In this video, we walk through 5 BAR practice questions on net other post employment benefit liability. These questions are from BAR content area 3 on the AICPA CPA exam blueprints: State and Local Governments.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
Net Other Post Employment Benefit Liability
At first glance, accounting for other postemployment benefits (OPEB) may seem like an entirely new topic. In reality, if you already understand defined benefit pension accounting, you’re most of the way there. OPEB accounting follows almost the same accounting model, making it much easier to learn once you understand pensions.
The key is recognizing a few important differences while remembering that the overall framework remains nearly identical.
What Is an OPEB?
OPEB stands for other postemployment benefits. These are benefits that employees receive after retirement that are not pension benefits. The most common example is retiree health insurance, although OPEB can also include other healthcare-related benefits provided after employment ends.
For example, suppose a city promises retired firefighters that it will continue paying a portion of their health insurance premiums after they retire. Those healthcare benefits are considered OPEB rather than pension benefits.
Just like pension plans, governments often set aside assets in a trust to help pay these future benefits.
Measuring the Net OPEB Liability
One of the most important concepts to remember is the formula used to measure the net OPEB liability.
Net OPEB Liability = Total OPEB Liability − OPEB Plan Fiduciary Net Position
The total OPEB liability represents the actuarially measured obligation for future OPEB benefits earned by employees.
The OPEB plan fiduciary net position represents the assets that have been accumulated in the OPEB trust to help pay those future benefits.
The difference between these two amounts is the net OPEB liability.
Example
Assume an OPEB plan has:
- Total OPEB liability: $8,500,000
- OPEB plan fiduciary net position: $6,900,000
The net OPEB liability would be:
$8,500,000 − $6,900,000 = $1,600,000
This tells users of the financial statements how much of the promised OPEB benefits has not yet been covered by assets held in the trust.
If you’ve already studied net pension liability, this calculation should look very familiar because the accounting model is almost identical.
Recognizing OPEB Obligations
Another important rule is knowing when OPEB obligations are recognized.
OPEB obligations are recognized when the related benefits are due and payable. The timing of the government’s contribution or funding does not change when the obligation is recognized.
In other words, recognition is based on when the plan actually owes the benefits, not when the employer decides to contribute money to the trust.
Example
Suppose an OPEB trust owes $90,000 of retiree healthcare benefits at year-end. The government plans to make its contribution next month.
Even though the funding has not yet occurred, the OPEB obligation is already due and payable. The OPEB trust should report a liability because the benefits are currently owed.
This is an important distinction because students sometimes assume a liability is recognized only after the employer contributes cash. That is not the case.
What Appears on the OPEB Plan’s Financial Statements?
Another commonly tested concept is where the net OPEB liability is reported.
The OPEB plan’s statement of fiduciary net position reports the plan’s own financial position. This includes items such as the assets held in the trust, current liabilities of the plan, deferred outflows and inflows of resources, and the plan’s fiduciary net position.
However, the net OPEB liability itself is not reported as a liability on the face of the statement of fiduciary net position.
Instead, information about the net OPEB liability is disclosed in the notes to the financial statements and further explained in the required supplementary information (RSI).
Example
Imagine an OPEB trust has:
- Investments of $15 million
- Cash of $500,000
- Benefits currently due and payable of $120,000
Those assets and current liabilities appear on the statement of fiduciary net position.
The larger actuarial calculation showing the relationship between the total OPEB liability and the fiduciary net position is presented through the financial statement disclosures and RSI rather than as a liability on the face of the statement.
Keeping these two ideas separate can help avoid confusion on exam questions.
OPEB Accounting Closely Mirrors Pension Accounting
One of the easiest ways to remember this blueprint topic is to think back to everything you learned about defined benefit pension accounting.
Both accounting models use nearly identical concepts, including:
- An actuarially measured total liability.
- A fiduciary net position representing assets held in trust.
- A net liability calculated as the difference between the two amounts.
- Extensive note disclosures and required supplementary information.
Example
Suppose you are asked two separate questions.
The first asks you to calculate a net pension liability.
The second asks you to calculate a net OPEB liability.
Although one involves retirement income and the other involves retiree healthcare benefits, the calculation process is essentially the same. In both cases, you subtract the fiduciary net position from the total liability to determine the net liability.
Recognizing this similarity can save valuable time during the exam because you are applying an accounting framework you already know.
