The Society of Actuaries recently released new mortality tables for use by employee benefit plans and plan sponsors when measuring pension obligations. The new tables, RP-2014 (mortality tables) and MP-2014 (longevity improvement scale) will most likely result in higher pension obligations. Subsequently, in February 2015, the AICPA issued Technical Questions and Answers (Q&A) in TIS Series 3700, Pension Obligations, addressing the effects of these new mortality tables on nongovernmental employee benefit plans, and their nongovernmental plan sponsors, that incorporate assumptions about participants' mortality in the calculation of the benefit liability.
The Q&A clarified that nongovernmental employee benefit plans and their sponsoring entities should consider the updated mortality tables in financial statement reporting as of the current measurement date, which was further clarified as the date in which the obligation is presented in the financial statements.
The Q&A emphasized the need to follow requirements of US generally accepted accounting principles (GAAP). US GAAP requires the use of a mortality assumption reflecting the best estimate of the plan's future experience for purposes of estimating the plan's obligation. GAAP requires the consideration of all available information through the date the financial statements are available to be issued to determine if any additional evidence can be provided about conditions that existed at the balance sheet date. Nongovernmental employee benefit plans and their plan sponsors should consider immediate adoption of these new mortality tables or, at the very least, evaluate the pension obligation utilizing the new mortality tables to adhere to professional accounting standards in arriving at their “best estimate.”
The new mortality tables are based on historical trends and data that extend over many prior years. Professional standards require that information that becomes available after the balance sheet date, but before the financial statements are available for issuance, may be indicative of conditions existing at the balance sheet date when it is a culmination of conditions that existed over a long period of time. Therefore, the tables are not determined to be predicated by only the date of the tables’ publication. This infers that management of a nongovernmental employee benefit plan or sponsoring entity should consider and evaluate the reasonableness of the mortality assumption chosen, document its evaluation, and document the basis for the selection of the mortality table in use, even when assisted by an actuary acting as management's specialist.
As many benefit plans present plan obligations as of the beginning of the plan year, it is expected this would represent an amount that should reflect management's best estimate of the plan's mortality and other assumptions in the financial statements, even though this presentation is before the balance sheet date. The assumptions used to estimate the plan's obligation should consider all available information through the date the financial statements are available to be issued, including whether updated mortality conditions existed as of the date of the obligation presented in the financial statements.
The Q&A defined an auditor's role in accordance with professional standards, which require auditors to evaluate the work of a specialist to include the competence, capabilities, and objectivity. Professional standards also require the evaluation of the reasonableness and relevance of significant assumptions and methods used by the specialist. In addition, the auditor is responsible for the evaluation of subsequent events under professional standards.
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