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GASB Update

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  1. GASB Update April 8, 2014

  2. GASB Pronouncement Update

  3. Agenda • Statement No. 65, Items Previously Recorded as Assets and Liabilities • Statement No. 67, Financial Reporting for Pension Plans-an amendment of GASB Statement No. 25 • Statement No. 68, Accounting and Financial Reporting for Pensions-an amendment of GASB Statement No. 27 • Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date • Statement No. 69, Government Combinations and Disposals of Government Operations • Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees

  4. GASB STATEMENT NO. 65 Items Previously Recorded as Assets and Liabilities

  5. GASB Statement No. 65 • Issued March 2012 • Effective Date: Periods beginning after December 15, 2012. Must be applied retroactively to transactions of previous periods. • GASB Statement No. 63 revised governmental financial statements to: • Present deferred outflows of resources and deferred inflows of resources • Replace the term net assets with net position • GASB Statement No. 65 reclassifies certain items currently reported as assets and liabilities to deferred outflows/inflows of resources or to expenses of the current period

  6. Continue to Report as an Asset • Prepaid Items

  7. Report as Deferred Outflow • Deferred amounts on refunding of debt (assuming that a loss was incurred on the refunding transaction) • Currently reported as an adjustment to long-term debt on the statement of net position • Losses on sale-leaseback transactions

  8. Report as Expense in Current Period • Debt issuance costs • The provisions of this statement must be implemented retroactively, so any existing debt issuance costs deferred on the statement of net position will have to be removed and beginning of year net assets adjusted

  9. Continue to report as a Liability • Advance of derived tax revenues (i.e. revenue received before the underlying transaction has occurred) • Grant proceeds received prior to meeting eligibility requirements (other than time requirements) • Receipt of prepayment

  10. Report as Deferred Inflow • Advance of revenue from imposed nonexchange transactions (including property taxes received/recorded as a receivable before the period for which they are levied) • Advance from grantor when time requirement not met

  11. Report as Deferred Inflow • Deferred amounts on refunding of debt (assuming that a gain was incurred on the refunding transaction) • Currently reported as an adjustment to long-term debt on the statement of net position • Proceeds from sales of future revenues • Unavailable revenue related to application of modified accrual accounting (including property tax payments received after 60 day cutoff) • Gain from sale-leaseback transactions

  12. Other Requirements • The term deferred should only be used in conjunction with deferred outflows and deferred inflows • Major fund thresholds under GASB Statement No. 34 have been revised to combine deferred outflows with assets and deferred inflows with liabilities

  13. Questions

  14. GASB Statements Addressing Defined Benefit Pension Plans • GASB Statement No. 67 addresses how the financial statements for pension plans should look • Applies to stand alone pension plan reports and plans presented in pension trust funds • Does NOT require underfunded status of the plan to be reported as a liability, but plan funded status is disclosed in the footnotes and required supplementary information • Effective for June 30, 2014 fiscal year ends

  15. GASB Statements Addressing Defined Benefit Pension Plans • GASB Statement No. 68 addresses how employers account for their participation in a defined benefit pension plan • Does require underfunded status of the plan to be reported as a liability on the financial statements • Effective for June 30, 2015 fiscal year ends • GASB Statement No. 71 provides a correction to a small error that was identified in GASB Statement No. 68 regarding its implementation • Implement simultaneously with GASB Statement No. 68

  16. Types of Defined Benefit Pension Plans • Single Employer Plans: Plans where pensions are provided to the employees of only one employer • Agent Multiple-Employer Pension Plans (Agent Plans): Plans where assets are pooled for investment purposes but separate accounts are maintained for each individual employer so that each employer’s share of the pooled assets is legally available to pay the benefits of only its employees

  17. Types of Defined Benefit Pension Plans • Single Employer Plans: Plans where pensions are provided to the employees of only one employer • Agent Multiple-Employer Pension Plans (Agent Plans): Plans where assets are pooled for investment purposes but separate accounts are maintained for each individual employer so that each employer’s share of the pooled assets is legally available to pay the benefits of only its employees

  18. GASB STATEMENT NO. 67 Financial Reporting for Pension Plans-an amendment of GASB Statement No. 25

  19. GASB Statement No. 67 • Issued June 2012 • Effective for periods beginning after June 15, 2013 • High level summary: Significantly revises financial reporting requirements for separately issued plan financial statements or for plans included within the financial statements as pension trust funds

  20. Required Financial Statements • Statement of Fiduciary Net Position • Statement of Changes in Fiduciary Net Position • These statements are required for ALL types of plans, including both defined benefit and defined contribution plans

  21. Statement of Fiduciary Net Position Assets + Deferred outflows of resources - Liabilities - Deferred inflows of resources = Fiduciary net position

  22. Statement of Changes in Fiduciary Net Position Additions (such as contributions and investment income) - Deductions (such as benefit payments and administrative expense) = Net increase (decrease) in fiduciary net position

  23. Note Disclosures for Defined Benefit Plans • Plan description • Name and number of participating employers • Types of benefits provided • Classes of plan members covered • Composition of plan’s board • Plan investments • Pension investment policies and how fair value is determined • Concentrations of investments exceeding 5% of net position • Annual money-weighted return of plan investments

  24. Note Disclosures for Defined Benefit Plans (continued) • Other disclosures • Contributions • Reserves • Allocated insurance contracts

  25. Note Disclosures for Defined Benefit Plans • Single-employer and cost-sharing plans must disclose the following regarding plan funding and actuarial status: • Total pension liability (TPL) • Fiduciary net position (FNP) • Net pension liability (NPL)

  26. Note Disclosures for Defined Benefit Plans (continued) • FNP as a percentage of TPL • Significant actuarial assumptions: • Inflation rate • Salary changes • Ad-hoc post-employment benefit changes, including cost of living adjustments (COLA’s) • Inputs into discount rates • Information about mortality assumptions • Dates of experience studies

  27. Required Supplementary Information for DB Plans • The following 10-year schedules are required for single-employer and cost sharing plans: • Sources of changes in the net pension liability • Information about the components of the net pension liability and related ratios, including: • Plan’s fiduciary net position as a percentage of the total pension liability • Net pension liability as a percentage of covered-employee payroll

  28. Required Supplementary Information for DB Plans (continued) • If contributions to the plan are actuarially determined, a schedule showing: • Actuarially determined contribution • Actual contributions • Related ratios • Methods and assumptions used (in a note to the schedule) • Annual money-weighted rate of return on the plan

  29. Actuary’s Valuations • Required at least once every 2 years, although more frequent valuations are encouraged • If valuation is not as of fiscal year-end, must rollforward most recent valuation to year end • Required valuation methodology will be discussed in the slides on GASB 68

  30. Questions

  31. GASB STATEMENT NO. 68 Accounting and Financial Reporting for Pensions-an amendment of GASB Statement No. 27

  32. GASB Statement No. 68 • Issued June 2012 • Effective for periods beginning after June 15, 2014 • High level summary: Significantly changes accounting and financial reporting for governments participating in defined benefit pension plans

  33. GASB Statement No. 68 – Key Changes • For single employer plans and agent plans, employers will have to record the underfunded status of the plan as a liability on the government-wide financial statements • Currently, governments only record a liability when they make less than the actuarially required annual contribution • For cost-sharing plans, employers will have to recognize a liability representing their proportionate share of the plan’s underfunded status • Currently, governments participating in cost-sharing plans disclose their participation in the footnotes to the financial statements but are not required to record any liabilities

  34. Changes to the Method of Accounting for DB Plans • Key changes to the calculation of liabilities and expenses associated with defined benefit plans relate to each of the following: • Employer liability • Employer expense • Discount rate • Actuarial method • Amortization

  35. Employer Liability • Under current pension standards: Annual required contribution (ARC) Less: Actual Contributions Net pension obligation (NPO) • Under GASB Statement No. 68: Total pension liability (TPL) Less: Fiduciary net position (FNP) Net pension liability (NPL)

  36. Employer Liability • Under current standards, only report a pension liability to the extent the entity is behind on its annual pension contributions • In other words, the actuary’s valuation focuses primarily on calculating pension expense • Under GASB Statement No. 68, must report a pension liability for the entire underfunded status of the plan • In other words, the actuary’s valuation focuses primarily on calculating pension liability

  37. Components of Expense Annual service cost Interest on the net pension liability Projected earnings on plan investments The full effect of any changes in benefit terms Amortization of deferred outflows/inflows of resources

  38. Discount Rate • Under current guidance, discount rate is the estimated long-term investment yield for the plan, with consideration given to the nature and mix of current and expected plan investments • Under GASB Statement No. 68, the discount rate must be modified if it is expected that FNP will not be sufficient to pay benefits to active employees and retirees • Single blended rate

  39. Discount Rate – Single Blended Rate • Single rate equivalent to the combined effect of using the following rates: • For projected cash flows up to the point the FNP will be sufficient, use the long-term expected rate of return on plan investments • For projected cash flows beyond that point, a yield or index rate on tax-exempt 20-year Aa-or higher rated municipal bonds

  40. Actuarial Method • Under current guidance, use the same actuarial method used for funding • Six acceptable methods • Must be applied within parameters defined by the GASB • Under GASB Statement No. 68, there is no tie to the actuarial method used for funding the plan • All employers will use the entry age method for accounting and financial reporting purposes (with service cost determined as a percentage of pay)

  41. Amortization • The following circumstances that could affect the net pension liability (NPL) are amortized to expense: • Changes in benefit terms • Changes in economics and demographic assumptions • Differences between economic and demographic assumptions and actual experience (other than investment returns) • Differences between expected and actual investment returns

  42. Amortization • Under current guidance, the effect is amortized over a period not to exceed 30 years • Under GASB Statement No. 68, the effect is to be amortized over a much shorter period. • Different periods, depending on the circumstances

  43. Amortization • Changes in benefit terms • Immediate recognition • Changes in economic and demographic assumptions • Closed period equal to average remaining service period of plan members (for retirees, average remaining service period = 0 years)

  44. Amortization • Differences between economic and demographic assumptions and actual experience (other than investment returns) • Closed period equal to average remaining service period of plan members • Differences between expected and actual investment returns • Closed 5-year period

  45. Actuary’s Valuations Valuations are as of a measurement date, which can be no more than one year before fiscal year-end Required at least once every 2 years, although more frequent valuations are encouraged In off years, must rollforward valuation to measurement date

  46. Cost Sharing Plan Considerations An employer’s proportionate share in the plan’s liability should be determined in a manner consistent with the way contributions for various employers are determined The plan’s management and actuaries will likely have to calculate each participating employer’s proportionate share of liabilities, expenses, and deferred inflows/outflows and communicate this to the employers Most cost sharing plans are still determining precisely how this will be done

  47. Note Disclosures • Plan description • Name of the plan • Entity that administers the plan • Type of plan (single employer, agent, cost-sharing) • Benefit terms • Number of employees covered • Contribution requirements • Availability of separate report • Information about the net pension liability (NPL) • Actuarial assumptions and other inputs (inflation, salary changes, COLA’s, etc.) • Impact on NPL of a +/- 1% change in discount rate • Fiduciary net position

  48. Note Disclosures: Changes in Net Pension Liability • Beginning balances for: • Total pension liability (TPL) • Fiduciary net position (FNP) • Net pension liability (NPL) • Changes during period • Ending balances for: • Total pension liability (TPL) • Fiduciary net position (FNP) • Net pension liability (NPL) • Other disclosures

  49. Required Supplementary Information: 10-Year Schedules • For cost sharing plans, the employer’s percentage share of NPL • Changes in net pension liability (NPL) • Funding progress: • Total pension liability (TPL) • Less: Fiduciary net position (FNP) • Equals: Net pension liability (NPL) • FNP / TPL = % (single and agent plans only) • Covered payroll • NPL / Covered payroll = %

  50. Required Supplementary Information: 10-Year Schedules • Actuarially or statutorily determined contributions • Actuarially/statutorily determined annual pension contribution • Amount of employer contribution actually made • Difference between the two • Payroll of covered employees • Ratio of actual employer contributions to covered payroll