranteeswithin the same program, this Statement treats theterms as a single type of activity. (Also seeseparate definition of social insurance).

Interest method - Under the interest method ofamortization, an amount of interest equal to thecarrying amount of the investment times theeffective interest rate is calculated for eachaccounting period. This calculated interest isthe effective interest of the investment (referredto as "effective yield" in some literature). Theeffective interest is compared with the statedinterest of the investment. (The stated interestis the interest that is payable to the investoraccording to the stated interest rate.) Thedifference between the effective interest and thestated interest is the amount by which thediscount or the premium should be amortized (i.e.,reduced) for the accounting period. (SFFAS Number1, "Accounting for Selected Assets and Liabilities").

Liability - For federal accounting purposes, aprobable future outflow or other sacrifice ofresources as a result of past transactions orevents.

Measurable - Reasonably estimable.

Net level premium reserve - The excess, if any, ofthe present value of future guaranteed deathendowment benefits over the present value offuture net premiums. The net level premiumreserve should be calculated based on the dividendfund interest rate, if determinable, and mortalityrates guaranteed in calculating the cash surrendervalues described in the contracts. [AICPA SOP 95-1]


Nonexchange transaction - A transaction thatarises when one party to a transaction receivesvalue without giving or promising value in returnor one party to a transaction gives or promisesvalue without receiving value in return.

Normal cost - That portion of the actuarialpresent value of pension plan benefits andexpenses that is allocated to a valuation year bythe actuarial cost method. (From ActuarialStandard of Practice No. 4)

Operating lease - An agreement conveying the rightto use property for a limited time in exchange forperiodic rental payments.

Other postemployment benefits (OPEB) - Forms ofbenefits provided to former or inactive employees,their beneficiaries, and covered dependentsoutside pension or ORB plans.

Other retirement benefits (ORB) - Forms ofbenefits, other than retirement income, providedby an employer to retirees. Those benefits may bedefined in terms of specified benefits, such ashealth care, tuition assistance, or legalservices, which are provided to retirees as theneed for those benefits arises, such as certainhealth care benefits. Or they may be defined interms of monetary amounts that become payable onthe occurrence of a specified event, such as lifeinsurance benefits. (FASB Statement of FinancialAccounting Standard No. 106, "Employers'Accounting for Postretirement Benefits Other thanPensions")

Premium deficiency - A condition under which aliability for future policy benefits using currentconditions exceeds the liability for future policybenefits using contract conditions. In suchcases, the difference should be recognized as acharge to operations in the current period.

Probable - That which can reasonably be expectedor believed to be more likely than not on the


basis of available evidence or logic but which isneither certain nor proven.

Projected unit credit actuarial method - A methodunder which the projected benefits of eachindividual included in an actuarial presentvaluation are allocated by a consistent formula tovaluation years. The actuarial present value ofbenefits allocated to the valuation year is calledthe normal cost. The actuarial present value ofbenefits allocated to all periods before avaluation year is called actuarial liability.(Actuarial Standard of PracticeNo. 4)

Social insurance programs - Income transferprograms financed by compulsory earmarked taxesand also, in certain cases, general revenues ofthe federal government. (Also see separatedefinition of insurance and guarantees).

Terminal dividends - Dividends to policyholderscalculated and paid upon termination of acontract, such as on death, surrender, ormaturity. If the payment of terminal dividends isprobable and the amount can be reasonablyestimated, the liability should be recognized.AICPA SOP 95-1.

Transaction - A particular kind of external eventinvolving the transfer of something of valueconcerning two or more entities. The transfermay be a two way or one way flow of resources orof promises to provide resources. (Adapted fromFASB Statement of Financial Accounting ConceptsNo. 6, "Elements of Financial Statements")

Variable value securities - Securities that haveunknown redemption or maturity values at the timeof issue. Values of these securities can vary onthe basis of regulation or specific language inthe offering.

Whole life policies - Policies that provideinsurance over the insured's entire life and theproceeds (face amount) are paid only upon death of


the insured.

**************************************************Major Contributors**************************************************

This document reflects extensive input from anumber of individuals,including those listed below.

Christine Bonham General Accounting Office

Debra Carey Department of the Interior

Sheila Conley Office of Management and Budget

John Crowley Bureau of Public Debt

Tom Cuny Congressional Budget Office

Benjamin Gottlieb Department of Defense

Ron Gresh Office of Personnel Management

Larry Jacobson Office of Management and Budget

Bob Kilpatrick Office of Management and Budget

Allan Lund Department of the Treasury

JoEllen McCormack General Accounting Office

Nancy Nichak Office of Personnel Management

John Reilly General Accounting Office

Justine Rodriguez Office of Management and Budget

Debra Sebastian General Accounting Office

Laura Triggs General Accounting Office

Mike Virga Office of Personnel Management


*************From Inside Back Cover***********

THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

Elmer B. Staats, ChairmanJames L. BlumDonald H. ChapinMartin IvesNorwood JacksonGerald MurphyJames E. ReidCornelius E. TierneyAlvin Tucker

The Secretary of the Treasury, the Director of theOffice of Management and Budget, and theComptroller General established the FederalAccounting Standards Advisory Board (the FASAB or"the Board") in October 1990 to consider andrecommend accounting principles for the UnitedStates Government.

The Board communicates its recommendations bypublishing recommended accounting standards afterconsidering the financial and budgetaryinformation needs of Congress, executive branchagencies, and other users of federal financialinformation. The Board also considers commentsfrom the public on its proposed recommendations,which are published for comment as "exposuredrafts." The Board's sponsors, i.e., the officialswho established the Board, then decide whether toadopt the recommendations. If they do, thestandard is published by the OMB and the GAO andthen becomes effective.

Additional background information is availablefrom the FASAB, including: (1) the "Memorandum ofUnderstanding among the General Accounting Office,the Department of the Treasury, and the Office ofManagement and Budget, on Federal GovernmentAccounting Standards and a Federal AccountingStandards Advisory Board" and (2) the "MissionStatement of the Federal Accounting StandardsAdvisory Board."


FASAB STAFF:Ronald S. Young, Executive DirectorProject Staff:Robert W. BramlettRichard FontenroseMonica R. Valentine

MAILING ADDRESS AND TELEPHONE NUMBERFederal Accounting Standards Advisory Board750 First Street, NE, Room 1001Washington, DC 20002Telephone (202) 512-7350Fax (202) 512-7366


accounting for liabilities sffas no. 5 office of ...files.fasab.gov/pdffiles/sffas-5.pdfaccounting...

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