[Federal Register Volume 63, Number 23 (Wednesday, February 4, 1998)]
[Notices]
[Pages 5822-5825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2698]


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OFFICE OF MANAGEMENT AND BUDGET


Interpretation Number 4 Related to Statement of Federal Financial 
Accounting Standards Number 5

AGENCY: Office of Management and Budget.

ACTION: Notice of Interpretation.

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SUMMARY: This Notice includes an interpretation of Statement of Federal 
Financial Accounting Standards (SFFAS), adopted by the Office of 
Management and Budget (OMB). This interpretation was recommended by the 
Federal Accounting Standards Advisory Board (FASAB) and adopted in its 
entirety by OMB.

FOR FURTHER INFORMATION CONTACT: James Short (telephone: 202-395-3124), 
Office of Federal Financial Management, Office of Management and 
Budget.

SUPPLEMENTARY INFORMATION: This Notice includes an interpretation of 
Statement of Federal Financial Accounting Standards (SFFAS) Number 5, 
adopted by the Office of Management and Budget (OMB). This 
interpretation was recommended by the Federal Accounting Standards 
Advisory Board (FASAB) and adopted in its entirety by OMB.
    Under a Memorandum of Understanding among the General Accounting 
Office, the Department of the Treasury, and OMB on Federal Government 
Accounting Standards, the Comptroller General, the Secretary of the 
Treasury, and the Director of OMB (the Principals) decide upon 
standards and concepts after considering the recommendations of FASAB. 
After agreement to specific standards and concepts, they are published 
by OMB in the Federal Register and distributed throughout the Federal 
Government.
    An Interpretation is a document, originally developed by FASAB, of 
narrow scope which provides clarification of the meaning of a standard, 
concept or other related guidance. Once approved by the designated 
representatives of the Principals, they are published by OMB in the 
Federal Register.
    This Notice, including the fourth interpretation of SFFAS, is 
available on the OMB home page on the Internet which is currently 
located at http://www.whitehouse.gov/WH/EOP/omb, under the caption 
``Federal Register Submissions.''
G. Edward DeSeve,
Controller.

Interpretation Number 4 of Statement of Federal Financial Accounting 
Standards Number 5

Accounting for Pension Payments in Excess of Pension Expense: An 
Interpretation of SFFAS No. 5

Introduction
    1. The Federal Accounting Standards Advisory Board (FASAB) was 
asked for guidance regarding accounting at the agency level for 
employer agencies' payments to the pension trust fund when they exceed 
pension expense (based on an allocation of the total service [or 
``normal''] cost 1 by the Office of Personnel Management). 
This is a situation that was not contemplated in Statement of Federal 
Financial Accounting Standards (SFFAS) No. 5, ``Accounting for 
Liabilities of the Federal Government.''
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    \1\ ''Service cost'' and/or ``normal costs,'' the terms are used 
synonymously in SFFAS No. 5, are defined in SFFAS No. 5 as that 
portion of the actuarial present value of pension plan benefits and 
expenses that is allocated to a valuation year by the actuarial cost 
method.
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    2. The objective of SFFAS No. 5 (paras. 71-78) is to have employer 
entities recognize the annual cost of their employees' pensions 
(pension expense) as measured by the annual normal cost for their 
employees, less any amounts contributed by the employees (para. 74).

[[Page 5823]]

    3. The employer entity payment rates for the two major civilian 
pension systems, the Federal Employees Retirement System (FERS) and the 
Civil Service Retirement System (CSRS), are provided in law and are not 
the same. For FERS, the payment rate is the employer entity's normal 
cost less the amount contributed by its employees; for FERS, the 
payment rate and the pension expense rate under SFFAS No. 5 
theoretically would be the same, since both would be based on the same 
principle: that pension expense and employer payments to the pension 
trust fund equal normal cost less the employees' contribution. For most 
CSRS, employer payments to the pension trust fund are by law set at 
seven percent of salaries which is substantially less than normal costs 
and therefore also less than pension expense based on normal cost.
    4. SFFAS No. 5 explicitly provides the accounting for a situation 
in which pension expense is more than employer payments to the pension 
trust fund. The difference between the pension expense and the payment 
to the plan is to be accounted for by the employer entity as imputed 
financing.
    5. However, due to (1) planning and operational requirements of 
budgetary administration and (2) recent legislation, the employer 
entity's FERS pension expense may be less than the FERS-related 
employer payments to the pension trust fund.
    6. The pension expense rate used by civilian employer entities to 
calculate pension expense is supplied by the administrative entity. In 
the case of FERS and CSRS, the administrative entity is the Office of 
Personnel Management (OPM). OPM analyzes the demographic and economic 
assumptions periodically and recalculates normal costs (for both FERS 
and CSRS).2 The recalculation was done during FY 1997 and 
resulted in a lower normal cost for both FERS and CSRS, and OPM has 
issued a revised FY 1997 pension expense rate based thereon. However, 
regarding the rate for employer payments to the pension trust fund, OPM 
allows time for employer entities to adopt the new rate for budgeting 
purposes during which the prior, higher payment rate will continue to 
be used by employer entities.
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    \2\ This is separate from OPM's annual recalculation of the 
actuarial liability which can result in actuarial gains and losses 
the accounting for which is provided in SFFAS No. 5.
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    7. In addition, the Balanced Budget Act of 1997 (BBA) increases 
FERS employees' withholding rate from 1999 through 2001 without 
correspondingly decreasing the employer entity's payment rate. For 
example, if FERS normal costs were $10,000 and the employees' 
contribution were raised from $5,000 (as calculated absent BBA) to 
$5,500 by the BBA, then the employer's expense according to SFFAS No. 5 
should be $4,500 ($10,000--$5,500). However, the BBA does not allow the 
employer entity to reduce its payment, and therefore the employer pays 
what it would have paid without the BBA, $5,000. The $500 difference 
between the $4,500 SFFAS No. 5 pension expense and the $5,000 payment 
to the pension trust fund represents a payment in excess of pension 
expense.
    8. For FY 1997, OPM has indicated that employer entities are 
unlikely to report total payments to the trust fund in excess of total 
pension expense (based on normal cost) at the entity-wide level, 
although it is possible, because the amount of the CSRS contribution 
deficiency is more than the excess FERS payment. However, OPM believes 
that it is probable that total payments will exceed total pension 
expense (based on normal cost less employee contributions) in future 
years.
Interpretation
    9. Change in Estimate--Changes in normal costs due to re-estimates 
of demographic and economic assumptions should be accounted for by the 
administrative entity as a change in accounting estimate. The effect of 
the change should be recognized in current and future years.
    10. Payments in Excess of Pension Expense--When the employer 
entity's total payment for FERS and CSRS exceeds the related total 
pension expense as defined in SFFAS No. 5, the entity should account 
for the excess payment as a transfer-out. The entity should include the 
transfer-out when determining results of operations on its statement of 
changes in net position.
    11. Any FERS-related payment that exceeds the FERS-related pension 
expense should be offset against any imputed financing resulting from a 
CSRS-related payment being less than CSRS-related pension expense in 
calculating the amount of the transfer out. Only when the total pension 
payment exceeds total pension expense would a transfer-out be 
recognized.
    12. Example #1:
    i. if an employer entity calculates total pension expense as 
$635,000 reflecting a FERS-related pension expense of $535,000 and a 
CSRS-related pension expense of $100,000,3 and
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    \3\ The amounts used for CSRS are from the example in SFFAS No. 
5, paragraph No. 78.
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    ii. it makes a total pension payment to the trust fund, excluding 
its employees' contribution, of $630,000 reflecting $570,000 for its 
FERS employees and $60,000 for its CSRS employees,
    iii. then it would off-set the $35,000 FERS-related excess payment 
($570,000-$535,000) against the $40,000 CSRS-related under payment 
($100,000-$60,000) and recognize the net $5,000 underpayment as an 
imputed financing as follows:


DR. Pension Expense...........................      635,000             
    (FERS $535,000 + CSRS $100,000)                                     
    CR. Funds with Treasury...................                   630,000
    (FERS $570,000 + CSRS $60,000)                                      
CR. Imputed Financing.........................                     5,000
    ($40,000-$35,000)                                                   
                                                                        

    13. Example #2: Assuming the same facts as in the paragraph 
immediately above except that the employer entity makes a payment of 
$640,000 ($580,000 FERS-related and $60,000 CSRS-related) instead of 
$630,000, then the entity would recognize a net transfer-out of the 
amount that the FERS-related excess payment ($580,000-$535,000 = 
$45,000) exceeded the CSRS-related under payment ($100,000-$60,000 = 
$40,000) as follows:


DR. Pension Expense...........................      635,000             
    (FERS $535,000 + CSRS $100,000)                                     
DR. Transfer-out..............................        5,000             
    ($45,000-$40,000)                                                   
    CR. Funds with Treasury...................                   640,000
    (FERS $580,000 + CSRS $60,000)                                      
                                                                        


[[Page 5824]]

    14. Administrative Entity Intra-governmental Entries--The 
administrative entity should account for funds received from employer 
entities in excess of the normal cost of pension expense as a transfer-
in. The administrative entity should include the transfer-in when 
determining results of operations on its statement of changes in net 
position.
    15. Adjusting Entries--Employer entities that recorded total FERS 
payments as pension expense during FY 1997 will need to adjust their 
accounts. The following examples use the amounts from paragraphs 12 and 
13 above.
    a. Example #3--if the entity had originally recorded the following 
pension expense based on an earlier provided normal cost rate:


DR. Pension Expense...........................      670,000             
    (FERS $570,000 + CSRS $100,000)                                     
CR. Funds with Treasury.......................                   630,000
    (FERS $570,000 + CSRS $60,000)                                      
CR. Imputed Financing (CSRS)..................  ...........       40,000
                                                                        

then, when the revised estimate is provided, the entry would 
recalculate pension expense as $635,000 (FERS-related $535,000 + CSRS-
related $100,000) and adjust the accounts accordingly by means of the 
following two simultaneous entries:
    (1) to reduce pension expense from $670,000 to $635,000 (FERS 
$535,000 + CSRS $100,000):


DR. Transfer-out..............................       35,000             
    CR. Pension Expense.......................                    35,000
                                                                        

    (2) to off-set the transfer-out against imputed financing:


DR. Imputed Financing.........................       35,000             
CR. Transfer-out..............................  ...........       35,000
                                                                        

    These entries adjust the accounts to the amounts that would have 
been entered had the original entry reflected the revised normal cost 
as shown in paragraph 12 above.
    b. Example #4--Also, if the entity's accounting resulted in a net 
transfer-out, an adjustment may be necessary. For example, using the 
illustration in paragraph 13 above, the entity may have originally 
recorded pension expense based on an earlier provided normal cost rate 
as follows:


DR. Pension Expense...........................      680,000             
    (FERS $580,000 + CSRS $100,000)                                     
    CR. Imputed Financing (CSRS)..............                    40,000
    CR. Funds with Treasury...................                   640,000
    (FERS $580,000 + CSRS $60,000)                                      
                                                                        

then the adjustments would be the following two simultaneous entries:
    (1) to reduce pension expense from $680,000 to $635,000 (FERS 
$535,000 + CSRS $100,000):


DR. Transfer-out..............................       45,000             
    (FERS $580,000-$535,000 = $45,000)                                  
    CR. Pension Expense.......................                    45,000
                                                                        

    (2) to off-set the transfer-out against imputed financing:


DR. Imputed Financing (CSRS)..................       40,000             
    CR. Transfer-out..........................                    40,000
                                                                        

    These entries adjust the accounts to the amounts that would have 
been entered had the original entry reflected the revised normal cost 
as shown in paragraph 13 above.
Scope of Interpretation
    16. This interpretation applies to employer entity pension (and, if 
applicable, to retirement health care) expense, and to administrative 
entity's receipt of funds from employer entities, accounted for in 
accordance with SFFAS No. 5.
Effective Date
    17. This interpretation should be applied for reporting periods 
that end on or after September 30, 1997. The FASAB has reviewed and 
agreed with this interpretation. After this interpretation is signed by 
the FASAB members who represent the Department of the Treasury, the 
Office of Management and Budget, and the General Accounting Office, it 
will be published by OMB and will be effective.
Basis for Conclusions
    18. Regarding changes in normal cost estimates, the prospective 
treatment called for in this interpretation reflects current practice, 
including APB Opinion No. 20, ``Accounting for Changes in Accounting 
Estimate,'' which provides that a change in accounting estimate should 
be accounted for in the period of change, if the change affects that 
period only, or in the period of change and future periods if the 
change affects both.
    19. Regarding employer payments to the pension trust fund in excess 
of pension expense, such payments are not an employer entity expense or 
an administrative entity revenue. Such payments do not meet the 
definition of employer pension expense in SFFAS No. 5,4 as 
discussed above, nor do they meet the general definition of 
expense.5

[[Page 5825]]

The entity receiving the transfer, in this case an employer payment in 
excess of pension expense, does not sacrifice anything of value to 
obtain the payment, and the transferring entity does not acquire 
anything of value beyond what it would have gotten had it contributed 
an amount equalling normal cost less the employees' contribution. Thus, 
such payments meet the description of ``transfer-out'' provided in 
SFFAS No. 7.6

    \4\ SFFAS No. 5, para. 74.
    \5\ See Statements of Federal Financial Accounting Concepts and 
Standards, Vol. I, Original Statements, Appendix E, Consolidate 
Glossary, p. 690, wherein expenses are defined as:
    Outflows or other using up of assets or incurrences of 
liabilities (or a combination of both) during a period from 
providing goods, rendering services, or carrying out other 
activities related to an entity's programs and missions, the 
benefits from which do not extend beyond the present operating 
period.
    \6\ For a description of transfers-in/out, see paragraphs 74 and 
344 of SFFAS No. 7, ``Accounting for Revenue and Other Financing 
Sources and Concepts for Reconciling Budgetary and Financial 
Accounting.''
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[FR Doc. 98-2698 Filed 2-3-98; 8:45 am]
BILLING CODE 3110-01-P