The American Institute of Certified Public Accountants (AICPA) released guidance for evaluating certain assumptions used in developing actuarial liabilities for defined benefit pension plans. Actuarial information related to the present value of future obligations is required to be disclosed in both the plan’s financial statements and financial statements of the plan sponsor. That information is based on a number of assumptions, including mortality tables. For financial reporting by plan sponsors, the information must be as of the balance sheet date. However, the plan’s financial statements can present the information as of the beginning of the year for which a balance sheet is presented. Effectively, the beginning of year presentation uses assumptions that are a year older than the information in the plan sponsor’s financial statements.
The AICPA observed professional associations of actuaries occasionally publish updated mortality tables to reflect changes in mortality conditions based on recent historical trends and data. In addition, established actuarial companies also may develop mortality tables based on other information and assumptions.
The AICPA guidance states the mortality assumption should reflect the best estimate as of the date at which the obligation is presented in the financial statements. As part of developing the estimate, available information after the balance sheet date through the date the financial statements are issued (commonly referred to as the subsequent events date) should be evaluated to determine whether the available information may be indicative of conditions that existed at the balance sheet date, which is generally the case when information is a culmination of conditions that existed over a long period of time.
Updated mortality tables are based on historical trends and data that go back many years; therefore, the publication date of the mortality tables would not necessarily be an indication of when the conditions existed.
Plan sponsors will need to evaluate the reasonableness of the chosen mortality assumptions and document the basis of the mortality tables used to develop the assumptions. Plan sponsors will need to be more actively involved with the plan’s actuaries to effectively reach reasonable conclusions. Plan sponsors will also need to have similar discussions and interactions with actuaries involved with other postretirement plans (health, compensation, etc.) for which the plan sponsors use the information for financial reporting.
Carl Kampel is Director in charge of professional standards at Ellin & Tucker, Chartered. He is a Member of the FASB Emerging Issues Task Force and past vice chair of the AICPA Accounting Standards Executive Committee. He is also past President of the Baltimore Chapter of Financial Executives International.