The Governmental Accounting Standards Board (GASB) has issued Statement No. 47, Accounting for Termination Benefits. The Statement provides accounting and reporting guidance for state and local governments that offer benefits such as early retirement incentives or severance to employees that are involuntarily terminated. The Statement requires that similar forms of termination benefits be accounted for in the same manner and is intended to enhance both the consistency of reporting for termination benefits and the comparability of financial statements.

Statement 47 specifies when governments should recognize the cost of termination benefits they offer in accrual basis financial statements. Benefits provided for involuntary terminations should be accounted for in the period in which a government becomes obligated to provide benefits to terminated employees, which is not necessarily the same period in which the benefits are actually provided. Regarding benefits provided to employees that voluntarily terminate employment, Statement 47 requires governments to recognize the cost of all such benefits when the termination offer is accepted.

The Statement provides an exception to the general recognition requirements for termination benefits that affect defined benefit post-employment benefits, such as pensions or retiree healthcare. Those termination benefits should be accounted for in the same manner as defined benefit pensions or other post-employment benefits, although any increase in an actuarial accrued liability associated with a termination benefit must be separately disclosed.

The Statement also elaborates on how to measure the cost of termination benefits and requires disclosure of information about termination benefit arrangements, including a description of the plan and the cost of the benefits.

In general, Statement 47 is effective for financial statements for periods beginning after June 15, 2005. However, for termination benefits that affect defined benefit post-employment benefits other than pensions, governments should implement Statement 47 simultaneously with Statement No. 45, Accounting and Financial Reporting by Employers for Post-employment Benefits Other Than Pensions. Statement 47 (Product Code GS47) can be ordered through the GASB’s order department at 800.748.0659 or via its web site.

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