Deferred Outflows of Resources: Sources, Amortization, and Expense

A deferred outflow of resources is a balance on a government’s Statement of Net Position that represents a cost already incurred but not yet recognized as expense. The Governmental Accounting Standards Board defines it as “a consumption of net assets by the government that is applicable to a future reporting period.”¹ In practice, almost every deferred outflow you see on a government’s books comes from pension or OPEB accounting, where actuarial adjustments and measurement-date timing gaps would otherwise cause large one-year swings in reported financial position.

Where It Sits on the Statement of Net Position

Deferred outflows appear in their own section after assets. Deferred inflows appear in their own section after liabilities.² The separate placement is deliberate. A deferred outflow is not an asset, because it provides no future economic benefit the government can spend or use. It is not a liability, because it is not a present obligation. It is a parked cost, waiting to move through expense on a set schedule.

The mirror image is a deferred inflow, which represents a future reduction in expense or a future revenue tied to a later period. Every source that can produce a deferred outflow can also produce a deferred inflow, depending on which way the actuarial number moves.¹ For readers of a government’s Statement of Net Position, the useful mental move is to combine the net pension liability with its related deferred outflows and deferred inflows to see the full pension-related burden still working its way through the statements.

Where Deferred Outflows Come From

GASB Statement No. 68, which governs defined benefit pension accounting, is the source of most deferred outflow balances on government books. Any change in the net pension liability that is not included in the current period’s pension expense must be reported as either a deferred outflow or a deferred inflow, depending on direction.³ Four sources account for nearly all of the pension-related balances.

Investment Returns Below Projections

The actuary projects a return on plan investments each year. When actual returns fall short, the net pension liability rises, and the unfavorable difference becomes a deferred outflow rather than an immediate expense. Spreading the shortfall protects the reported financial position from a single bad market year. Returns that beat projections produce a deferred inflow instead.

Changes in Actuarial Assumptions

Pension plans periodically update assumptions like the discount rate, projected salary growth, or mortality tables. When a change increases the total pension liability, the portion not immediately recognized in expense becomes a deferred outflow.³ Adopting updated mortality tables that show longer life expectancies, for example, drives the liability up, and part of that increase parks itself as a deferred outflow. An assumption change that lowers the liability produces a deferred inflow.

Experience Different From What Was Assumed

Actuarial models rest on assumptions about employee turnover, retirement ages, disability rates, and similar factors. When actual experience deviates in a way that increases the total pension liability, the unrecognized portion of that increase becomes a deferred outflow. If fewer employees retire than expected and they keep accruing benefits, the liability grows past what the model projected. A favorable deviation flows the other way.

Employer Contributions After the Measurement Date

This one operates on different mechanics from the other three. Employer contributions paid to the pension plan after the measurement date of the net pension liability but before the end of the employer’s fiscal year are reported as a deferred outflow.⁴ They are not amortized. Instead, the entire balance reduces the net pension liability in the following reporting period. The category exists purely to bridge the calendar gap between the measurement date and the fiscal year-end.

The OPEB Parallel

GASB Statement No. 75 applies the same framework to Other Post-Employment Benefits such as retiree healthcare, dental, vision, and life insurance. The sources of OPEB-related deferred outflows are structurally identical: investment shortfalls, unfavorable assumption changes, experience losses, and contributions made after the measurement date.⁵ Healthcare cost trend rate assumptions tend to be more volatile than pension-related assumptions like salary growth, so OPEB deferred outflow balances can swing more from year to year.

The Cost-Sharing Wrinkle

Many governments participate in cost-sharing multiple-employer plans, where one system covers employees of numerous employers. Each participating employer reports its proportionate share of the collective net pension liability, deferred outflows, and deferred inflows.³ Cost-sharing adds a source of deferred outflows that single-employer plans do not have: changes in the employer’s proportion of the collective liability. If a government’s allocated share grows from one measurement period to the next, the increase generates a deferred outflow. Differences between actual contributions and the employer’s proportionate share of total contributions produce deferrals as well.

How the Balances Are Worked Off

Not every deferred outflow is amortized the same way. GASB 68 and GASB 75 set different periods depending on the source.³

Investment earnings differences are amortized over a closed five-year period beginning in the year the difference arises. The short window reflects that market returns can reverse quickly.
Assumption changes and experience differences are amortized over the average of the expected remaining service lives of all employees, active and inactive, who receive benefits through the plan. This period is typically longer than five years, matching the long-term nature of demographic and economic shifts.
Employer contributions made after the measurement date are not amortized. The entire balance is applied against the net pension or OPEB liability in the next reporting period.
Proportion-related deferrals in cost-sharing plans follow the same schedule as assumption changes and experience differences.

Each year the amortized slice moves from the Statement of Net Position to the Statement of Activities as part of pension or OPEB expense. Governments typically carry multiple overlapping layers from different years and different sources, each with its own remaining schedule.

The Measurement Date Gap

GASB 68 requires that the net pension liability be measured as of a date no earlier than the end of the employer’s prior fiscal year, applied consistently from year to year.³ Many governments use a measurement date that falls a full year before their fiscal year-end. A government closing its books on June 30 might use the prior June 30 as its measurement date.

During the intervening year the employer keeps contributing to the plan. Those contributions cannot reduce the net pension liability as of the earlier measurement date, because they happened afterward. So they sit as deferred outflows until the next reporting cycle. A large deferred outflow balance from post-measurement-date contributions is not a warning sign. It reflects the calendar mismatch built into the standard.

How Deferred Outflows Show Up in Reported Expense

The annual pension or OPEB expense on the Statement of Activities is not the same figure as what the government contributed to the plan that year. GASB 68 recognizes several components in expense immediately: the current year’s service cost, interest on the total pension liability, the effect of any benefit term changes, and projected earnings on plan investments.³ On top of those, the year’s amortized slice of every active deferred outflow gets added, and the year’s slice of every active deferred inflow gets subtracted.

That layered arithmetic is why pension expense can rise in a year when contributions were flat, or fall in a year the government paid more. Expense is driven by actuarial mechanics, not cash flow. A growing balance of deferred outflows means more expense is already in the pipeline, scheduled to hit the operating statement in coming years.

1
Governmental Accounting Standards Board. GASBCS 4 Elements of Financial Statements
2
Governmental Accounting Standards Board. GASBS 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position
3
Governmental Accounting Standards Board. Summary – Statement No. 68
4
Governmental Accounting Standards Board. GASBS 68 Accounting and Financial Reporting for Pensions
5
Governmental Accounting Standards Board. Summary – Statement No. 75