Presentation Transcript

1. NASACT Middle Management Conference

   GASB Update April 9, 2014 Lealan Miller, Partner
2. Hot Button Issues Pension implementation 2-a-7-like investment pools Financial reporting model reexamination FAF policy on GASB scope Jurisdiction
3. Pension Implementation GASB has issued two new pension implementation guides in the past eight months Plan—June 2013 Employer—January 2014 The guides are key components of the GASB toolkits that can be accessed on the website Auditing issues
4. 2-a-7-like Investment Pools SEC proposal—significantly reduces the application of amortized cost-based measures Stakeholder reaction—unintended consequences, especially for government investment pools Potential alternatives No standards-setting action Develop criteria (types of securities held and maturity limits) to replace 2-a-7 for the application of amortized cost-based measures GASB Third-party with GASB input
5. FAF Policy on GASB Scope Policy issued in November 2013 recognizes: GASB’s independence as a standards-setter Trustees’ role in determining the scope of the GASB The need to reach the appropriate balance (if the Trustees’ authority is exercised) Potential standards setting activities are tentatively classified: Group 1 topics—clearly in scope Group 3 topics—clearly out of scope Group 2 topics—additional consultation required before a subject is added to the GASB’s technical agenda Pre-agenda research
6. Jurisdiction Arrangement established in 1984 FASB –private and not-for-profits GASB—state and local governments Standards setting powers FASB—SEC GASB—State governments Jurisdiction challenged in 1989 Special entities change proposed by FAF Board of Trustees States considered withdrawing support Jurisdiction arrangement reaffirmed November 30, 1989 Some are now raising this issue again
7. Effective Dates—FYE June 30 2014 Statement 65—Assets and Liabilities—Reclassification and Recognition Statement 66—Technical Corrections Statement 67—Pension Plans Statement 70—Nonexchange Financial Guarantees 2015 Statement 68—Pension Accounting for Employer and Nonemployer Contributing Entities Statement 69—Government Combinations and Disposals of Government Operations Statement 71—Pension Transition for Contributions Made Subsequent to the Measurement Date

8. Pensions

   GASB-67 and 68 Implementation Guides
9. Some Basic Definitions of Defined Benefit Plans Single Employer Plan A plan that is only open to one employer or multiple departments /functions within one employer Agent Multiple – Employer Plan A plan that includes more than one employer Assets pooled for investment purposes Separate account exists for each employer Employer’s assets can only be used to pay for that employer’s benefits (and no others) Cost Sharing Multiple – Employer Plan A plan that includes more than one employer Assets and liabilities are pooled All assets are available to pay for all benefits
10. Some Basic Definitions of Defined Benefit Plans – Hybrids (only occasionally found in government) Cash Balance Plan Hypothetical accounts maintained for participants Employer credits participants’ accounts with funds annually and promises earnings at a specific rate Rate may be different from actual earnings Formula may be changed annually Has defined contribution aspects as well as defined benefit Money Purchase Plan Mostly like defined contribution plan Employers contributions determined for and allocated for specific individuals as a percentage of compensation Employer contributions based on formula Target Benefit Plan Employees contribute on an actuarial basis knowing a certain date of retirement (e.g. Target 2025) No guarantees of balance or return
11. Types of Defined Contribution Plans IRC 401(k) plans Optional percentage of compensation contributed Employer may match Tax deferred unless election to tax currently (Roth 401k) Thrift Savings Plans Employees make after tax contributions matched by employer (whole or in part) Federal government is the largest TSP IRC 403(b) Plans Tax deferred annuities funded by salary reductions Usually in non-profit /government higher ed and hospitals Some governments may have a wrinkle in lump sum transfers to 403(b) plan IRC 457 Plans Common in government Plan administrator invests plan assets at direction of plan participants Participant has risk due to potential loss of value
12. Statement 68 Accounting and Financial Reporting for Pensions Statement 67 Financial Reporting for Pension Plans
13. The GASB Revolution FOUR Major Focus Areas in the new standards 1. Placing the Net Pension Liability on the Balance Sheet 2. Decoupling Expense from Funding 3. Accounting for Cost-Sharing Plans (n/a for single employer) 4. Expanding Disclosure Information (Notes & RSI) Timing of Measurements, Effective Dates Implementation Guides and Audit Guidelines
14. 1) Project Benefit Payments The Basic Three-Step Approach for Defined Benefit Pensions 25 40 62 80 2) Discount Future Payments Present Value of Payments 3) Attribute to Employee Service Periods
15. GASB Objectives and Goals Focus on FINANCIAL REPORTING not operations GASB establishes accounting and financial reporting standards, not funding policies Focus on pension obligation, changes in obligation, and attribution of expense Assume Governments Last Longer than 1 year Unlike Businesses Cost of services to long-term operation “Interperiod equity” matches current period resources and costs Use Federal Guidance (US DOL / SSA) on Who is an Employee and Who they Work For Employer incurs an obligation to its employees for pension benefits Transaction is in context of a career-long relationship

16. A Deeper Dive into the Four Issues

17. Major Focus Area #1Net Pension Liability Reported on Balance Sheet Net Pension Liability (NPL) Total pension liability (TPL) minus plan assets at market value (“plan net position”) TPL uses new “blended” discount rate and “Entry age” cost method Similar to Unfunded Actuarial Accrued Liability (UAAL) but using market assets, not “smoothed” assets Note 5-year asset smoothing still allowed (in determining pension expense), but reported separately NPL must be reported on the employer’s balance sheet Currently, UAAL is reported in the Required Supplementary Information (RSI) Currently, only the Net Pension Obligation (NPO) is reported on the balance sheet Cumulative difference between annual required contribution (ARC) and actual contributions
18. The New “Blended” Discount Rate Discount rate is based on projected benefits, current assets, and projected assets for current members Projected assets include future contributions that fund benefits for current members Projected assets do not include employer or employee contributions that fund service cost for future employees For projected benefits that are covered by projected assets Discount using long-term expected rate of return on assets For projected benefits that are not covered by projected assets (i.e., after the “cross-over date”) Discount using yield on 20-year AA/Aa tax-exempt municipal bond index Solve for a single rate that gives the same total present value Use that single equivalent rate to calculate the total pension liability (TPL)
19. What is this thing called the Crossover Point? Long Term Rate of Return AA rate
20. Major Focus Area 2Decoupling Expense from Funding Currently, pension expense is based explicitly on an actuarially determined funding requirement The ARC, which is the “annual required contribution” Even though is not required to be contributed! Based on established practices for managing contribution volatility Asset smoothing and UAAL amortization The ARC served as a de facto funding standard New GASB pension expense is the change in NPL each year, with deferred recognition of only certain elements ARC Specifically not intended to be a funding target or standard
21. New Pension Expense Components Changes in Total Pension Liability that are recognized (i.e., expensed) immediately—no deferrals allowed Service cost – pensionable compensation x rate + Annual interest on the TPL - Projected investment returns over the year + / - All plan amendments Immediate recognition of all plan amendments, whether for actives or retirees Probably different from funding
22. New Pension Expense Components Changes in Total Pension Liability where some deferrals are allowed (i.e., expensed over multiple periods) Changes in actuarial assumptions Actuarial gains and losses Changes are recognized in expense over average expected remaining service lives of active and inactive members (including retirees) Resulting amortization periods will still be very short 5 to 10 years Shorter than for funding (currently ranges from 15 to 30 years)
23. What Change in Assumptions Really Are
24. New Pension Expense Components Changes in Assets where some deferrals are allowed (i.e., expensed over multiple periods) Differences between actual and projected earnings over the year (i.e., investment gain/loss) Recognized in expense over closed 5-year period Most systems use either 5- or 7-year asset smoothing for funding So the NPL on balance sheet will be “market volatile”, but effect on expense and on employer net position will still reflect asset smoothing Need to look at “Deferred Outflows and Inflows” Effect on expense will be different from funding (and current ARC), where investment gain/loss is: Smoothed over 5 or 7 years and Also amortized as part of the UAAL
25. Decoupling Expense from Funding The faster — often immediate — recognition of net pension liability changes will introduce much greater volatility in the reported pension expense. This volatility will be reflected directly on the income statements of plan sponsors. This volatility is what disqualifies this new expense as a basis for determining a funding policy. Two competing measures of plan cost Plans will want to review or adopt funding policies, now that GASB expense no longer provides funding guidance. Funding policy also needed for discount rate calculation – and for disclosures
26. What Does it All Mean? Fiscal folk in the room will have some explaining to do to decision – makers Decision – makers are used to “Noah’s ARC” or the letter from the plan Decision – makers are used to compensation x rate OR rate per employee Budget and funding only a component of expense Assumption setting cannot be solely done by the following method….
27. Major Focus Area 3Accounting for Cost-Sharing Current standards are simple Pension expense is equal to the contractually required contribution No “ARC” Balance sheet only presents the sum of the difference (if any) since 1988 between the contractually required contribution and the actual contribution Unfunded actuarial accrued liability is not reported at all
28. Accounting for Cost-Sharing Under new standards cost sharing reporting same as a single - employer Recognize proportionate share of the plan’s total Net Pension Liability Pension Expense Deferred Positions NONE of these are to be reported on the plan financial statements
29. Major Focus Area 4Expansion of Disclosure Information Includes both Notes and Required Supplementary Information (RSI) Greatly expanded plan and employer disclosures, including: Description of the plan and assumptions Policy for determining contributions Sensitivity analysis of the impact on NPL of a one percentage point increase and decrease in the discount rate Changes in the NPL for the past 10 years Development of long-term earnings assumption Annual rates of investment return for past 10 years (plan only)
30. Expansion of Disclosure Information More new disclosure information “Actuarially determined (employer) contribution” (aka the ARC) Basis and amount – if determined! Comparison to amount actually contributed May encourage review (or creation) of actuarial funding policy Expanded disclosures greatly increase the pension information needed for plan and employer’s financial statements New and challenging questions for employer’s financials: Which actuary/auditor develops this information? Who pays for it?

31. GASB 68 Single or Agent Employers

    Footnotes, Disclosures and Required Supplementary Information
32. Single/Agent Employers Financial Statements Recognize full amount of NPL, Pension Expenses and Deferred Outflows and Inflows (100%). Recognition and Measurement using the economic resources measurement focus and accrual basis of accounting. NPL recognized to the extent the liability is expected to be liquidated with **expendable available financial resources. Calculated as: Amounts paid by the employer to the pension plan + the change between beginning and ending balances of amounts expected to be liquidated. ** Means when benefits are due and payable, but the FNP is not sufficient to pay those benefits.
33. Single/Agent Employers Footnotes to the Financial Statements Significant Assumptions/Inputs used to calculate Total Pension Liability (TPL) Date of the Actuarial Valuation used to determine TPL Details regarding changes in assumptions for benefit terms, basis for determining employer contributions to the pension plan, purchase of allocated insurance contracts Number of employees covered of Active and Inactive Members (receiving and not receiving benefits) Current Year Sources of Changes in Net Pension Liability
34. Single /Agent Employers Required Supplementary Information (RSI) 10 Years - Sources of changes in the Net Pension Liability (NPL) 10 Years - Components of TPL, FNP, NPL and Related Ratios Plans Fiduciary Net Position (FNP) as a % of TPL NPL as % of Covered-Employee Payroll 10 Years (if applicable) - If contributions are actuarially determined, schedule covering 10 most recent fiscal years including information on actuarially determined contributions, contributions to the pension plan, and related ratios. 10 Years (if applicable) - If contributions established by statute, 10 most recent years of statutorily required contributions, contributions to the pension plan and related ratios.
35. Single Agent Employers Required Supplementary Information (RSI) - Footnotes Notes to RSI – Significant assumptions used to calculate actuarially determined contributions (if applicable) – Single/Agent Employers Only Notes to RSI - Factors that affect the trends in the amounts reported in the schedules (i.e. changes in benefit terms, size and composition of the population, use of different assumptions) – All Employers
36. Required Supplementary Information Note: Only 5 years are presented here; 10 years of information would be required 35
37. Required Supplementary Information Note: Only 5 years are presented here; 10 years of information would be required 36
38. Required Supplementary Information Note: Only 5 years are presented here; 10 years of information would be required 37
39. Plan Required Supplementary Information

40. GASB 68 Cost Sharing Employers

    Footnotes, Disclosures and Required Supplementary Information
41. Attributes of a Cost Sharing Employer Recognize only a proportionate share of the “Collective NPL”, Pension Expenses and Deferred Outflows and Inflows. Based on annual assessed contributions by employer. Proportionate share could change from year to year.
42. CostSharing Employers Footnotes to the Financial Statements Include all Single/Agent Employer Information + Descriptive information about the pension plan Identify the Discount Rate Assumptions made in measuring employer’s proportionate shares of net pension liabilities, basis of proportion, and changes in proportion from year to year
43. Cost Sharing Employers Footnotes to the Financial Statements Descriptive Plan Information Name of the Pension Plan Identification as Single Employer/Agent Plan/Cost Sharing Plan and the Plan Administrator Benefit Terms (classes of employees covered, types of benefits, key elements of the pension formula, automatic COLAs, authority under which benefit terms are established Number of employees covered allocated by inactive employees (receiving benefits), inactive members (entitled to but not receiving benefits, and active members) Brief description of Contribution Requirements Whether the pension plan issues a standalone financial report or included part of another government entity.
44. Cost Sharing Employers Footnotes to the Financial Statements Discount Rate Disclosures Discount Rate applied and change from last measurement date. Assumptions about projected cash flows related to the pension plan including contributions from employers, non-employers and employees. Long-term expected rate of return and how it was determined. Municipal bond rate used and source of that rate. Breakdown of how projected benefit payments are allocated between those applied to the long-term expected rate of return and municipal bond rate to arrive at the discount rate. Assumed Asset Allocation and long-term expected rate of return applied to each asset class. NPL calculated using a discount rate that is +/-1% than stated Discount Rate
45. Cost Sharing Employers Footnotes to the Financial Statements Significant Assumptions Inflation Salary Changes Ad Hoc post-employment benefit changes (COLA) Mortality Assumptions/Source of Assumptions (i.e. published mortality table/experience study) Dates of the Experience Study
46. Required Supplementary Information (RSI) for financial statements 10 Year – Employer’s Proportionate Share (%, Amount) of Collective NPL, Covered Employee Payroll, Net Pension Liability as a % of Employee Covered Payroll, Pension Plans Net Position as % of TPL 10 Year – Schedule of Changes in NPL 10 Year - FNP/TPL/Funded Status/Covered Payroll/NPL as % of Payroll 10 Year - ADEC to Actual Contributions (If necessary) 10 Year - Statutory/Contractual Contributions to Actual Contributions and Payroll (If necessary) 10 Year Schedules not required in year of implementation other than the ADEC schedule which is presented in full.
47. 10 year schedule of contributions If contributions to the plan are actuarially determined: the employers actual contributions, the difference between the actual and actuarially determined contributions, and a ratio of the actual contributions divided by covered-employee payroll.

48. GASB Made a Boo Boo…

    GASB 71
49. Problem in Implementation GASB 68 requires employer to recognize NPL as of the measurement date no earlier than the prior fiscal year end Contributions made during the period after measurement date but before reporting date is required to be deferred Transition to new standards If not practical to determine all deferred positions at transition, then start at zero. BUT – contributions deferred! Houston… we have a problem…
50. Updated transition guidance Recognize a deferred amount for pension contributions made after actuarial report but before fiscal year end Recognize no other beginning balance for deferred positions unless known at transition Effective date – same as GASB-68

51. GASB-67 and 68 Audit Issues

52. Key Worries for ALL Employers Who is going to provide me this information? What is it going to consist of? Where do I present this information? When am I going to get the information to put into my financial statements? In other words – when do I need the information to put into my financial statements? Which plan year is the information from? Why am I doing this? How much is it going to cost? Is it auditable?
53. Cost Sharing Employers 2 White Papers published by AICPA Census data testing Plan reporting to employers Census data testing would be based on risk Testing coordinated by plan auditor Employers > 20% of plan active employees tested annually Between 5% and 20% - tested every 5 years Less than 5% - tested every 10 years Very small employers may never get tested – immaterial Report is an attestation report
54. Employer Auditor of Cost Sharing Plans Evaluate appropriateness of information to be used in financial statements Evaluate whether plan auditor’s report on schedules (see next slides) are adequate and appropriate Verify & recalculate amounts in schedules specific to employer Allocation percentages and amounts Accounting elements apportioned
55. Plan Reporting to Employers 2 “Best Practice” Schedules (NOT GAAP) Schedule of Employer Allocations Schedule of Pension Amounts by Employer Alternative 1 – each employer Alternative 2 – all employers in aggregate Individual employer would have to calculate pension amounts based on schedule of employer allocations Audit report based upon AU-C 805 – Special Considerations – Audits of Single Financial Statement and Specific Elements, Accounts or Items of a Financial Statement May likely be performed “off – cycle”
56. Example Schedule of Employer Allocations Allocation may be historical or actuarial
57. Example Schedule of Pension Amounts by Employer This is alternative 1 – alternative 2 is only totals
58. Example
59. Allocation Methodology May Also Be For Single / Agent Employers Further allocation in multiple levels necessary to Proprietary Funds Component Units Presumes entities contribute through primary government to a plan Required for full accrual financial statements and full cost of services
60. Single Employer Plan Audits Census testing likely every year based on initial white paper Testing of employer amounts may include Interest crediting Administrative expense Contributions Benefit payments Eligibility and “pensionable” compensation
61. Agent Employers Current thinking Plan auditor engaged to issue a SOC-1 (type 2) report on Contributions Investment crediting Benefit payments Expense allocations OR – If SOC-1 (type 2) report can’t be done Combining schedule of changes in fiduciary net position as a “best practice” Alternative would have plan auditor issue opinions on each employer’s schedule Which is better? Depends…
62. Single Employer Plans Single Employer Plan Auditing would include Contributions Investment crediting Benefit payments Expense allocations Census testing likely annually May be performed “off cycle”? Separate reporting?
63. Next Steps AICPA State and Local Audit Guide published soon with “best practices” New chapter on pensions If plans haven’t started implementing yet – get started now! Suggestion – task force / working group with employers, auditors, actuaries etc. Decision-makers need to be informed ASAP of changes so they are not caught off - guard

64. GASB Update Other than Pensions

    There are other things going on!
65. GASB 65 Identified deferred in flows and out flows Non exchange revenue transactions Sale of future revenue Debt issuance costs Leases Lending activities Regulated operations Use of deferred
66. GASB 66 Amendments to: GASB 62 – operating leases GASB 62 – purchase of a loan or groups of loans GASB 62 – servicing fees GASB 10 – Use of SRF for risk financing activities

67. Statement 70Nonexchange Financial Guarantees

    Effective for periods beginning after June 15, 2013
68. Financial Guarantees Financial Guarantees are Numerous (especially for a state) Lower levels of government (Cities, districts etc) Not for profits Private corporations Individuals What could be some that you know about?
69. Financial Guarantees Non-exchange transaction – no direct consideration equal to value provided Government commits to paying an obligation if the holder does not pay
70. Financial Guarantees Other Items Does not apply to Special Assessments (GASB-6) but calls into question whether or not it should – potential future project Amends portions of GASB-10 (Risk – Insurance), GASB-33 and GASB-62
71. Financial Guarantees Key Elements The government that extends a non- exchange financial guarantee will recognize a liability when qualitative factors or historical data indicate that it is more likely than not that the government will make a payment on the guarantee Amount of liability = best estimate of future cash flows to be incurred If no best estimate, then use minimum amount in range Similar to GASB-49
72. Qualitative Indicators of Liability Initiation of the process of entering into bankruptcy or a financial reorganization Breach of a debt contract in relation to the guaranteed obligation, such as Failure to meet rate covenants, Failure to meet coverage ratios, Default or delinquency in interest or principal payments
73. Qualitative Indicators of Liability Indicators of significant financial difficulty, such as Failure to transfer deposits from debt service funds to paying agents or trustees; Out of Ordinary draw on a debt service reserve fund; Initiation of the process by a creditor to intercept receipts to make a debt service payment; Debt holder concessions; Significant investment losses; Loss of a major revenue source; Significant increase in noncapital disbursements in relation to operating or current revenues; Commencement of financial supervision by another government Also consider default ratios, history – history is very important in pools of loans / guarantees
74. Recognition More Likely Than Not threshold is 50% Recognition in Full Accrual statements Amount recognized = best estimate of discounted PV of cash flows expected to incur due to guarantee If no best estimate in a range, pick the minimum In Governmental Funds Amount = funds to be expended with current financial resources
75. Government Issuing a Guaranteed Obligation Entity wide and Governmental Funds: If a government is required to repay a guarantor for non-exchange financial guarantee payments made on the government’s obligations, the government should reclassify that portion of its previously recognized liability for the guaranteed obligation as a liability to the guarantor. The government that issued the guaranteed obligation should continue to report its liability until that portion of the liability is legally released, such as when a Plan of Adjustment is confirmed by the court in the case of bankruptcy. Upon release of liability - REVENUE
76. Financial Guarantees Other Key Elements of GASB-70 Typical disclosures (who, what, when, how much etc.) Liability is reported until either paid or released by the obligor (entity holding the liability) If released – revenue recognized upon release Note disclosure on guarantees will be required similar to commitments Implementation is periods beginning after June 15, 2013 (July 1) Retroactive restatement required
77. What lies ahead… Financial reporting model reexamination Current technical agenda Conceptual Framework – Measurement (GASB Concepts Statement No. 6) Fair Value – Measurement and Application Fiduciary Activities GAAP Hierarchy Leases Postemployment Benefits (OPEB alignment to GASB-67 / 68 and non-irrevocable trust pension / OPEB arrangements) (3 Exposure Drafts)
78. Financial Reporting Model Reexamination Added to the agenda in August 2013 Staff research roundtables held in October 2013 Preparer, auditor, and user surveys are now being developed Research scheduled to be completed by June 2015 What will the outcome be? Stay tuned
79. Fair Value—Three Things Fair Value Definition The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Investment Definition A security or other asset that a government holds primarily for the purpose of income or profit and its present service capacity is based solely on its ability to generate cash or to be sold to generate cash Disclosures—amendments based on current FASB standards (ASC™ 820)(including fair value hierarchy—levels 1-3)
80. Fiduciary Responsibilities—Three Things Fiduciary definition A government that controls assets other than those that can be used to support the government’s own programs. Fiduciary activities continue to be reported as basic financial statements Custodial funds An expanded fund type be established that includes any fiduciary arrangement that is not governed by a formal trust agreement or equivalent arrangement Funds previously classified as agency funds Trust funds for which there is no trust agreement or equivalent arrangement
81. GAAP Hierarchy—Three Things Reduce GAAP Hierarchy from four levels to two levels Level 1—GASB Statements Level 2—GASB Technical Bulletins and Implementation Guides and AICPA pronouncements cleared by the GASB Nonauthoritative—further clarifies role of concepts statements Requires broader public exposure of comprehensive implementation guide
82. Leases—Three Things Single approach—right of use No classification of leases into operating/capital or other categories Potentially develop some exceptions Underlying assumption that leases are financings Practicality exception—short-term lease Leasethat, at the beginning of the lease, has maximum possible term under the contract, including any options to extend, of 12 months or less Lessor—working with FASAB
83. Postemployment Benefits—Three Things Three Exposure Drafts Other Postemployment Benefits (OPEB)—Plans OPEB—Employers Pensions—Plans that are not qualifying trusts OPEB proposals based on new pension standards Certain modifications made, including provision for healthcare trend rates
84. Timeline Exposure drafts of plan, employer and non-irrevocable trusts reporting by late April 2014 Comment periods through July 2014 Public hearings likely August 2014 Redeliberation into 2015 Final standards – June 2015 Implementation – likely by July 1, 2016 for plans, July 1, 2017 for employers?

85. Questions!

    Lealan Miller, CPA, CGFMPartnerEide Bailly LLP877 W. Main St., Ste. 800Boise, ID 83702-5858T 208.424.3524 M 626.375.3600 E eberman@eidebailly.comwww.eidebailly.comExperience the Eide Bailly Difference