GASB Review Session Handout

Transcription

1 GASB Review Session Handout 56th County Auditors Institute Austin, Texas May 15, 2014 PATTILLO, BROWN & HILL, L.L.P. Paula Lowe, CPA Johnasan Gregory, CPA GASB Concepts Statement No. 4, Elements of Financial Statements A. No effective date since not an authoritative source of GAAP B. Elements of Financial Statements 1. Five Elements of Statements of Financial Position a) Assets - resources with present service capacity that the government presently controls b) Liabilities - present obligations to sacrifice resources that the government has little or no discretion to avoid c) Deferred Outflows of Resources - a consumption of net assets by the government that is applicable to a future reporting period d) Deferred Inflows of Resources - an acquisition of net assets by the government that is applicable to a future reporting period e) Net Position - the residual of all other elements presented in a statement of financial position 2. Two Elements of Resource Flows Statements a) Outflows of Resources - a consumption of net assets by the government that is applicable to the reporting period b) Inflows of Resources - an acquisition of net assets by the government that is applicable to the reporting period 3. Net Assets a) No longer an element of governmental financial statements since it is not reported b) Still relevant since it is central to the definition of other financial statement elements 1 of 12

2 GASB Statement No. 65, Items Previously Reported as Assets and Liabilities A. Effective Date 1. For reporting periods beginning after December 15, Put another way, for fiscal years ending December 31, 2013, and later B. Use of the term deferred limited to items reported as deferred outflows/inflows of resources 1. Previously, deferred revenue reported in governmental funds included a) Unavailable revenue i) No longer a liability; instead reported as deferred inflows of resources b) Unearned revenue i) Still a liability ii) Display as unearned revenue rather than as deferred revenue C. Major fund determination for financial reporting 1. Previously used 4 financial statement elements; now uses 6 elements 2. But condense the 6 elements into 4 groups for purposes of applying calculations a) Assets + deferred outflows of resources b) Liabilities + deferred inflows of resources c) Revenues d) Expenditures/expenses D. Reclassified from assets to deferred outflows 1. Grant funds disbursed prior to satisfaction of time requirements 2. Deferred amounts from refunding of debt (debits) 3. Rights to future revenues, when acquired from within the reporting entity (intra-entity) 4. Deferred loss from sale-leaseback E. Reclassified from liabilities to deferred inflows 1. Grant funds received prior to satisfaction of time requirements 2. Property taxes received prior to applicable budget year 3. Deferred amounts from refunding of debt (credits) 4. Proceeds from sales of future revenues 5. Deferred gain from sale-leaseback 6. Unavailable revenue in governmental funds F. Balances now recognized as current outflows 1. Debt issuance costs 2. Initial costs incurred by lessor in an operating lease 3. Loan origination costs 4. Costs to acquire loans G. Balances that remain assets 1. Prepayments 2. Grant funds disbursed prior to satisfaction of eligibility criteria (other than timing) 3. Rights to future revenues, when acquired from outside the reporting entity H. Balances that remain liabilities 1. Resources received in advance of an exchange transaction 2. Sales tax revenue received in advance 3. Grant funds received prior to satisfaction of eligibility criteria (other than timing) 2 of 12

3 GASB Statement No. 68, Financial Reporting for Pension Plans an amendment of GASB Statement No. 25 A. Effective Date 1. For fiscal years beginning after June 15, Put another way, for fiscal years ending June 30, 2015, and later B. Overview of Statement No GASB Pension Project Objective Provide improved financial information by which to: a) Determine if current year revenues were sufficient to pay for the current year cost of services b) Assess/compare the cost of services of the governmental entity c) Assess/compare the financial position and economic condition of the governmental entity 2. Improvements to financial reporting a) Enhanced comparability b) Recognition of full obligation to employee c) More accurate recognition of costs of services d) Detailed disclosure of the above amounts e) 10-year schedules in RSI to improve the usefulness of the above information C. Applicability 1. GASBS 67 a) Applicable to plan financial statements i) The financial statements issued by TCDRS b) Implemented one year prior to GASBS GASBS 68 a) Applicable to employer financial statements 3. Applicable to plans administered through trusts or equivalent arrangements a) Contributions from employers to the pension plan and earnings on those contributions are irrevocable b) Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms c) Pension plan assets are legally protected from creditors of employers, plan members, and plan administrators 4. Not applicable to pensions plans not administered through a trust a) Continue to report under GASBS 27 b) GASBS is evaluating as part of the OPEB GASB project and will issue separate statements to address 3 of 12

4 D. Plan classification 1. Pension plans are classified as either a) Defined benefit or defined contribution b) Single, agent multiple employer, or cost-sharing multiple employer 2. When accessing resources to assist implementation, note that TCDRS is: a) Defined benefit b) Agent multiple employer E. Financial Reporting vs. Funding Policy 1. Old Standards a) For the most part, pension expense equals the employer contributions i) Employer contributions are normally based on the annual required contributions (ARC) as determined by the funding policy b) No amount recognized on the balance sheet, except i) In the government-wide and proprietary funds, if the employer paid anything other than 100% of the ARC into the plan a net pension asset or net pension liability was recognized. In the following year, the interest on that asset or liability also contributed to pension expense 2. New Standards a) Financial reporting of pensions and pension funding are necessarily divorced b) The actuarial valuation prepared to determine funding has no impact on the net pension liability or pension expense c) The new pension standards for financial reporting have no impact on funding policy 3. Governmental Fund Expenditures, Fund Balance, and Budget a) Most likely, no impact to any of the above i) For the most part, governmental funds will continue to recognize an amount of pension expenditure that is equal to employer contributions b) Recognize a net pension liability if benefit payments are due and payable and the pension plan s fiduciary net position is not sufficient for payment of those benefits i) Highly unlikely assuming adherence to minimum TCDRS funding policies F. Enhanced Comparability 1. GASBS 27 a) Allowed six different actuarial cost allocation methods, each of which could be applied in two different ways. b) Gave no information by which users could assess the reasonableness of the discount rate used or compare to rates used by other governments c) Liability appearing on the Statement of Net Position entirely unrelated to the liability for future benefit payments i) Instead, determined by the government s adherence to the ARC 4 of 12

5 2. GASBS 68 a) Requires all governments to use one type of actuarial cost method (entry age) and apply it only as a level percentage of payroll. i) No change for TCDRS. b) Disclosures by which users may assess the reasonableness of the discount rate and compare to other governments c) Net pension liability reported on the Statement of Net Position represents compensation owed to employees 3. Other assumptions will continue to vary from government to government, and rightly so a) Salary progression b) Retirement age c) Mortality rates d) Expected rate of return on investments G. Statement of Net Position 1. Net pension liability a) The liability of employers to employees for benefits provided through a defined benefit pension plan Total Pension Liability Liability for projected benefits attributable to past service < Fiduciary Net Position > Essentially the fair value of plan assets Net Pension Liability Unfunded liability - employer's obligation to employees 2. Deferred inflows/outflows a) Unamortized changes to the total pension liability arising from: i) Differences between expected and actual experience (economic or demographic factors) ii) Changes of assumptions iii) Differences between projected and actual earnings on investments b) Contributions made by the employer during its fiscal year that will be reflected in the net pension liability in the next measurement period 3. Conversion entries will be one of the more complicated parts of implementation. 5 of 12

6 H. Statement of Activities 1. Pension Expense Effect on Pension Exp Components of Pension Expense If Less Than Fully Funded Service cost Increase Interest on the total pension liability Increase Amortization of: Difference between expected and actual experience Increase/decrease 1 Changes of assumptions Increase/decrease 1 Difference between projected and actual investment earni Increase/decrease 2 Projected earnings on pension plan investments Decrease Pension plan administrative expense Increase Other changes in fiduciary net position Increase/decrease 1 - Amortized over a closed period equal to the average expected remaining service lives of all employees (active and inactive). Unrecognized amounts reported as deferred inflows/outflows 2 - Amortized over a closed five-year period, with unrecognized amounts reported as deferred inflows/outflows of resources 2. Increased volatility of pension expense a) Any amortization or smoothing methods and periods shown here are specific to TCDRS s application of GASBS 27. i) Note that TCDRS will continue to use these methods for funding purposes b) The continued amortization of the initial UAAL as of implementation of GASBS 27 acted to smooth the ARC, which was the primary component of pension expense under GASBS 27; pension expense under GASB 68 won t include this component c) Actuarial value of assets vs. fair value i) Asset smoothing Asset smoothing recognizes differences between the actuarial value of assets and the fair value of assets over a 10-year period, with an adjustment of 1/3 rd of the difference if the smoothed value falls outside 60% or 140% of the fair value. ii) As compared to a simple 5 year amortization under GASBS 68 d) Shorter amortization periods for differences between expected and actual experience and changes of assumptions about future economic or demographic factors i) Currently amortized over 20 years ii) Under GASB 68, this is amortized over the average remaining service life of all employees (including inactive employees) iii) Moody s estimates the average remaining service life of current employees to be 17 years (does not include inactive employees, so amount used for amortization will be even less) 6 of 12

7 e) Plan changes recognized immediately in pension expense i) Currently amortized over 15 years (increases) and 20 years (decreases) ii) Under GASBS 68, the effects of plan benefit changes on the total pension liability are recognized in expense for the first measurement date in which the changes were applied. Likely reflected in financial statements one year after the plan changes go into effect, due to the timing of actuarial valuations Types of Plan/Benefit Changes One-time COLA increase/decrease for retired members' benefits One-time flat percentage increase to retired members' benefits Change in employer match rate Change in employee contribution rate Change in the years of service for vesting Change in serv ice retirement eligibility iii) If COLAs are determined to be substantively automatic, they are included in the projected benefit payments. The effects of substantively automatic COLAs should already be included in the total pension liability, so they won t create a spike in pension expense. iv) TCDRS does not allow automatic COLAs, but COLAs meeting the following criteria should be considered substantively automatic: There is a historical pattern of granting the COLA The COLA is consistent in amount or in the amount relative to a defined cost-of-living index There is no indication that the pattern of granting the COLA will be disrupted I. Notes to the Financial Statements 1. Discussed below are a few of the required disclosures more central to GASB s objectives for the new pension standards. This is not a comprehensive list of required disclosures. 2. Measures of the net pension liability calculated using a discount rate that is 1-percentagepoint higher 1-percentage-point lower 1% Decrease Current Discount Rate 1% Increase (6.75%) (7.75%) (8.75%) Net pension liability $ 1,050,638 $ 751,753 $ 393,091 7 of 12

8 3. The long-term expected rate of return on pension plan investments, a brief description of how it was determined, and the investment portfolio asset allocation a) Allows the user to better assess whether or not the plan is using a realistic discount rate in determining the present value of the pension liability Target Long Term Expected Asset Class Allocation Real Rate of Return Domestic equity 46% 5.4% International equity Fixed income Real estate Cash Total 100% 4. Beginning balances, detail of net changes, and ending balances for the total pension liability, plan fiduciary net position, and net pension liability. J. Required Supplementary Information (see handout attachments) 1. Schedule of Changes in the Net Pension Liability and Related Ratios 2. Schedule of Contributions K. Impact on Bond Ratings 1. Minimal 2. Credit rating agencies have always incorporated pensions into credit analysis 3. Standard & Poor s a) 5 primary rating factors i) Institutional Frameworks 10% ii) Economy 30% iii) Management 20% iv) Financial Measures 30% v) Debt & Contingent Liabilities 10% 8 of 12

9 b) Management factor i) A very high pension or other postemployment benefit burden with no credible plan for addressing can result in a capped score of 4 (out of 5, with 5 being the lowest) c) Debt & Contingent Liability factor i) If future pension or OPEB payments are expected to result in budget stress And management has a credible plan to address the burden (i) The score worsens by 1 (out of 5) And no credible plan to address the burden (i) The score worsens by 2 4. Moody s a) April 2013 Rating Methodology for US Local Government General Obligation Debt i) Replaced the October 2009 Rating Methodology ii) Calculates the Moody s-adjusted Net Pension Liability using the actuarial data reported in financial statements Amongst other adjustments, uses a high-grade long-term taxable bond index rate of about 5.5% (i) In most cases, results in a higher net pension liability than would be reported in local government financial statements under GASB Statement No. 68 b) January 2014 Rating Methodology for US Local Government General Obligation Debt i) Replaced the April 2013 Rating Methodology ii) Implemented a scorecard approach to quantify several factors that were previously evaluated qualitatively iii) Decreased the weight assigned to Economy/Tax Base by 10%, and increased the Debt/Pension factor weighting by 10% 9 of 12

10 Pension Resources AICPA Government Audit Quality Center: GASB Pensions AICPA whitepapers and authoritative auditing interpretations As of May 1, 2014: All publications relate to cost-sharing plans Publications applicable to agent multiple employer plans (TCDRS) are expected sometime in May. Link to GAQC Archived Web Events on Pensions Overview of the New GASB Pension Accounting Standards: Part I (2/6/2013) The New GASB Pension Standards: An Auditor's Perspective: Part II (2/7/2013) The May 7, 2014, web event is expected to be archived and available to non-gaqc members (normally 2 3 weeks later) ssues.aspx GASB Implementation Toolkit Full text of GASBS 68 and Implementation Guide Multiple FAQs GASB PowerPoint videos on numerous pension-related topics S&P s methodology for rating local government general obligation debt Moody s methodology for rating local government general obligation debt Free registration required Input US Local Government General Obligation Debt into the search field Moody s FAQ for the effect of government reported pension data on credit ratings GFOA Best Practice Core Elements of a Pension Funding Policy Pension Funding: A Guide for Elected Officials Report from the Pension Funding Task Force GFOA Best Practice Reviewing, Understanding and Using the Actuarial Valuation Report and Its Role in Plan Funding 10 of 12

11 GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees A. Effective Date 1. For reporting periods beginning after June 15, Put another way, for fiscal years ending June 30, 2014, and later B. Applicability 1. Applicable to financial guarantees that are nonexchange transactions extended or received by a state or local government a) Financial guarantee - a guarantee of an obligation of a legally separate entity which requires the guarantor to indemnify a third-party obligation holder under specified conditions b) Nonexchange The government extending the guarantee (the guarantor ) is not receiving resources equal or approximately equal to the expected value of the risk assumed c) Entities a government might extend a guarantee to: i) Blended component units ii) Discretely presented component units iii) Not-for-profits iv) Other governments v) Private companies vi) Individuals 2. Not applicable to guarantees related to special assessment debt a) e.g., bonds issued for improvements to specific properties, repaid with additional taxes assessed on those properties C. Recognition 1. For governments extending nonexchange financial guarantees a) Recognize liability and expense when it becomes more likely than not (greater than 50%) that a payment will be made for liabilities of other entities i) To determine probability, consider qualitative factors Initiation of bankruptcy Failure to comply with bond covenants Other indicators of financial difficulty (i) Significant investment losses (ii) Loss of major revenue stream b) Report the expense similarly to expenses reported for grants or other financial assistance awarded and paid to other entities c) Amount recognized is the discounted present value of the best estimate of the future outflows expected to be incurred as a result of the guarantee d) Recognize in governmental fund financial statements when due and payable i) Would include any delinquent payments of the government that received the guarantee 11 of 12

12 2. For governments issuing a guaranteed obligation a) If required to repay the guarantor for any payments made, reclassify the previously recognized liability for the obligation as a liability to the guarantor i) Continue to recognize the liability until legally released from the holder of the original obligation and legally released from any liability to the guarantor Once released, recognize revenue to the extent of the reduction of the guaranteed liability D. Reporting Entity Considerations 1. The following relationships would require the entity issuing the guaranteed financial statements to recognize a receivable equivalent to the liability recognized by the guarantor a) Government that issues the guaranteed obligation is i) A blended component unit of the guarantor ii) A primary government that includes the guarantor as a blended component unit iii) A blended component unit of a primary government that also includes the guarantor as a blended component unit b) The receivable and liability will cancel when combined in the same primary government for financial reporting i) Only the initial liability remains 12 of 12

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