Transcript GASB Standards on Pensions - California State University

Presented by: Mark Thomas
KPMG LLP
Agenda

GASB Pension Standards

Issues Related to Cost-Sharing MultipleEmployer Plans

Other Observations
GASB Standards on Pensions
 GASB Standards
- GASB Statement No. 68, Accounting and Financial Reporting for Pensions,
Issued June 2012
- GASB Statement No. 71, Pension Transition for Contributions Made
Subsequent to the Measurement Date (amendment of GASB Statement No.
68), Issued November 2013
- GASB Statement No. 67, Financial Reporting for Pension Plans, Issued June
2012
Statement No. 68
• GASB Statement No. 68, Accounting and Financial Reporting for Pensions
• Issued June 2012
• Effective for periods beginning after June 15, 2014 (effective June 30, 2015)
• Replaces the requirements of Statement No.27, Accounting for Pensions by
State and Local Government Employers and No. 50, Pension Disclosures
• Addresses accounting and financial reporting for pensions that are provided to
the employees of state and local governmental employers through pension
plans that are administered through trusts (see related scope for Statement
No. 67)
• Establishes standards for measuring and recognizing liabilities, deferred
outflows of resources, and deferred inflows of resources, and
expenses/expenditures. Employers should report in their financial statements
a net pension liabilities determined as of a date (measurement date) no earlier
than the end of the employer’s prior fiscal year.
Employer Reporting
 The following amounts for a defined benefit pension plan must be determined
as of a date no earlier than the end of the employer’s prior fiscal year (i.e.,
measurement date):
– Net pension liability (asset)
– Pension expense
– Pension deferred outflows of resources and deferred inflows of resources
 Employers participating in single-employer or agent multiple-employer plans
recognize 100 percent of the above amounts for each plan
 Employers participating in cost-sharing multiple-employer plans recognize
their proportionate share of the collective amounts for the plan as a whole.
Net Pension Liability
Net Pension Liability = Total pension liability less fiduciary net position
 Total pension liability is the actuarial present value of projected benefit
payments attributed to past employee service.
 Fiduciary net position is determined using the same valuation methods as used
for plan’s GAAP financial reporting.
 Measurement of the total pension liability is determine 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 yearend
 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)
 Required actuarial valuations at least every two years (more frequent actuarial
valuations are encouraged)
Total Pension Liability
Projecting
Discounting
Attributing
A single blended rate should be used to discount projected
future benefit payments, based on:
• The long-term expected rate of return on plan
investments (net of investment expenses) that are
expected to be used to finance the payment of pension
benefits to the extent that the plan’s fiduciary net
position is projected to be sufficient to make projected
benefit payments and is expected to be invested, using a
strategy to achieve that return; and
• A yield or index rate for 20-year, tax-exempt general
obligation (municipal) bonds with average rating of AA
or higher, to the extent that the conditions above are not
met.
Total Pension Liability
 To determine extent that projected plan fiduciary net position is expected to be
available for the payment of pension benefits, a comparison should be made
between:
 The amount of benefit payments projected to occur in each future period,
and
 The plan’s projected fiduciary net position at the beginning of the future
period:
 Consider all employer contributions intended to fund benefits of current
and former employees and all contributions from current employees
 Consider projected investment earnings on projected plan fiduciary net
position
 Consider projected benefit payments and administrative expenses
 Do not consider employer contributions intended to fund service costs
of future employees or contributions of future employees, unless those
contributions are projected to exceed service costs for those employees
Total Pension Liability
 To project future employer contributions when they are (a) established by
statute or contract, or (b) determined under a formal written policy:
 Apply professional judgment, considering:
Employer’s most recent five-year contribution history as a key indicator
of future contributions
- All other known events and conditions potentially impacting
contribution amounts
 To project future employer contributions in other circumstances:
 Contribution amounts should be limited to an average of employer
contributions over most recent five-year period, potentially modified based
on consideration of subsequent events
 Basis for average should be matter of professional judgment
- Percentage of covered payroll contributed
- Percentage of actuarially-determined contributions made
-
Pension Expense
 Generally, the changes in Net Pension Liability should be included in pension
expense immediately.
 Employers participating in single-employer or agent multiple-employer
plans will recognize 100% of the pension expense and deferred amounts for
each plan
 Employers participating in cost-sharing plans will recognize their
proportionate share of the collective pension expense and deferred amounts
determined for the plan as a whole.
 Changes in net pension liability immediately recognized as pension expense:
1. Changes in the total pension liability - Current period service cost, Interest
on the beginning total pension liability and Impact of changes in benefit
terms
2. Changes in plan’s fiduciary net position - Projected earnings on plan
investments and Changes in plan fiduciary net position other than employer
contributions and benefit payments (e.g., employee contributions, admin costs)
Deferred Outflows/Inflows of
Resources

Changes in net pension liability resulting in deferred inflows/outflows of
resources.
1. Changes in the total pension liability
 Effects of actuarial differences and changes in assumptions related to
economic or demographic factors attributable to active and inactive
employees, including retirees --- amortize over a closed period equal to the
average of the expected remaining service lives of all employees
2. Changes in plan’s fiduciary net position
 Differences between actual and projected earnings on plan investments
--- amortize over a closed five-year period (report amounts from
multiple years, net)
 Employer contributions made directly by the employer subsequent to the
measurement date of the net pension liability and before the end of the
employer’s fiscal year should be recognized as deferred outflow of resources.
Recognition (Amortization) of
Deferred Outflows/inflows
 Recognition (amortization) of deferrals attributable to changes in total pension
liability should be based on “systematic and rational” method over a closed
period equal to the average of the expected service lives of all employees that
are provided pensions through the pension plan (active and inactive
employees) service beginning with the year in which the difference occurred
Results in the creation of “layers”, which are amortized over closed period
 The number of “layers” established for each year is based on whether
deferral are equally attributable to all plan participants
 Recognition (amortization) of deferrals attributable to differences between
projected and actual earnings on plan investments should be based on a
“systematic and rational” method over five years beginning with the year in
which the difference occurred

Participation in Cost-Sharing
Multiple-Employer Plans
Cost-sharing Multiple-Employer plans – those in which the pension
obligations to the employees of more than one employer are pooled (plan assets
can be used to pay the benefit of the employees of any employer)
 An employer should recognize its proportionate share of the collective net
pension liability, pension expense, and deferred inflows/outflows of a cost-
sharing plan as of the employer’s measurement date (no earlier than employer’s
prior year-end)
 Basis for proportion should be consistent with manner in which required
contributions are determined
- Use of projected long-term contribution effort of the employer(s) and
nonemployer contributing entities is encouraged
- If different contribution rates are assessed based on separate relationships
(i.e., different tiers or classes of employees), calculation of proportion should
reflect the separate relationships
- Employer’s proportion established as of measurement date, unless actuarially
determined, in which case actuarial valuation date should be used
Participation in Cost-Sharing
Multiple-Employer Plans
As a practical matter, it is not anticipated the calculation of proportion will be
performed by the plan for all participating employers, based on either required
contributions or covered payroll
 Application of this proportionate share concept results in two types of
potential changes in employer net pension liability unique to cost-sharing
multiple-employer plans:
a. Net effect of a change in the employer’s proportion of the plan’s collective net
pension liability and deferred outflows/inflows of resources
- Measured as the difference between the plan’s collective balances as of the
beginning of the employer’s measurement period, multiplied by: (1) employer’s
proportion assumed in the prior period, and (2) employer’s proportion
assumed in the current period.
- Recognized as deferred inflow/outflow in the period of change
- Recognized as part of pension expense, beginning in the period of the change
over a closed period, using a systematic and rational method.
Participation in Cost-Sharing
Multiple-Employer Plans
b. Difference during the measurement period between actual plan contributions
made by the employer and the amount of 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 equal to the average of the expected remaining service
lives of all employees (active, inactive, and retirees)
- This deferred outflow/inflow of resources may be reported on a net basis with
that resulting from a change in the employer’s proportion of collective plan
Relevant Employer Note
Disclosures
 Balances of deferred pension outflows/inflows of resources as of employer’s
fiscal year-end classified as follows:
• Net difference between projected and actual earnings on plan investments
• Differences between expected and actual experience
• Changes of assumptions
• Changes in employer’s proportion and effect of certain employer
contributions on net pension liability
• Employer contributions made subsequent to measurement date
 Schedule presenting for each of subsequent five years and in aggregate
thereafter:
• Net amount of deferred pension outflows/inflows of resources that will be
recognized in pension expense
• Amount that will be recognized as a reduction of employer’s net pension
liability
Relevant Employer Note Disclosures (CostSharing Multiple-Employer Plans)
 The employers’ proportionate share (amount) of the net pension liability
 The employer’s proportion of the net pension liability including:


Basis on which its proportion was determined
Changes, if any, in proportion since prior measurement date
Statement No. 71
• GASB Statement No. 71, Pension Transition for Contributions Made Subsequent
to the Measurement Date (amendment of GASB Statement No. 68)
• Issued November 2013
• Effective date: Simultaneously with Statement No. 68 (effective June 30, 2015)
• Amendment of Statement No. 68:
par. 137……It may not be practical for some governments to determine the
amounts of all deferred inflows of resources and deferred outflows of
resources related to pensions, as applicable, at the beginning of the period
when the provisions of this Statement are adopted. In such circumstances,
beginning balances for deferred inflows of resources and deferred outflows
of resources related to pensions should not be reported.”
Statement No. 71
• Amendment to Statement No. 68 (par. 137)
•
•
Recognize a beginning deferred outflow of resources only for its
pension contributions, if any, made subsequent to the measurement
date of the beginning net pension liability, but before the start of the
government’s fiscal year.
No beginning balances for other deferred outflows of resources and
deferred inflows of resources related to pensions should be recognized
Statement No. 67
• GASB Statement No. 67, Financial Reporting for Pension Plans
• Issued June 2012
• Effective for periods beginning after June 15, 2013 (effective June 30, 2014)
• Replaces the requirements of Statement No.25, Financial Reporting for Defined
Benefit Pension Plans and Note Disclosures for Defined Contribution Plans and
No. 50, Pension Disclosures
• Scope: Pension plans (defined benefit and defined contribution) that are
administered through trusts or equivalent arrangements, in which:
•
•
•
Contributions from employers and nonemployer contributing entities to the pension plan and
earnings on those contributions are irrevocable
Pension plan assets are dedicated to providing pensions to plan members in accordance with
the benefit terms
Pension plan assets are legally protected from the creditors of employers, nonemployer
contributing entities, and the pension plan administrator. For defined benefit pension plan,
plan assets also are legally protected from creditors of the plan members
Statement No. 67
 The term pensions ---
Include: retirement income, postemployment benefits* (i.e. death benefits, life
insurance and disability benefits)
Exclude: postemployment healthcare benefits, termination benefits
* If separately provided from a pension plan, they are classified as OPEB (and should be
accounted for and reported as OPEB plans)
Statement No. 67
 Defined Benefit Pension Plans --are pensions for which the income or other benefits that the plan member will
receive at or after separation from employment are defined by the benefit
terms.

a.
b.
c.
Defined Contribution Pension Plans --- are pensions having terms that:
Provide an individual account for each plan member
Define the contributions that an employer is required to make
Provide that the pensions a plan member will receive will depend only on the
contributions to the plan member’s account, actual earnings on investments
of those contributions, and the effects of forfeitures of contributions made for
other plan members, as well as pension plan administrative costs, that are
allocated to the plan member's account

Majority of public pensions are defined benefit pensions
Statement No. 67
Defined Benefit Pension Plans --Measurement and disclosures are made regarding the particular requirements
depending upon the type of pension plan administered as follows:
a. Single-employer – those in which pensions are provided to the employees of
one employer
b. Agent multiple-employer (agent pension plans) – those in which plan assets
are pooled for investment purposes but separate accounts are maintained for
each individual employer (each employer’s share of the pooled assets is legally
available to pay the benefits)
c. Cost-sharing multiple-employer (cost-sharing pension plans) – those in which
the pension obligations to the employees of more than one employer are pooled
(plan assets can be used to pay the benefits of the employees of any employer)
Statement No. 67
A defined benefit pension plan should present the following, prepared on the
accrual basis of accounting:
a. A statement of fiduciary net position
 assets, deferred outflow of resources, liabilities, deferred inflows of
resources, and fiduciary net position
b. A statement of changes in fiduciary net position
 Additions (i.e. contributions), deductions (benefit payments and
administrative expense), and net increase (decrease) in fiduciary net
position
Summary of Plan Provisions
 Recognition, measurement and presentation of financial statement amounts
generally similar to current guidance with exception of receivables for
contributions.
-
Receivables for contributions recognized only for contributions due pursuant to legal
requirements
 Note disclosures and required supplementary information:
Similar to nature of disclosures for employers with the addition of information on
investment policies and actual rates of return on plan assets
- Certain information only required for single-employer and cost-sharing plans
- No actuarial-related disclosures for agent multiple-employer plans
-
 Requirements regarding the measurement of net pension liability (asset) are
similar to the requirements for employers:
-
Net pension liability (asset) not recognized by pension plans
Summary of Plan Provisions
Disclosures, cont’d. -- Single Employer and Cost-sharing Plans:
Portion of actuarial present value of projected benefit payments
Pension plan’s fiduciary net position
Net pension liability
Pension plan’s fiduciary net position as a % of the total pension liability
Significant assumptions and other inputs to calculate pension liability
Required supplementary information for each of the 10 most recent fiscal
years about employer/nonemployer contributing entity obligations for
pensions provided through the pension plan.
 Agent Pension Plans:
 10-year schedule presenting for each fiscal year the annual weighted rate of
return on pension plan investments
Issues Related to Cost-Sharing
Multiple-Employer Plans
Cost-Sharing Multiple-Employer
Plans (AICPA Proposed Recommendations)
Issues
Information for
Employer Reporting
Census Data
White Papers
• Government Employer Participation in
Cost-Sharing Multiple Employer Plans:
Issues Related to Information for
Employer Reporting
• Single-Employer and Cost-Sharing
Multiple-Employer Plans: Issues
Associated with Testing Census Data
• Substantially finalized
Four Auditing Interpretations (expected to be released: end of
March)
Cost-Sharing Multiple-Employer
Plans Issues
 Audited financial statements of the plan only include disclosure of the
collective net pension liability for the plan as a whole. They do NOT include:
• Deferred outflows/inflows of resources by category
• Pension expense
• Each participating employer’s share of collective pension amounts
 Issues over allocations:
 Standard is silent on who (plan or each individual participating employer)
should calculate allocation percentages
 Audited financial statements of the plan may not include necessary
information to calculate allocation percentages
 Standard provides flexibility in approach to determine allocations
 Standard encourages an allocation method would be extremely difficult to
audit as it is based on projected future contributions
Cost-Sharing Multiple-Employer
Plans Issues (AICPA Proposed Recommendations)
Information for Employer Reporting
• Plan prepares the following for which plan auditor is engaged to
provide opinion:
• Schedule of employer allocations
• Use allocation method based on covered payroll or required
(actual) contributions depending on whether resulting allocations
are expected to be representative of future contributions
• Projected future contributions could be used if necessary
• Schedule of pension amounts by employer
• Includes the following elements: net pension liability, deferred
outflows of resources by category, deferred inflows of resources by
category and pension expense
• Alternative: Prepare a “schedule of collective pension amounts”
(excluding employer specific deferrals) for the plan as a whole
Cost-Sharing Multiple-Employer
Plans Issues (AICPA Proposed Recommendations)
Cost-Sharing Multiple-Employer
Plans Issues (AICPA Proposed Recommendations)
Cost-Sharing Multiple-Employer
Plans Issues (AICPA Proposed Recommendations)
Information for Employer Reporting
(Plan Auditor)
• Plan auditor issues opinion on the employer allocations and on the
total of each of the four “elements” in accordance with AU-C 805
• Net pension liability, total deferred outflows of resources, total
deferred inflows of resources, and total pension expense for the sum
of all participating entities
• Restriction on use to appropriate parties
• Plan auditor needs to consider the appropriateness of the materiality
used in the audit of plan financial statements
• For audit of a public employee retirement system (PERS) plan
financial statements, the audit opinion is provided on the system
as a whole
• Audit of the plan financial statements effectively has to be
performed at a lower level consistent with the “allocation” pool
Cost-Sharing Multiple-Employer
Plans Issues (Employer Responsibilities)
• Complete and accurate data to plan
Report
Evaluate
Verify and
recalculate
• Appropriateness of information used to record financial
statement amounts
• Whether plan auditor’s report on schedules are adequate and
appropriate for employer purposes
• Amounts in schedules specific to employer
• Employer amount used in allocation percentage (numerator)
• Recalculate allocation percentage of employer
• Recalculate allocation of pension amounts based on allocation
percentage of employer
Cost-Sharing Multiple-Employer
Plans Issues (Employer Auditor Responsibilities)
Determine
Evaluate
Verify and
recalculate
Test
• Sufficiency and appropriateness of audit evidence
• Whether plan auditor’s report on schedules are adequate and
appropriate for auditor purposes (i.e. evidence)
• Review plan auditor’s report and any related modifications
• Evaluate whether the plan auditor has necessary competence and
independence
• Determine whether named as specified user
• Amounts in schedules specific to employer
• Employer amount used in allocation percentage (numerator)
• Recalculate allocation percentage of employer
• Recalculate allocation of pension amounts based on allocation
percentage of employer
• Census data submitted to plan
Cost-Sharing Multiple-Employer
Plans Issues (Census Data)
Testing Underlying Census Data for Active
Employees
• Example risk factors to consider for selecting employers to test
• Size of employer in relation to the plan
• Past errors or control deficiencies of an employer
• Length of time since procedures last performed for employer
• Whether there have been significant changes in workforce
• Results of internal analysis (analytical procedures) of employer
information
• New or terminating employer
• Whether employer financial statement are audited have received
unmodified opinions
Absence of effective management procedures and controls by plan to verify census
data is considered a control deficiency and will impact the level of auditor testing.
Cost-Sharing Multiple-Employer
Plans Issues (Census Data)
 Employer auditor may perform procedures under examination engagement in
accordance with AT (Attest) Section 101
 Employer auditor engaged to provide opinion on relevant assertions related
to census data reported to plan during period
 Consider the actuarial valuation date in determining which period to be
covered by opinion
 Most plans will likely be using beginning of year actuarial valuation date
 Relevant census data for actuarial valuation will be prior year
information reported to plan
 Relevant census data for contributions and benefit payments will be
current year information reported to the plan.
Other Observations
AICPA guidance on
agent-multiple employer
plans and pension
chapter still to come
Significant education
will need to occur to
successfully implement
new pension standards
Special funding
situations continues to
be problematic
Effective
communication
between plans and
participating employers
is essential
There likely will be more
issues that will surface
as plans and employers
implement the
standards
Action by GASB may be
necessary
Next Steps
Plan to develop a comprehensive implementation plan
Evaluate auditor relationships and scope of work
Working with constituent group
Monitor progress of implementation
Evaluate need to request extension from GASB
Communicate implementation progress to constituent groups
Q&A