Transcript Document

Pension Accounting
GASB Pension Accounting and Financial Reporting Overview
SAAABA Annual Business Seminar– April 18, 2012
Cindy Peters – Accountant Manager, Dept. of Technology, Management & Budget
Financial Services, Fiscal Management Division
Agenda
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Summary of Exposure Draft provisions –
Pension Reporting
Project Plan for Exposure Draft – Other
Postemployment Benefit (OPEB) Reporting
Overview of Preliminary View – Economic
Condition Reporting
News Release – Statements No. 65 and No. 66
Questions
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Summary of Exposure Draft provisions –
Pension Reporting
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Project Objective:
◦ Improve accounting and financial reporting by state
and local governments whose employees are
provided with pensions to create additional
transparency.
 Establish procedures for measuring and recognizing the
obligations associated with pensions.
 Identify the methods and assumptions that would be used to
project pension payments, discount projected payments to
their present values, and attribute those present values to
periods of employee service.
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Pension Reporting – continued
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Details the recognition and disclosure
requirements for employers with liabilities to a
pension plan administered through a qualified
trust including:
◦ Single employers
◦ Agent employers
◦ Cost-sharing employers
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Pension Reporting – continued
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Key Components of employer exposure draft
◦ Conceptual shift in reporting pension liabilities and
expenses from a “funding” approach to an “earnings”
approach:
 Currently - no liability is reported if government fully funds its annual
required contribution
 Under proposed approach:
 Pension liability will be reported as employees earn their pension benefits
by providing services
 Changes in pension liability will be immediately recognized as pension
expense or reported as deferred outflows/inflows of resources
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Pension Reporting – continued
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Substantial changes to methods and assumptions used
to determine actuarial information for GAAP reporting
◦ The actuarial methods and assumptions allowable under current
standards may continue to be used to determine funding
amounts
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Defined benefit pension plans will be required to
determine the following as of the employer’s fiscal year:
◦ Net pension liability (asset)
◦ Pension expense
◦ Pension deferred outflows and inflows of resources
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Pension Reporting – continued
Employers participating in single-employer or
agent multiple-employer plans will recognize
100 percent of the amounts identified above for
each plan.
 Employers participating in cost-sharing,
multiple-employer plans will recognize their
proportionate share of the collective amounts
for the plan as a whole.
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Pension Reporting – continued
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Timing, frequency and measurement of total
pension liability:
◦ Measurement – should be determined as of the
employer’s fiscal year end
 Through an actuarial valuation, or
 The use of update procedures to roll forward amounts from
an actuarial valuation to the employer’s year-end
 Actuarial valuation of total pension liability should be
performed at least biennially
 Use professional judgment to determine the extent of update
procedures
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Pension Reporting – continued
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Plan Net Position:
◦ Measurement – should be as of the employer’s fiscal
year end
 Use same valuation methods as used for Plan’s GAAP financial
reporting
 If the plan and employer year-ends are different, procedures
to roll forward (or backward) the plan financial statement
amounts to the employer’s year-end will be required
 Would require measurement as of the year-end of each employer
participating in a cost-sharing plan
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Pension Reporting – continued
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Determine pension expense and deferred
outflows/inflows of resources:
◦ Certain aspects of the change in net pension liability
should be recognized as pension expense and others
should be recognized as deferred outflows/inflows
and amortized into pension expense over time
◦ Employers participating in single- or agent multipleemployer plans will recognize 100 percent of the
pension expenses and deferrals
◦ Employers participating in cost-sharing multipleemployer plans will recognize their proportionate
share of the collective pension expenses and deferrals
of the plan as a whole
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Pension Reporting – continued
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Net Pension Liability:
◦ Total pension liability (actuarially calculated), less any
plan net position changes
◦ Total pension liability is calculated by:
◦ Projecting future benefits
◦ Discounting projected benefits to actuarial present value
◦ Attributing the present value to past and future years
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Pension Reporting – continued
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Projecting future benefits:
◦ Based on actuarial assumptions:
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Number of employees expected to receive benefits
How long employees are expected to work
What salaries will be and how fast they will grow
Life expectancy after retirement (how many years benefits
will be paid)
◦ What (if any) cost of living adjustments (COLA) will be made
to retirement benefits
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Pension Reporting – continued
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Discounting projected payments:
◦ Based on discount rate:
◦ If the Annual Required Contribution (ARC) is being fully
funded, use the expected long-term rate of return on plan
assets
◦ If not fully funded, use the proposed rate of return (taxexempt, high-quality 30-year municipal bond index)
◦ If the ARC is being partially funded, the two rates should be
blended
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Pension Reporting – continued
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Attribute present value to specific periods:
◦ Based on actuarial methods:
◦ Specified by the GASB to be
◦ Entry age normal
◦ Level percent of payroll
◦ If differ from funding method, would require separate
valuations for the different purposes
◦ Must be as of the government’s/employer’s fiscal year end
◦ If differ from government/employer’s fiscal year, update
procedures will be required
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Pension Reporting – continued
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Recognition of changes in total pension liability:
◦ Immediately recognized as pension expense:
 Current year – value of benefits earned
 Interest on any outstanding pension liability
 Changes in total pension liability caused by changes in terms
of pension benefits
 Changes in plan assets caused by projected earnings on plan
investments
 Amortization of deferred outflows/inflows
 Effects of actuarial differences and changes in assumptions
inactive/retired employees
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Pension Reporting – continued
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Recognition of changes in plan net position:
◦ Recognize as deferred outflow/inflow and amortize:
 Effects of actuarial differences and changes in assumptions
active employees
 Changes in the amount of plan assets due to differences
between projected and actual investment earnings (amortized
over 5 years)
◦ All other changes in plan net position should be
included in pension expense in the period of the
change
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Pension Reporting – continued
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Participation in cost-sharing multi-employer
plans:
◦ An employer’s proportion of a cost-sharing multiemployer plan should be:
 A measure of the employer’s expected long-term contribution
effort to the plan as compared to the total of all expected
long-term contributions of the employers
 Established at the actuarial valuation date and may be used to
roll forward pension amounts to the employer’s fiscal yearend assuming no significant changes to the employer’s
expected proportion
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Pension Reporting – continued
◦ Application of this proportionate share concept
results in two types of potential changes in the
employer net pension liability unique to cost-sharing
multi-employer plans:
 Net effect of a change in the employer’s proportion of the
plan
 Difference between actual employer contributions and the
employer’s proportionate share of collective employer
contributions
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Pension Reporting – continued
◦ Difference between actual employer contributions
and the employer’s proportionate share of collective
employer contributions:
 Recognized by the employer as a deferred outflow/inflow of
resources in the period of the difference
 Recognized as part of pension expense beginning in the
period of the difference over a closed period using a
systematic and rational method
 Closed period is representative of employees’ expected remaining
service lives
 Use the same period as that used for differences between
expected and actual experience related to economic or
demographic factors
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Pension Reporting – continued
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Note Disclosures – all plans
◦ Most of the note disclosures remain the same. Below
are a few of the new disclosures required by the
exposure draft:
 Assumptions used to measure total pension liability
 Detailed disclosure requirements for the discount rate – which have
changed
 Brief description of changes in benefit terms and assumptions
that affect the measurement of the total pension liability
 Date of actuarial valuation on which the recognized
information is based and whether update procedures were
used to roll forward measurements to the employer’s fiscal
year-end.
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Pension Reporting – continued
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Note Disclosures – single or agent multiemployer plan
◦ Below are a few of the new disclosures required by
the exposure draft:
 Detail of changes in net position liability (asset)
 Information about components of pension expense
 Reconciliation of beginning and ending balances of deferred
pension outflows and inflows, with separate identification of
applicable categories of changes
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Pension Reporting – continued
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Note Disclosures – cost-sharing multi-employer
plan
◦ Below are a few of the new disclosures required by
the exposure draft:
 Employer’s portion of the collective plan
 Amounts of the net pension liability, deferred outflows and
inflows, and pension expense recognized in the financial
statements
 The effect of net pension liability (asset), deferred outflows
and inflows, and pension expense recognized by the employer
attributable to:
 Changes in the employer’s proportion of the collective plan
 Difference between actual employer contributions and employer’s
proportionate share of collective employer contributions
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Pension Reporting – continued
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Required Supplementary Information (RSI) – new
◦ Single and agent multi-employer plan
 Notes to RSI, factors that significantly affect the identification of trends in
the amounts reported
◦ Cost-sharing multi-employer plan
 RSI – similar to single and agent multi-employer plans as they relate to
the collective plan
 RSI – as it relates to the employer’s proportion of the plan
 Notes to RSI as appropriate
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Other aspects of the Employer ED
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Special funding situations
Liabilities to a defined benefit pension plan
Insured pension benefits
Defined contribution benefits
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Pension Reporting – continued
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What is the impact of these changes:
◦ Government (Employer) financial statements
 A significant liability will be brought onto the face of the
financial statements
 May cause deficits
 May distort other information
 May require two actuarial valuations or require significant
effort to develop update procedures
 Increased cost / effort
 Result in increased audit effort
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Pension Plan Financial Statements
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Key Components of plan financial statement
exposure draft
◦ Recognition, measurement and presentation of
financial statement amounts generally similar to
current guidance
 Note disclosures and RSI:
 Similar to disclosures for employers with addition of information
on investment policies and actual rates of return on plan assets
 Requirements regarding measurement of net pension
liability (asset) are similar to those for employers:
 Net pension liability (asset) not recognized by pension plans
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Pension Plan Financial Statements – cont’d
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Plans should present on the accrual basis of accounting:
◦ Statement of Plan Net Position
◦ Statement of Changes in Net Position
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Statement of Plan Net Position:
◦ Plan assets subdivided by major category and principal components of
receivables and investments
◦ Investments generally reported at fair value
◦ Liabilities such as benefits and refunds recognized when due
◦ Equity reported as net position restricted for pensions
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Statement of Changes in Plan Net Position:
◦ Separate display of contributions from employers, employees, and nonemployer contributing entities
◦ Separate display of components of net investment income
◦ Separate display of benefits and refunds paid to plan members and
administrative expenses
◦ Report net increase/decrease in plan net position
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Pension Plan Financial Statements – cont’d
Note disclosures are similar to employer
disclosures
 Effective date of Employer and Plan EDs
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◦ In general the ED proposes the future standard be
effective for financial statements with a fiscal year
beginning after June 15, 2012
◦ Criteria are provided in the ED related to size and
type of government or plans that would impact the
effective date
◦ Earlier application of the standard is encouraged
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Project Plan for Exposure Draft – Other
Postemployment Benefit (OPEB) Reporting
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As a result of the staffing requirements associated with the
pension project, further Board deliberations on this project will not
be conducted until July 2012
The Board will continue deliberations related to differences
between pensions and OPEB and determine the overall approach
to OPEB standards – July – November 2012
Issue Exposure Drafts on employer and plan OPEB accounting and
financial reporting issues – August 2013
Comment period – September to November 2013
Public hearing – December 2013
Issue Statements – June 2014
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Overview of Preliminary View – Economic
Condition Reporting – Financial Projections
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Project focus:
◦ Forward-looking information that would provide
users of governmental financial reports with
information they need to assess a government’s
current financial health and its ability to meet its
commitments going forward
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Project objective:
◦ To better enable taxpayers, bond holders, and other
interested parties to assess a government’s financial
health
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Economic Condition Reporting – continued
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The Big Picture:
◦ Improve the communication of decisionuseful information about a governmental
entity’s overall economic condition, defined in
terms of:
 financial position
 fiscal capacity
 and service capacity
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Economic Condition Reporting – continued
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Financial position:
◦ The status of assets, liabilities, deferred outflows and inflows of
resources, and net position, as of a point in time
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Fiscal capacity:
◦ The ability and willingness to meet financial obligations as they
come due on an ongoing basis
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Service capacity:
◦ The ability and willingness to meet commitments and provide
services on an ongoing basis
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Economic Condition Reporting – continued
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Fiscal sustainability:
◦ The ability and willingness to generate inflows of resources
necessary to honor current service commitments and to meet
financial obligations as they come due, without transferring
financial obligations to future periods that do not result in
commensurate benefits
 This last component has been described by the Board as being the
forward-looking aspect of economic condition reporting
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Economic Condition Reporting – continued
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Five components of information necessary to
assess a governmental entity’s fiscal
sustainability:
◦ Projections of total cash inflows and major individual
cash inflows, in dollars and as a percentage of total
cash inflows, with explanations of the known causes
of fluctuations
◦ Projections of the total cash outflows and major
individual cash outflows, in dollars and as a
percentage of total cash outflows, with explanations
of the known causes of the fluctuations
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Economic Condition Reporting – continued
Five components - continued
o Projections of total financial obligations and major
individual financial obligations, including bonds,
pensions, other postemployment benefits, and longterm contracts, with explanations of the known causes
of fluctuations in financial obligations
o Projections of annual debt service payments (principal
and interest)
o A narrative discussion of major existing intergovernmental service interdependencies and their
nature
NOTE: Projections would use historical and known information and extrapolate that
information into the future. Accompanying narrative discussions would provide context
to better understand why the changes are expected.
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Economic Condition Reporting – continued
All components of fiscal sustainability, in the
Board’s view, would be required to be included
the RSI of all governmental entities’
comprehensive annual financial reports and
annual financial reports
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With the exception of projections for outstanding debt
service payments (required currently), all of the
components are new components of fiscal sustainability
information
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Economic Condition Reporting – continued
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Projections of outflows and inflows of resources
are essential to assessing interperiod equity, or
a government’s ability to meet annual spending
needs with current-period resources, rather
than delaying to the future or consuming
accumulated resources
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Economic Condition Reporting – continued
Projections – how they would be calculated
Based on current policy, informed by historical information, and
adjusted for known events and conditions that affect the projection
periods
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Outflows and inflows – projected on a cash basis of accounting to assess
fiscal sustainability
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Financial obligations – projected on an accrual basis of accounting for
more complete projected information on obligations incurred than the
cash basis
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Assumptions – would not be prescribed, but would be 1) consistent with
each other and the information used as the basis of the assumptions and
2) comprehensive by considering significant trends, events and conditions
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Economic Condition Reporting – continued
Disclosures – requirements
Disclosures of assumptions would be required in order to help users
understand how the financial projections were made and assess how
reasonable they are
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Financial projections – made for a minimum of five individual years
beyond the reporting period for external reporting purposes
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Components of fiscal sustainability information – reported for the
primary government, including both governmental activities and businesstype activities, with net subtotals (inflows less outflows)
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Cautionary notice – should precede the financial projections and related
narrative discussion to provide context and inform readers that the
projections do not represent a forecast or prediction of the most likely
outcome and that actual future financial results may differ significantly
from those reported
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Economic Condition Reporting – continued
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Next Steps in the process
◦ When the GASB has reviewed the comments they
will, if there is sufficient agreement to proceed,
publish an exposure draft
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News Release – 04/02/12
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GASB Issues Statements No. 65 and No. 66
◦ Statement 65, Items Previously Reported as Assets
and Liabilities
◦ Clarifies the appropriate reporting of deferred outflows of
resources and deferred inflows of resources to ensure
consistency in financial reporting
◦ Statement 66, Technical Corrections - 2012
◦ Enhances the usefulness of financial reports by resolving
conflicting accounting and financial reporting guidelines that
could diminish the consistency of financial reporting
◦ Effective dates
◦ The provisions for both Statements are effective for periods
beginning after December 15, 2012, and would be applied on
a prospective basis
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Thank you!
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Questions?
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Email: [email protected]
Phone: 517-241-5042
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More information can be found at:
www.gasb.org
www.gfoa.org
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