Overview of GASB 67 and 68

Transcription

1 Overview of GASB 67 and 68 Community College Internal Auditors May 7, 2015 Crowe Horwath LLP Jeff Jensen, Partner Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP

2 Implementation Dates When will the changes be reflected? For a Pension Plan: The standards will be implemented beginning with the June 30, 2014 year end and going forward. (September 30, 2014, November 30, 2014, December 31, 2014 and so on) For an Employer: The standards will be implemented beginning with the June 30, 2015 year end and going forward. Not an optional standard. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 2

3 Why are there new standards? Improve the accounting and financial reporting of public employee pension plans for state and local governments. Increase the transparency and comparability of these plans for the users of the financial statements, as the financial statements relate to pension information. Does not affect the cash in and out. This relates to the accounting and financial reporting treatment only. This does not change plan funding or how much is contributed to the plan. Net pension liabilities will be reported on the government s statement of net position. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 3

4 Changes to the Liability New Terminology: Net Pension Liability Old Terminology: Net Pension Obligation Primary Change Accounting for pensions will no longer be based on the funding process. The net pension liability amount is the difference between the total pension liability and the assets set aside to pay for the benefits. Other changes to provide consistency across plans: only one actuarial cost method now allowed, automatic COLA s must be included, rules around discount rate were tightened Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 4

5 GASB 67/68 Applicability State and local government pension plans administered through a trust or equivalent arrangement: Employer/non-employer contributions irrevocable Plan assets dedicated to providing pension benefits Plan assets legally protected from creditors Defined benefit plans Single employer Agent multiple employer Cost sharing multiple employer Defined contribution plans Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 5

6 Liabilities Total Pension Liability (TPL) Pension Plan s Fiduciary Net Position Net Pension Liability (NPL) TPL Actuarial present value of projected benefit payments Single/agent employers recognize 100% of NPL Cost-sharing employers recognize proportionate shares of collective NPL Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 6

7 Statement changes Larger liability will be recorded on the government-wide statements and/or enterprise fund statements Unrestricted Net Position may go negative THIS DOES NOT CHANGE GENERAL FUND ACCOUNTING. The amount that is recorded in this fund will still be the actual paid contribution expense. Enterprise Funds may also be impacted with a liability being recorded What is the amount? Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 7

8 The World Isn t Ending GASB is not establishing requirements on how to fund pension liabilities. Long-term perspective should be used for the liabilities. Bond ratings, in most cases, won t take a nosedive. The plans are not changing. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 8

9 NPL: Measurement General Three broad steps Project benefit payments Discount projected benefit payments to actuarial present value Attribute actuarial present value to periods Methods and assumptions Generally, assumptions in conformity with Actuarial Standards of Practice Fewer alternatives than in Statement 27 for methods and assumptions for GAAP reporting purposes Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 9

10 Valuation Date Date as of which census data is collected and the initial Total Pension Liability (TPL) is measured Performed by an actuary Process may be driven by pension or employer, but ultimately is employer s responsibility to ensure information is available for reporting Valued as early as 24 months before pension year end and 30 months before employer s year end Actuarial valuations of TPL must be performed at least every two years Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 10

11 Timing and Frequency of Measurement of Total Pension Liability The measurement date used should be consistently applied from period to period As of date no earlier than end of prior fiscal year Measurement date will most likely correspond to year-end of plan. In this case, employers with same year-end as plan should choose measurement date as of their prior or current year-end Both components (TPL/plan net position) as of the same date Measurement of the total pension liability is determined through: An actuarial valuation performed as of the measurement date, or The use of update procedures to roll forward amounts from an actuarial valuation as of a date no more than 30 months and 1 day earlier than the employer s year-end Use professional judgment in determining extent of update procedures when changes in plan occur between last valuation date and the measurement date Consider whether new actuarial valuation is needed Actuarial valuation of total pension liability should be performed at least biennially Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 11

12 Impact of Measurement Date Measurement Date Pension Expense (Measurement Period) Deferred Outflows of Resources 6/30/13 12/31/13 6/30/14 12/31/14 6/30/15 Employer FYE Plan FYE Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 12

13 Impact of Using Prior Year Measurement Date Measurement Date Pension Expense (Measurement Period) Deferred Outflows of Resources 6/30/13 6/30/14 6/30/14 6/30/15 Employer FYE Plan FYE Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 13

14 Impact of Using Current Year Measurement Date Measurement Date Pension Expense (Measurement Period) 6/30/13 6/30/14 6/30/14 6/30/15 6/30/15 Employer FYE Plan FYE Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 14

15 Reporting Date For pension plan reports (67), end of plan year For employers (68), end of fiscal year Reporting date for plans can be different In year of implementation, will need the NPL for the beginning of the fiscal year as well Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 15

16 Different Type of Liabilities Pension liability is not the same as accounts payable or payment of vacation time. Accounts payable are bills that are expected to be paid within 30 days. Bond payments are scheduled out and usually have a very specific funding source Payroll occurs on a regular schedule and are expected to be paid from current funds Sick/Vacation time not funded in advanced as they are budgeted with payroll Pension funded over the lifetime of an employee and has multiple variables including: market fluctuations, changes in contracts, changes in contribution rates and changes in outside statutes/legislation. Pension liabilities are meant to be funded over time following actuarially determined contributions. Issues arise when the actuarially determined contributions are not made. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 16

17 Statement Example Year 1 City Statement of Net Position December 31, 2015 Before AJEs After Assets Cash & Cash Equivalents $ 1,225,599 $ 1,225,599 Accounts Receivable 105, ,595 Capital Assets Being Depreciation, Net 1,556,644 1,556,644 Total Assets 2,887,838 2,887,838 Liabilities Accounts Payable 45,667 45,667 Long Term Liabilities Bonds Payable 456, ,450 Net Pension Obligation 45,989 (45,989) Net Pension Liability 751, ,746 Total Liabilities 548,106 1,253,863 Deferred Inflows of Resources Difference Between Projected and Actual Earnings 36,924 36,924 Difference Between Expected and Actual Experience 35,042 35,042 Total Deferred Inflows of Resources 71,966 Net Position Net Investment in Capital Assets 1,100,194 1,100,194 Unrestricted 1,239,538 (777,723) 461,815 Total Net Position $ 2,339,732 $ 1,562,009 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 17

18 Statement Example Year 2 City Statement of Net Position December 31, 2016 Before AJEs After Assets Cash & Cash Equivalents $ 1,225,599 (45,555) $ 1,180,044 Accounts Receivable 105, ,595 Capital Assets Being Depreciation, Net 1,556,644 1,556,644 Total Assets 2,887,838 2,842,283 Deferred Outflows of Resources District Contributions Subsequent to Measurement Date 45,555 45,555 Difference Between Expected and Actual Experience 19,922 19,922 Total Deferred Outflows of Resources 65,477 Liabilities Accounts Payable 45,667 45,667 Long Term Liabilities Bonds Payable 456, ,450 Net Pension Liability 751,746 12, ,220 Total Liabilities 1,253,863 1,266,337 Deferred Inflows of Resources Difference Between Projected and Actual Earnings 36,924 12,113 49,037 Difference Between Expected and Actual Experience 35,042 (2,503) 32,539 Total Deferred Inflows of Resources 71,966 81,576 Net Position Net Investment in Capital Assets 1,100,194 1,100,194 Unrestricted 461,815 (2,162) 459,653 Total Net Position $ 1,562,009 $ 1,559,847 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 18

19 Plan Specific Items Implementation of GASB 67/68 does not cause a change to the Statement of Fiduciary Net Position or the Statement of Changes in Fiduciary Net Position Changes in footnotes, RSI and supplemental schedules Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 19

20 Special Funding Situation Specifically identified in the GASB Standards Definition Certain governments are legally responsible for making contributions to a pension plan that is used to provide pension benefits to employees of another government. The government that is legally responsible for making the contribution is the entity that recognizes in their financial statements the net pension liability. The government with the employees earning the pension should record a revenue and expense/expenditure on the financial statements for the amount of the contribution. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 20

21 Statement 67: Q & A Q If, at the end of a pension plan s fiscal year, a contractually required contribution due from a cost-sharing employer for the last month of the year is unpaid, should the amount of the contribution be recognized as a receivable under the requirements of paragraph 16 of Statement 67? That is, is a contractually required contribution considered to be due pursuant to legal requirements? A Yes. The reference to legal requirements in paragraph 16 is intended to broadly describe circumstances in which the pension plan has a legally enforceable right to the resources that are due to it. Concepts Statement No. 4, Elements of Financial Statements, defines assets as resources with present service capacity that the government presently controls. One embodiment of control over the present service capacity of resources is a legally enforceable right to the resources. Contractual provisions or statutory requirements for employer contributions create a legally enforceable right of the pension plan to the resources due. Therefore, the plan should recognize a receivable for unpaid contractually required contributions at its fiscal year-end. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 21

22 Statement 67: Q & A Q When a single-employer or cost-sharing multiple-employer pension plan has biennial actuarial valuations, does Statement 67 require an update in the intervening year for financial reporting purposes? A Yes. Statement 67 requires that information presented in notes and in schedules of RSI about the net pension liability for benefits provided through a single-employer or cost-sharing multiple-employer pension plan be measured as of the end of the pension plan s fiscal year. That requirement can be met through the use of the results of an actuarial valuation as of the plan s fiscal year-end or through the use of update procedures to roll forward the results of an actuarial valuation performed as of a date no earlier than 24 months prior to the fiscal year-end of the pension plan. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 22

23 Statement 68: Q & A Q What guidance does Statement 68 provide regarding recognizing a portion of the net pension liability in fund financial statements if a portion of the net pension liability of a cost sharing employer will be paid from an enterprise, internal service, or fiduciary fund? A Except for blended component units, which are discussed in Questions 34 and 35, Statement 68 does not establish specific requirements for allocation of the net pension liability or other pension-related measures to individual funds. However, for proprietary and fiduciary funds, consideration should be given to National Council on Governmental Accounting (NCGA) Statement 1, Governmental Accounting and Financial Reporting Principles, paragraph 42, as amended, which requires that long-term liabilities that are directly related to and expected to be paid from those funds be reported in the statement of net position or statement of fiduciary net position, respectively. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 23

24 Statement 68: Q & A Q If the total pension liability is less than the pension plan s fiduciary net position, should the net balance be displayed in a single or agent employer s statement of net position as a negative net pension liability or as a net pension asset? A A net pension liability that is negative is, and should be displayed as, an asset in the employer s statement of net position. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 24

25 Statement 68: Q & A Q What are the components of the prior-period adjustment to beginning net position when Statement 68, as amended, is first implemented? A The prior-period adjustment should (a) remove the net pension obligation (asset) balance determined in accordance with Statement 27, and any payables to the pension plan, associated with formal commitments; (b) add the balance of the net pension liability (or proportionate share of the collective net pension liability), as of the beginning of the initial period of implementation (c) add a deferred outflows of resources balance for the government s contributions to the pension plan made between the measurement date of the beginning net pension liability and the beginning of the government s fiscal year; and (d) add balances associated with all other deferred outflows of resources and deferred inflows of resources, if applicable, determined as of the same date as the beginning net pension liability. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 25

26 Other Auditors Cost Sharing Plans Limitations with the Audited Statements of the Plan Only net pension liability for the plan as a whole included Deferred outflows and deferred inflows by category is not included Pension expense for all participating employers is not included Each employer s share of the collective pension amounts is not included Methods of Allocation Should be consistent with the manner in which contributions to the plan are determined. Best Practice Solution for Allocation of Pension Amounts Cost Sharing plans calculate the employer s allocation percentage and collective pension amounts. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 26

27 Other Auditors Cost Sharing Plans Schedule of Employer Allocations AICPA recommends cost sharing plans prepare a schedule of employer allocations and related notes. Include each employer s allocation percentage AICPA recommends that the cost sharing plan s auditors provide an opinion on this schedule. An in-relation to opinion only provides limited assurance and is not sufficient for employers and their auditors to use for purposes for determining that allocation percentages are accurate and reliable. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 27

28 Other Auditors Cost Sharing Plans Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 28

29 Other Auditors Cost Sharing Plans Schedule of Pension Amounts by Employer AICPA recommends cost sharing plans prepare a schedule of pension amounts by employer. Include total net pension liability, total deferred outflows, total deferred inflows and total pension expense for the sum of all entities. Also include net pension liability, the various categories of deferred outflows of resources and deferred inflows of resources, and pension expense for all participating employers including differences between expected and actual economic experience; differences between projected and actual investment earnings, net; and changes of assumptions AICPA recommends that the cost sharing plan s auditors provide an opinion on this schedule. An in-relation to opinion only provides limited assurance and is not sufficient for employers and their auditors to use for purposes for determining that allocation percentages are accurate and reliable. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 29

30 Other Auditors Cost Sharing Plans Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 30

31 Other Auditors Cost Sharing Plans Schedule of Collective Pension Amounts AICPA recommends cost sharing plans prepare a schedule of collective pension amounts if a schedule of pension amounts by employer is not prepared. Include total net pension liability, total deferred outflows excluding employer specific amounts, total deferred inflows excluding employer specific amounts and total pension expense for the sum of all entities. Each employer would need to calculate two additional deferred outflows and deferred inflows which are employer specific: Net impact from changes in proportion (allocation percentage between periods) Differences between actual contributions made and total contributions calculated based on the allocation percentage AICPA recommends that the cost sharing plan s auditors provide an opinion on this schedule. An in-relation to opinion only provides limited assurance and is not sufficient for employers and their auditors to use for purposes for determining that allocation percentages are accurate and reliable. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 31

32 Other Auditors Cost Sharing Plans Schedule of Collective Pension Amounts Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 32

33 Other Auditors Cost Sharing Plans Employer Responsibilities Financial Statements Evaluating information used to recognize and disclose pension amounts Employer Auditor Responsibilities Audit of employer financial statements Determine the sufficiency and appropriateness of audit evidence necessary to reduce audit risk to an appropriately low level. May use plan auditor s report on the schedules to provide evidence that the pension amounts allocated to the employer and included in the employer financial statements are not materially misstated. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 33

34 Reporting: Financial Statements Basic Statements NPL recorded on Statement of Net Position (Balance Sheet) Pension Expense calculated differently New RSI Ten year schedule of NPL changes, funding status, and unfunded liability as % of payroll Ten year schedule of actuarial/non-actuarially calculated contributions Differences between PERS and STRS disclosure requirements. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 34

35 Reporting: Footnotes Tell us everything! Air out all the information about your pensions Descriptive information Type of plan, identification of administrator Benefit terms types of benefits, key elements of benefit formula, classes of employees covered, legal authority Contributions basis, authority, rates ($ or % of pay), contributions in reporting period Availability of plan report Significant assumptions and rates used Special funding situations Yes this applies to you Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 35

36 Reporting: Footnotes (Continued) Discount Rate Disclosure Example Discount rate. The discount rate used to measure the total pension liability was 7.75 percent. The projection of cash flows used to determine the discount rate assumed that employee contributions will be made at the current contribution rate and that contributions from the District will be made at contractually required rates, actuarially determined. Based on those assumptions, the pension plan s fiduciary net position was projected to be available to make all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the District s proportionate share of the net pension liability to changes in the discount rate. The following presents the District s proportionate share of the net pension liability calculated using the discount rate of 7.75 percent, as well as what the District s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage-point lower (6.75 percent) or 1- percentage-point higher (8.75 percent) than the current rate: District s share of NPL 1% Decrease (6.75%) Current Discount Rate (7.75%) 1% Increase (8.75%) $16,476 $14,910 $13,091 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 36

37 Reporting: Footnotes (Continued) Info regarding pension plan s fiduciary net position or reference to plan report Key Dates Measurement date Valuation date Changes in: Assumptions Benefit terms Activity after the measurement date Pension expense in current reporting period Deferred outflows/deferred inflows of resources Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 37

38 Reporting: Footnotes (Continued) A Sneak Peek at Future Disclosures: Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 38

39 Questions? Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 39