GASB 68 Implementation (The time is now upon us)

Transcription

1 GASB 68 Implementation (The time is now upon us) Maryland Association of Certified Public Accountants April 17, 2015 CLAconnect.com

2 GASB No. 68 Accounting and Financial Reporting for Pension Plans Effective June 30,

3 Background Part of the effort which goes back to GASB 34 to make government statements more usable, comparable and on par with the corporate world Investors understand full accrual accounting and get confused with multiple levels of government reporting Gives a better perspective as to both financial position and financial condition

4 Scope and Applicability Applies to: Employers in single employer and agent multipleemployer defined benefit plans Employers in cost sharing plans Special funding situations One government makes payments on behalf of another Employers in defined contribution plans

5 Know Your Plan Type Single Employer Plan Plan for one employer By definition this can cover the primary government and its component units Agent Multiple employer Each participating government has individual valuations and investment accounts (tracking) Investments of the individual employer can only be used to satisfy the liabilities of that employer (no sharing of investments) Cost sharing default position Investments are in one big pool and can be used to satisfy the liabilities of any plan member Single valuation of the entire plan

6 Defined Benefit Pensions Employer liability Current: Difference between the annual required contribution (ARC) and actual contributions = Net pension obligation Only record a liability if required funding not made New: Difference between the total pension liability and the fiduciary net position = Net pension liability Record net liability of the governmental entity Measured as of a date no earlier than the end of the employer s prior fiscal year (measurement date)

7 Defined Benefit Plans (continued) Changes in the pension liability Service cost, interest on the pension liability and changes in benefit terms Recorded as pension expense immediately Changes in economic and demographic assumptions and differences between economic and demographic assumptions and actual experience Amortized over a closed period equal to the average remaining service period for plan members Current portion recorded as pension expense Remaining portion recorded as deferred outflows or deferred inflows of resources

8 Defined Benefit Plans (continued) Changes in the pension liability (continued) Differences between expected and actual rates of investment returns Amortized over a closed 5 year period (including current period) Current portion recorded as pension expense Remaining portion recorded as deferred outflows or deferred inflows of resources Employer contributions made subsequent to the measurement date of the net pension liability are recorded as deferred outflows of resources

9 Defined Benefit Plans (continued) Actuarial valuations Required at least every two years Total pension liability should be determined by An actuarial valuation as of the measurement date which must be within 1 year and 1 day of the report date or The use of update procedures to roll forward from the actuarial valuation to the measurement date no more than 30 months and 1 day before employers year end Entry age method only Consistency multiple methods no longer accepted No tie to actuarial method used for funding Service cost determined as a percentage of pay

10 Timing of Measurement of Total Pension Liability Pension Expense (measurement period) Deferred Outflows of Resources Plan Prior Year End Employer Prior Year End Plan Current Year End Employer Current Year End Measurement Date June 2014 December 2014 June 2015 December 2015 Measurement date will most likely correspond to year end of plan. Employer contributions made directly by the employer subsequent to the measurement date of the net pension liability and before the end of the employer s fiscal year should be recognized as a deferred outflow of resources. 10

11 Example Impact of Using Prior Year Measurement Date Pension Expense (measurement period) Deferred Outflows of Resources Employer Prior Year End Employer Current Year End Plan Year End Plan Year End Measurement Date June 2013 June 2014 June

12 Example Impact of Using Current Year Measurement Date Pension Expense (measurement period) Employer Prior Year End Employer Current Year End Plan Year End Plan Year End Plan Year End June 2013 June 2014 Measurement Date June

13 Projection of Benefit Payments Projections Include: Automatic cost of living adjustments (COLAs) and other automatic retroactive benefit changes Ad hoc COLAs and ad hoc retroactive benefit changes substantively automatic Projected future salary increases if benefit formula is based on future levels Projected future service credits (when determining probability of eligibility for benefits and when formula is based on years of service)

14 New Blended Discount Rate Single rate reflective of: Long term expected rate of return to extent plan net position for specified source is: Projected sufficient to make benefit payments Expected to be invested using long term investment strategy Otherwise, index rate for a tax exempt 20 year GO rated AA/Aa (or equivalent) or higher

15 Example Scenario Discount Rate Current Situation 8% discount rate, same as historical rate of return 75% funded plan 20 year GO rate is 4%

16 Example Scenario Discount Rate (cont d) New Calculation: Blended rate Calculation Step Funded % X Historical Rate of Return Unfunded % X Tax Exempt 20yr Rate Example 75% X 8% 6% 25% X 4% 1% Blended Discount Rate 6% + 1% = 7%

17 Discount rate calculation The sum of the present values of the two benefit payment streams is calculated. 17

18 Cost Sharing Plans Cost Sharing Employers Current: New: Liability recorded only if the actual employer contribution is less than annual required contribution Expense is equal to annual required contribution Liability is equal to the employers proportionate share of the total net pension liability of all participating employers Will now allow readers to determine overall liabilities currently not easily determinable More pressure to adequately fund Expense is equal to the employer s proportionate share of the pension expense of all participating employers Both liability and expense are reported as of the date reported by the plan No need to adjust/rollforward to actual report date of the government

19 Cost Sharing Plans (continued) Employer s recognize their proportionate share of collective: Net pension liability Pension expense Deferred outflows of resources Deferred inflows of resources This will provide audit challenges

20 Special Funding Situations Nonemployer entity legally responsible for making contributions directly to a pension plan for the employees of another entity and either: The amount of contributions for which the nonemployer entity legally is responsible is not dependent upon one or more events unrelated to pensions or The nonemployer is the only entity with a legal obligation to make contributions directly to the pension plan Nonemployer contributor accounting patterned on accounting for employers in cost sharing plans

21 Defined Contribution Plans No significant changes Expense Amount of contributions (employee and employer) to the employee accounts, net of forfeited amounts Liability Difference between the amount of the expense recorded and amount paid to the plan

22 Note Disclosures Description of the Plan Assumptions Used to Measure Total Pension Liability Brief Description of Changes in Benefit Terms and Assumptions that Affect Measurement of Total Pension Liability

23 Required Supplementary Information Single Employer Plan SCHEDULE OF CHANGES IN THE COUNTY S NET PENSION LIABILITY AND RELATED RATIOS Last 10 Fiscal Years

24 Required Supplementary Information Single Employer Plan (continued) SCHEDULE OF COUNTY CONTRIBUTIONS Last 10 Fiscal Years

25 Required Supplementary Information Cost Sharing Employer Plan SCHEDULE OF THE DISTRICT S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years*

26 Required Supplementary Information Cost Sharing Employer Plan (continued) SCHEDULE OF DISTRICT CONTRIBUTIONS Teachers Pension Plan Last 10 Fiscal Years

27 Required Supplementary Information Special Funding Situation SCHEDULE OF THE DISTRICT S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years*

28 Required Supplementary Information Special Funding Situation (Continued) SCHEDULE OF THE DISTRICT CONTRIBUTIONS Teachers Pension Plan Last 10 Fiscal Years*

29 Required Supplementary Information Special Funding Situation: Nonemployer Contributing Entity SCHEDULE OF THE STATE S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years*

30 Required Supplementary Information Special Funding Situation: Nonemployer Contributing Entity (continued) SCHEDULE OF THE STATE CONTRIBUTIONS Teachers Pension Plan Last 10 Fiscal Years*

31 Implementation Issues to Consider Restatement for Opening Liability Liability is only affected at measurement date Special Funding situations Who is legally responsible? Requirements The amount of contributions for which the nonemployer entity is responsible is not dependent o events unrelated to the pension Nonemployer entity is only entity with legal responsibility to make contributions This does not relieve the requirement to record and disclose pension related expenses and related revenue Examples State appropriates funds to an entity specifically to make its contribution to the pension Plan, provided for in statute Not a special funding situation State makes payment for the entity directly to the plan Special funding situation

32 Implementation Issues to Consider (cont) Evaluation of Actuary and Valuation Know your actuary Is the actuary familiar with government plans and their requirements? Is this a widely used actuary in the industry? Example client was told by actuary last yr that GASB 67 did not apply to them at that time Review the assumptions Method used Is it the correct one as only 1 is now allowed Discount rate Is it properly calculated? Was a crossover analysis performed? Is 1% increase/decrease effect provided Review for Specific information/disclosures

33 Implementation Issues to Consider (cont) Cost Sharing Plan Allocations How were they determined? Did the plan auditor provide a schedule supporting amounts in their audit of the plan and what level of assurance was provided? What procedures were performed at the plan level to determine accuracy of census data? Fund Allocation Follow the guidance for long term liabilities in NCGA stmt 1, para 42, which effectively requires the liability to be shown in the fund from which it is expected to be paid Follow practice in use currently Deferred Inflows and outflows Generally cannot net each component should be shown separately (e.g. diff in expected returns, funding after measurement date, etc.)

34 Additional Guidance AICPA White Paper: Governmental Employer Participation in Cost Sharing Multiple Employer Plans: Issues Related to Information for Employer Reporting Provides guidance on employer challenges related to recognizing proportionate share of collective pension amounts and related auditor issues Recommends cost sharing plans calculate each employer s allocation percentage and collective pension amounts Prepare a Schedule of Employer Contributions and related Notes to the Schedule Plan engage its auditor to form an opinion on the schedule in accordance with AU C section 805, Special Considerations Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement

35 Additional Guidance (continued) GASB Toolkit (available at the GASB website, Implementation guide for GASB Statement 68 on Accounting and Financial Reporting for Pensions Full Texts of related GASB pronouncements Podcasts discussing the most significant changes to accounting and financial reporting for pensions Background documents and fact sheets A Setting the Record Straight document addressing common misperceptions about the new pension standards

36 GASB No. 71 Pension Transition for Contributions Made Subsequent to the Measurement Date

37 Background GASB 68 requires: Recognition of a net pension liability measured as of a date no earlier than the end of its prior fiscal year If a contribution is made between the measurement date and the end of the reporting period, its recognized as a deferred outflow of resources Recognition of deferred outflows and inflows of resources for other pension related events Differences arising between expected and actual experience in relation to economic and/or demographic factors Effects of changes of assumptions about future economic or demographic factors Differences between projected and actual investment earnings

38 Background (continued) At transition, if it s not practical to determine the amounts of all deferred inflows and outflows of resources related to pensions, no beginning balances for deferred inflows and outflows be reported other than those related to contributions after the measurement date Potential for significant misstatement of beginning net position and subsequent expense in accrual based statements if the employer does not recognize its contributions made after the measurement date of the beginning net pension liability as deferred outflows of resources at transition

39 Summary When it s not practical to determine all amounts of deferred inflows and outflows of resources related to pensions, GASB 71 states: Employers should recognize a beginning deferred outflow of resources for pension contributions, if any made subsequent to the measurement date of the beginning net pension liability No beginning balances for other deferred inflows and outflows of resources related to pensions should be recognized

40 Keith F. Novak, CPA Principal, State and Local Government CLAconnect.com twitter.com/ CLAconnect facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 40