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Home My WebLink AboutDocumentation_Workshop_Tab 03_02/29/2016 Al� �e Governmental n Audit Quality Center � � , s � � i aicpa.org/gaqc * gaqc a�aicpa.org October 2015 ai�� 015 t��4 Readers of the article below titled, Etfect of EmpJoyer-Paid Merrrher Contributroras ori Plai�s an� Err��oy��rs, should be aware of recent Governmental Accounting Standards Board (GASB) developments on employer-paid member contributions. Upon issuance of the article, GASB received a number of inquiries which provided them with more information on the depth of the issue. As a result, the GASB will be addressing the treatment of employer-paid member contributions as part of a GASB project that was already underway titled, r'��;:�rc;r� �3err��";; �ss��s. At its October 26, 2015, meeting, the GASB discussed potential changes in accounting for employer-paid member contributions and formed the following tentative conclusions: • Contributions should be classified by pension plans in a manner consistent with the designation as an employee or employer contribution pursuant to the pension plan terms. • Expense for amounts paid by the employer to satisfy employee contribution requirements should be included in salaries. An exposure draft on the Pension Benefit Issues project is expected in December 2015, with a final standard scheduled for March 2016. In the meantime, readers should follow this GASB project to determine the effects on plan and employer accounting of employer-paid member contributions. This article provides nonauthoritative accounting guidance and is an other auditing publication as defined in AU-C section 200, Overall Objectives of the /ndependent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards (AICPA, Professional Standards). Other auditing publications have no authoritative status; however, they may help you, as an auditor, understand and apply certain auditing standards. Users of this article should consult the original material referenced in this practice aid for a complete understanding of the standards, requirements, and guidance. In applying the auditing guidance included in an other auditing publication, the auditor should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the audit. The auditing guidance in this document has been reviewed by the American Institute of Certified Public Accountants (AICPA) Audit and Attest Standards staff and published by the AICPA and is presumed to be appropriate. This document has not been approved, disapproved, or otherwise acted on by any senior technical committee of the AICPA and does not represent an official position of the AICPA. It is distributed with the understanding that the AICPA Governmental Audit Quality Center is not rendering legal, accounting or other professional services in this publication. The application and impact of laws can vary widely based on the specific facts involved. If legal advice or other expert assistance is required, the services of a competent professional should be sought. . .. _ __ . . � � .. . .. . �. � . ,_ . ." J •..�... . . . . ,. � . � . �. Copyright O 2015 by the American Institute of Certified Pubtic Accountants, Inc., New York, New York. ; Q:r�`�� ?"1r� �°� �� Wi#h the implementation of Governmental Accounting Standards Boa�d (GASB) Statement No. 68, Accounting and Financial Reporting forPensions, the AICPA has received a number of inquiries. This article includes a summary of the more significant issues that have been raised and provides related discussion for plan auditors and employer auditors to consider. Issues addressed in this article include: • Accounting for a change in proportion and audit evidence on beginning net pension liability in the initial year of implementation for employers participating in cost-sharing plans (cost-sharing employers); • Effect of employer-paid member contributions on plans and employers; • Additional illustrative schedule of pension amounts by employer for cost-sharing plans; • Employer's presentation of net position; • Allocation of pension amounts to funds and departments; and • Audit evidence on intra-entity allocations. The following sections reflect the discussions of the AICPA's State and Loca1 Government Expert Panel (SLGEP) on these pension-related inquiries and are intended to build awareness and assist auditors in recognizing and addressing these issues. �i:c��t�� v��t�� ►�r�i�r� �r�e� �►+�� vidence on Beginning Net Pension Liability' in the �� :, ��T �� u � �� xy= �nra�►I+��er� � �'i R' �� m � � � � �f ��. � _ � ��.�� ' ' �i � , �;# h .. • �� i �� -. ��, Auditors of cost-sharing employers are reminded that in the initial year of implementing GASB Statement No. 68: • Cost-sharing employers should report changes in the proportionate share of collective pension amounts (changes in proportion); and • Sufficient appropriate evidence should be obtained by the employer auditor on the employer's proportionate share of fhe collective net pension liability as of the beginning of the measurement period. Accounting for a Change in Proportion in the Implementation Year There is no exclusion in the transition provisions of GASB Statement No. 68 for calculating a change in the employer's proportionate share of the collective net pension liability in the year of implementation. tn accordance with paragraph 54 of GASB Statement No. 68, the employer should report a change in proportion for the initial measurement period (e.g., for the year ended June 30, 2014). Thus, the employer ' References to a net pension liability in this section also apply to situations in which the fiduciary net position exceeds the total pension liability resulting in a net pension asset Copyright OO 2015 by the American Institute ot Certified Public Accountants, Inc., New York, New York. 2of12 requires its allocation percentage from the plan as of the end of the prior year (e.g., June 30, 2013) to determine the net pension liability as of the beginning of the year (i.e., the opening balance). Based on the inquiries received by the GAQC, it appears that some employers have confused the recording of deferred outflows of resources or deferred inflows of resources resulting from the change in proportion in the year of implementation with the transition provisions in paragraph 137 of GASB Statement No. 68. The guidance in paragraph 137 acknowledges that it may not be practical to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, as applicable, at the beginning of the period of implementation. However, the change in proportion represents activity during the year and is not a transition adjustment affecting beginning balances. In some situations, it may be appropriate for employers to use the same allocation percentages for the beginning and end of the year if the employer determines (and the employer auditor concurs) that any changes in the allocation that occurred during the year would be immaterial to the employers' financial statements. Audit Evidence on Beginning Net Pension Liability in the Implementation Year The guidance in AU-C section 508, Opening Balances-lnitial Audit Engagements, requires the auditor to obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period's financial statements. GASB Statement No. 68 requires cost- sharing employers, for the first time, to report net pension liability. To accommodate the employer auditor's need to obtain this evidence on the opening balance of the employer's net pension liability in the year of implementation, it is recommended that plans prepare an additional schedule of employer allocations and a schedule of net pension liability as of the plan's prior year end (e.g., June 30, 2013) for which the plan auditor is engaged to obtain reasonable assurance and report on the schedule of employer allocations and on the total net pension liability. This would be in addition to similar schedules previously recommended by the AICPA that the plan prepares as of its current year end (e.g., June 30, 2014) and that the plan auditor is engaged to opine on. Said another way, the cost-sharing plan solutions communicated in Appendix B, Govemmental Employer Participation in Cost-Sharing Multiple-Employer Plans: Issues Related to Information for Employer Reporting, of Chapter 13 of the 2015 AICPA Audit and Accounting Guide, State and Loca! Governments (SLG Guide), would be applied for the year prior to implementation, as well as the actual year of implementation. Unlike the current year schedule of pension amounts described in Appendix B of the SLG Guide, the recommended schedule of net pension liability as of the plan's prior year-end does not need to include deferred outflows of resources, deferred inflows of resources, and pension expense. This is because paragraph 137 of GASB Statement No. 68 does not require employers to determine these amounts prior to the year of implementation. In lieu of preparing a separate schedule of net pension liability for the prior year, the plan may add an additional column to the current year schedule of pension amounts that includes the net pension liability as of the end of the prior year for which the plan auditor is engaged to opine. Without the plan addressing the opening balances as described above, it is unlikely that the employer auditor could meet the requirements of AU-C section 508. Some have asserted that the recommended approach is not necessary as the plan auditor has, in essence, substantiated the beginning net pension liability because they have audited the current year schedule of pension amounts, which includes ending net pension liability and the changes in net pension liability (NPL) for the year (i.e., Ending NPL + Decreases � �.L'�. .. _ ".�d.s-a-'.�ai--'�... ' _ ,.�.__ ,._ . . .�i_ '— . �ii..._ Copyright O 2015 by the American Institute of Certified Public Accountants, Inc., New York, New York. 3of12 in NPL — Increases in NPL = Beginning NPL). However, because the increases and decreases in net pension liability are based on the measurement of net pension liability at the beginning and end of the year, additional evidence that supports the begin�ing net pension liability and its allocation to the employers is necessary. -�t�ect o� �mp�oyer-Paid Member �Contril�utions on �-.'� _� � ,.�.'��,��y�r� , �, _ _ ,� Readers should be aware of recent GASB developments on employer-paid member contributions. Auditors of plans and participating employers should be aware that employer-paid member contributions may have accounting and financial reporting implications for both the plan and participating employers depending on how they are recognized by the employer. To understand the issues related to employer- paid member contributions, it is important to understand the background and information on certain Internal Revenue Service (IRS) guidance that is relevant to the issue. Background Employer-paid member contributions arise when payments are made by an employer to satisfy member contribution requirements to a plan. They are also referred to as employer pick-ups. There are two employer recognition alternatives for employer-paid member contributions: • The employer recognizes the employer-paid member contributions as salarv expense. This is appropriate when the employer increases the member's salary by the amount of the member's required contribution. • The employer recognizes the employer-paid member contributions as other than salarv expense. This is appropriate when the employer elects to comply with Internal Revenue Code (IRC) section 414.h.2, Employer "Pick-Up" Contributions to Benefit Plans, as further described in the following paragraphs. IRC 414.h.2 Election IRC section 414.h.2 provides that for any plan established by a government, where the contributions of employing units are designated employee contributions, but the employer picks up the contributions, the contributions are treated as employer contributions. For the employee contributions to be deemed picked up by the employer and characterized as employer contributions, certain tests must be met. A series of rulings by the IRS have established that only amounts that employers pay (including certain amounts withheld or otherwise offset from the employee's salary) are considered employer contributions, and are therefore excludable from the employee's gross income. ._# , �:, .; A , , �:. i�. ....,.a � -- - -- �.�.1��' .J(��+�i:n« Copyright O 2015 by the American Institute of Certified Public Accountants, Inc., New York, New York. 4of12 IRS Revenue Ruling 2006-43, Government Pick-Up Plans; Employer Contributions; Income Tax; Praspective Application, clarifies the requirements for employee contributions to be considered made, or picked up, by the employer. Among its clarifications are: • Employing units must take formal action (such as through the issuance of a resolution by the governing body) to provide that the contributions on behalf of a specific class of employees, although designated as employee contributions, will be paid by the employing unit in lieu of employee contributions. • Participating employees, from the date of the pick-up and later are not permitted to have a cash right or deferred election right with respect to the designated employee contributions. Participating employees must not be permitted to opt out of the pick-up, or to receive the contributed amounts directly instead of having them paid by the employing unit to the plan. Effect on Plan Financial Statement Display of Contributions Employer-paid member contributions may affect the classification of contributions by the plan in the statement of changes in fiduciary net position. Based on the guidance in footnote 2 of GASB Statement No. 67, Financial Reporting for Pension Plans: • If the employer-paid member contribution is recognized by an employer as salary expense (i.e., there has been no IRC section 414.h2 election made by that employer), the contributions relative to that employer should be classified as member contributions. • If the employer-paid member contribution is recognized by an employer as other than salary expense (i.e., the IRC section 414.h.2 election has been made by that employer), the contributions relative to that employer should be classified as emplover contributions. If plans have not been aware of this nuance, it is possible that the employer pick-ups may have been misclassified in the plan's statement of changes in fiduciary net position. Plan auditors are advised to inquire of the plan about their knowledge of the nature of employer-paid member contributions and to determine the appropriateness of the classification of any employer pick-ups in the statement of changes in fiduciary net position. If applicable, plan auditors should also consider verifying that a management resolution was issued by the governing body of the employer in accordance with IRC section 414.h.2 to determine that the expense classification made by the employer is appropriate. This nuance is even more complex for multiple-employer plans because the IRC section 414.h.2 election may be made on an employer-by-employer basis. Auditors of multiple-employer plans are advised to also consider evaluating whether the plans have appropriate processes and controls to determine which participating employers have made the IRC section 414.h.2 e�ection and the effect of such elections on the classification of contributions in the plan's statement af changes in fiduciary net position. Effect on Employer Pension Expense and Deferred Outflows of Resources In situations in which employers have made payments to a plan to satisfy member contributions, the employer should evaluate whether such payments affect pension expense. Based on the guidance in footnote 2 of GASB Statement No. 68: . , , .. � . .. _ �".�'��.:�!niw.:. . .. �-: _ -: r�,_.__�r_ . . ...1�� ...-,��:.. Copyright �O 2015 by the American Institute of Certified Public Accountants, Inc., New York, New York. 5of12 • lf the employer-paid member contribution is treated by the employer as salary expense (i.e., there has been no IRC section 414.h.2 election made by the employer), that contribution would be reported as salary expense and excluded from the emt�lover's pension exqense. • If the employer-paid member contribution is treated by the employer as other than salary expense (i.e., the IRC section 414. h.2 election has been made by the employer), those contributions would be considered additional emplover pension expense. Some employers may not be aware of the complex nuances of the IRC section 414.h.2 election and its effect on expense recognition and deferred outflows of resources. Auditors of employers are advised to determine whether the employer has made any employer-paid member contributions and, if so, whether the IRC section 414.h.2 election was made. In situations in which the employer-paid member contributions meet the criteria to be classified as pension expense (i.e., the IRC section 414.h.2 election was made by the employer): • Employer-paid member contributions made during the measurement period should be reflected in pension expense. • Employer-paid member contributions to the plan subsequent to the measurement date and before the employer year end should be reported by the employer as deferred outflows of resources in accordance with paragraphs 34 and 57 of GASB Statement No. 68. In contrast, employers that did not make the IRC section 414.h.2 election should report employer-paid member contributions to the plan during the employer's fiscal year as salary expense. Effect on Schedule of Pension Amounts for Cost-Sharing Employers As noted above, the IRC Section 414.h.2 election and its effect may not have been appropriately addressed by plans and employers. An additional implication is that the schedules prepared by cost-sharing plans to assist participating employer reporting as recommended in Appendix B of the SLG Guide (e.g., the schedule of pension amounts) could be affected. It should be noted that if the plan used the illustrative schedules included in the SLG Guide, those illustrations did not take into consideration scenarios in which there are employer-paid member contributions. In addition to the considerations for plan auditors described in the section above °��f�:ct or7 �'f:.;� 1=Gr��irn�� t�tE�-re�,t I�isal�y� �t C�ti�trinuEi��:s," auditors of cost-sharing plans are advised to consider whether there is any effect on the plan's schedule of pension amounts. If employers have made the IRC section 414.h.2 election or if the plan is unsure as to whether the election has been made by participating employers, the plan would be advised to revise the pension expense columnar headings in the schedule of pension amounts to be more descriptive of what is included in the pension expense column and the plan auditor would accordingly revise the apinion wording on the schedule to be more descriptive of the revised columnar heading. See the related discussion in tfiis article of the ��r+*��r.a_,� �� _ �rh� that has been developed to address this situation. ,. .i �._�l.tc�'Jl�!s5�:��.� . +';��;:'_. i . . _ . _':1 Copyright O 2015 by the American Institute of Certified Public Accountants, Inc., New York, New York. 6of12 Effect on the Calculation of Employer's Proportionate Share of Collective Pension Amounts for Cost-Sharing Employers While employer-paid member contributions have numerous accounting effects, such contributions made by cost-sharing employers would not affect the calculation of the employer's proportionate share of the collective pension amounts (i.e., net pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense). While GASB Statement No. 68 is not specific on this point, the SLGEP believes that employer-paid member contributions should not be considered in the calculation of the proportionate share of the collective pension amounts due to the potential for inappropriate cost-shifting among participating employers. This position is further supported by the Board's tentative conclusions reached in recent deliberations (insert hyperlink to minutes when posted). In other words, if the cost-sharing allocation calculation is made on a basis of employer contributions, employer-paid member contributions would be excluded. Moreover, in calculating the proportionate share of collective pension expense, the effect of all employer-paid member contributions would have to be subtracted in determining the total allocable pension expense. Individual employers that have made the IRC section 414.h.2 election would need to add the allocated pension expense with their employer specific amount for employer-paid member contributions in de#ermining total pension expense reported by the employer. �'e�itiona� ��ustrative �c�e�u�e o� �ension Amounts �y �`�y�r �or G�s#=Sl��r�n� ��ar�� The illustrative schedule of pension amounts by employer, which appears in Appendix B of Chapter 13 of the SLG Guide displays two parts of pension expense: 1. Proportionate share of pension expense. 2. Net recognition (amortization) of deferred amounts from change in proportion and differences between employer contributions and proportionate share of contributions. The previously issued illustrative schedule did not consider employer-paid member contributions. Additionally, it did not address pension expense related to specific liabilities of individual employers as described in paragraph 56 of GASB Statement No. 68. These specific liabilities result in pension expense specific to the individual employer; in other words, pension expense that is not allocable to all employers. The SLGEP is providing an updated illustrative schedule titled, Illustrative Schedule of Pension Amounts by Employer: Revised for Employer-Specific Situations, to incorporate appropriate changes for employer- paid member contributions and pension expense specific to individual employers. The main revisions made to the illustrative schedule include: • A new column added as a best practice to reflect pension expense related to specific liabilities of individual employers as reflected in the revised schedule. • Revisions fio the titles of column headings to be clear as to whether the pension expense being opined upon by the plan auditor includes or excludes the effect of employer-paid member contributions as follows: • Changed column header to read "Proportionate Share of „�� Pension Expense" to reflect the pension expense to which the proportionate share applies. � _ '�_'�=i+,.�':'�'�a�:'�, . ._ y . �:_ �1�,��3:'�� Copyright �O 2015 by the American Institute of Certified Public Accountants, Inc., New York, New York. 7of12 • Changed the pension expense header to read, "Pension Expense ExcOtrdirag Tt�at ��tri�utable t�� E�n,�l�y�a--P��t 11+i��?�a�r �rsntriDut%o�rs" to clarify that employer-paid member contributions that should be added to pension expense for the employer's purpose are not included in the schedule. A revised auditor's report on the schedule of pension amounts is also being provided to assist plan auditors in reporting on the schedule of pension amounts that have been presented using the revised illustrative schedule described above. . _ ._ . • �. � - .,�_. ,,:_ �.s� .�.s:,� �----. _ , > . ; . _ __. _. __ _-- ��_ __ �_.v��. _ �� .__ �: ._ ��;:� .,.��,_.. __,� Copyright �O 2015 by the American Institute of Certified Public Accountants, Inc., New York, New York. 8of12 - -- -- _ _ _ __ p � �_7 ,;- i __ _ __--- - -- _..__ ___ _ __ .. .__ _ __-, �d a-��..,,,�° � .,��s � ��m��z� a m m � `� o c o « o � o € a u �' � v _ m E ' a c u m a � u« 3 - a w� "a ai�+ c N � c N � E P. � ,' �. � . _ � n ,A G - � � � . � v a . � `' s ` - ' - - = v � n� y � a� i ' � � S c .� o ��^ °-� v m a v v v � �° � � N c�t„ y � c, � � fi, e� L� - c � e c � � � c c„' °- c �. c N C C L �� C� � .Y F. � s a m m J � 2` => a a�+ a+ �C O. 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Z� w m o m Z � v a o m �. "FF 5�v� =a �v° _„ v ,,, a ._ a� ,,, �n ._ . H � -vp c O Q � � ~ �� c o V � "- O t p C J N t � O C�� N �- _ ------ < " ° � o � �a s3 ° � o � �a >, .. �. > � .. . . � =�:�� , ,� _ �?�€��.�e.€�5�.�� ,s i.�. , 4 _ . .� � �E -_, �. . .. �11 �4 . . � L.'C:{Y 4. .-' . � . _ II .. I Employer auditors are reminded that unrestricted net position should not be disaggregated to present separate components on the face of the statement of net position. Upon adoption of GASB Statement No. 68, many governments will report a negative unrestricted net position based on the recognition of a relatively large net pension liability. Given the related effect on many governments' net position, there have been questions about whether a government may display a separate pension component of unrestricted net position (deficit) on the face of the financial statements. Because the unrestricted net position is a residual balance that results from the cumulative inflows and outflows since the inception of the organization, a deficit unrestricted net position cannot be attributed to any one individual liability or expense and thus, be reported in the aggregate. However, Q&A 7.23.10 of the GASB's Comprehensive Implementation Guide provides guidance that a government may disclose additional details of unrestricted net position in the notes to the financial statements or in MD&A. ' �i��a��c��n o� I�ension �►r�no�r�� fio i=unc�s �n� ,, w'h ifl�� s ;r�+�� . - m�� . ... Although net pension liabilities will not be recorded in governmental funds, employer auditors are reminded that pension amounts should be allocated to proprietary and fiduciary funds based on the amounts that the funds are expected to pay, either directly or indirectly (e.g., through a fringe rate reimbursement), in future periods. The guidance on this issue resides in paragraph 42 of National Council on Governmental Accounting (NCGA) Statement 1, Governmental Accounting and Financial Reporting Principles, as amended, which requires that long-term liabilities that are "directly related to, and expected to be paid from" those funds be reported in the statement of net position or statement of fiduciary net position, respectively. Note that NCGA Statement 1 is considered in the GASB's hierarchy of generally accepted accounting principles (GAAP) as Category A level GAAP and thus must by applied by the government. With regard to departments, paragraph 15.91 of the SLG Guide states, "although GASB standards do not address the accounting and financial reporting for separately issued GAAP-based departmental financial statements, in meeting their reporting obligations, auditors should consider long-established practice dictating that those presentations should apply all relevant GAAP." Therefore, NCGA Statement 1 would be relevant to departments with separately issued financial statements as well. In terms of how the allocations to funds or departments would be made, governments generally use the allocation methodology for employers participating in cost-sharing plans as further discussed in chapter 13 of the SLG Guide (see Part I II of the chapter titled, Employer Accounting, Financial Reporting, and Auditing Considerations: Cost-Sharing Employers). This allocation will also likely result in the employer recognizing additional deferred outflows of resources or deferred inflows of resources related to changes in proportion from year to year. -, •�.ti�ilf��i -- � 1 --ce��St��+i'��'^i:^•'�F��lS;':i� `4'•��ti• r.�r,�� + _ , _ , � :: � , ��u; w-,. - �_ r�" _ , -. ' " . ta— V!R . _ , -�i ,� ��,N' � � �l!!:. Copyright O 2015 by the American Institute of Certified Public Accountants, Inc., New York, New York. { 1 � y � i � %� `:�, ii _� ;� � � � y F � � �`_ �`� �' A � '�S� Ik �4 '°` "� .� '� �,?'4 �'�`w � t � ! � �r+ �+ �y #' p .'ro, rT .-� a In situations where a primary government allocates pension amounts to components (funds, departments, or component units) that issue separate financial statements that are audited by other auditors, component auditors are advised that additional audit evidence may be needed to support the allocations. The following discussion addresses when component auditors may require additionak audit evidence from the primary government on the allocated amounts based on the type of plan involved. Cost-Sharing Employers As noted in Appendix B to the SLG Guide, cost-sharing employers receive an audited schedule of employer allocations and schedule of pension amounts. These audited schedules, at the overall employer (primary government) level, provide components receiving an intra-entity allocation with sufficient appropriate evidence on the basis to apply relevant allocation percentages. However, an audited schedule of intra- entity allocations may be needed for separately issued financial statements of components audited by other auditors depending on whether the allocation basis used by the plan for the schedule of employer allocations (e.g., actual contributions) is the same or different from that used for the intra-entity allocation. If the allocation basis is the same, component auditors would likely not need additional assurance from the auditor of the primary government on the intra-entity allocations. This is because the allocation to the employer (primary government) provided in the plan's schedule of employer allocations becomes the denominator for the intra-entity calculation. Component auditors could then test the numerator of the allocation based on the books and records of each component. If the allocation basis is different, component auditors would likely need additional assurance (i.e., an opinion) from the auditor of the primary government on the intra-entity allocations. In this circumstance, it is recommended that the primary government prepare a schedule of intra-entity allocations and engage its auditor to obtain reasonable assurance and report on the schedule of intra-entity allocations for use by components and component auditors. Single Employers and Agent Employers There are different considerations for employers participating in single-employer and agent multiple- employer defined benefit pension plans. The need for an audited schedule of intra-entity allocations in these situations hinges on whether any of the components receiving an allocation of pension amounts are audited by other auditors. If other auditors are not involved in comaonent audits, additional assurance from the auditor of the primary government on the intra-entity allocations would not be necessary as the auditor of the primary government is the auditor of the financial reporting entity and would have access to the books and records of the components suitable for testing the various allocations. If other auditors are involved in component audits, component auditors would likely need additional assurance (i.e., an opinion) from the auditor of the primary government on the intra-entity allocations and on the pension amounts to which #he allocation is applied. Thus, it is recommended the primary government prepare a schedule of intra-entity allocations and engage its auditor to .. . . ., . ' . . . ' �I f r �� y s� �W 3 . � ..v ..',.....,.� .: �::..�...� s':�c:��"� .s.:::.+a� w�:w ,rr•�. .�:._.; . , .- -..-�'.'. _�_ _�'.'��^�_t..... . - .'�':�4 . �P i ..'7'-;t��,',�.�L'��'� , ,�.,. � Copyright O 2015 by the American Institute of Certified Public Accountants, Inc., New York, New York. 11 of 12 obtain reasonable assurance and report on the schedule of intra-entity allocations. It is also recommended that either the primary government or plan prepare a schedule of pension amounts and engage the respective auditor (i.e., the auditor of the primary government or plan) to obtain reasonable assurance and report on total net pension liability, total deferred outFlows of resources, total deferred inflows of resources, and total pension expense for the sum of all participating components included in this schedule. Without such audit evidence, it is unlikely that component auditors will be able to accumulate sufficient appropriate audit evidence necessary to provide an unmodified opinion on the separately issued financial statements of components that have material allocated pension amounts. . _s.� .� _-...., , ��:�:�r.E. . j � y � y � _ .�''�'�C.� .. ._'a`.'.'uT ` 15:�4�: ' 74' . , .. - .. . . , .,. � t ��$;1��.�,C'�'C; Copyright �O 2015 by the American Institute of Certified Public Accountants, Inc., New York, New York. 12 of 12 �.,, . _ • �„,. � u n � n e ws a newsletter for Rhode Island municipalities ... � �h` '__ . .. . _ _ . . .. . . . ... . . . .. _ .-_ — ...> e�rrs r� X .. . ... - _ _�'s_...:.. _—_ ....... ..,.._ .. ,;. _.._.--, ,.. „�'��.N S.. ._ ._�� ..... _ _ __ j__� - i.l�.i µ �ri'Mr u �... .... �'� �. . . � ,�,,� � � Issued jointly by the: �pt'►12014 � ,,��--.- �. + �r�'1§�°{Jr"1 �3i' �db@l6PYt;t�Jc7{ �` , :.+E:i;:+�aa"�'t5"r¢ �°i: +�i �eE?Vf;i7t,de; • Office of the Audi#or General Planning for GASB's New Pension ��" ?pTa ��f��ra! r��rf�� - Accounting Standards If the municipality only participates in the state-administered ERS (teachers) or MERS plans and does not have a locally- Two accounting pronouncements issued by the Governmental administered defined benefit plan there will be no impact due to Accounting Standards Board (GASB) - Statements No. 67 and 68 the new standards on a municipality's fiscal 2014 financial - will have a significant impact on govemment financial statements statements. However, significant financial reporting changes will beginning in fiscal 2014. For separately issued plan financial occur in fiscal 2015 as described below. statements and municipalities with locally administered pension plans, changes will be required in 2014. In fiscal 2015, all If the municipality has a locally-administered pension plan(s), govemment employers participating in a defined benefit pension which is included as a pension trust fund within the financial plan will be required to make changes in their financiaf reporting. statements, new note disclosures and required supplementary information (RSI) are required to be included within the financial The following is a brief summary of: statements for fiscal 2014. This information needs to be provided by the plan's actuary. Advance planning with the actuary to ■ the likely impact on fiscal 2014 and 2015 financiat reporting ensure this new data is available to meet the fiscal 2014 financial depending upon which defined benefit pension plans (ERS, reportinglaudit timeline is critical. GASB has outlined MERS, or locally-administered plans) cover a municipality's employees; requirements regarding when the actuarial data must be measured. For locally-administered plans, a municipality and its ■ ongoing planning activities at the State level to assist actuary need to coordinate the measurement dates, any required employers that participate in the state-administered ERS and changes in actuarial MERS plans to implement the new standards; assumptions, and the timing Mu€ti-news is a new joinf of data provided to and from �ffort between the Department ■ recommended planning activities if the municipality of Revenue and the Office of the administers its own pension plan (a locally-administered �e actuary. GASB requires pension plan); and that decisions regarding Auditor 6eneral to communicate measurement dates be matters of interest to ■ resources available to help with the implementation of these consistently observed in municipal'►f►es. This frrst new pension accounting standards and explain the impact of future periods. This requires newsletter, prepared by the these standards on the financial reporting of govemments to advance planning to ensure OAG, highl'rghts recommended elected officials and citizens. the new actuarial schedule is p�anning considerations for the 6nancial reporting impact of the workable and can be new GASB pension accounting �� rY �� $ adhered to going forward. standards. Statement No. 67 — Financial Reporting for Pension Plans (an When a municipaliry has a amendment of GASB Statement No. 25) — effective for fiscal 2014 locally-administered plan, the fiscal 2014 financial reporting impact financial statements — generally impacts separately issued plan is limited to the inclusion of new note disclosures and RSI. financial statements and governments that include a locally- Further financial reporting changes occur in fiscal 2015. administered pension plan as a pension trust fund within its , financial statements. ' '` �° �� `� `�� `�� '�" ��`� � Statement No. 68 — Accounting and Financial Reporting for For all govemment employers with employees participating in a Pensions (an amendment of �ASB Statement No. 27} — effective defined benefit plan, the net pension liability will be recorded on for fiscal 2015 financial statements — applicable to the financial the govemment-wide financial statements at June 30, 2015. The statements of any govemmental employer contributing to a net pension liability will be calculated in accordance with the new defined benefit pension plan for its employees. GASB requirements and reflects the market or fair value of assets accumulated as of the measurement date. Under current accounting standards, a liability was recorded on the financial statements only when a government contributed less than the 1� Muni-news • Apri12014 _ __ _ _ _ ---_ _ annual required contribution. The recording of the new net actuary and auditor to ensure all the necessary information will be pension liability (for all defined benefit pension plans) will likely be avai�able for inclusion in their financial statements. a material liability on a government's financial statements. The significant changes in financial reporting and actuarial Annual pension expense is generally the change in the net information provided for pension plans should be discussed in pension liability between years — this amount is different from the advance with elected officials and those charged with governance. previous recognition of annuai pension cost based on the annual required contribution. Certain actuarial gains and losses are Additional training opportunities are planned to assist Rhode deferred and amortized over a defined period as outlined in the Island municipalities in meeting the new pension accounting standard rather than recognized immediately. The governmental standards. These future training events will include detail about the nature and timing of information for the state-administered fund level financial statements will still include contribution or ERS and MERS plans. funding based amounts as expenditures as opposed to the new pension expense amounts described above. �� „� _;� ;� K, � �;, �, , ; . For employers who participate in multiple plans (e.g., a GASB has good implementation guidance on its website at combination of state-administered and locally-administered plans) ,��;, Qr� . Copies of the statements, implementation guides in a — the net pension liability and pension expense recorded on the Qg,q format, podcasts, and other related guidance materials are government-wide financial statements will be a composite of all available at no cost. Links to guidance materials: the defined benefit plans. For a cost-sharing plan, such as ERS which includes teachers, the municipality will recognize their . About the new standards proportionate share of the ERS plan's net pension liability and pension expense. 7itp /Iwwua qasv orc��sprGA�F%r'�:GA�SESectionPa!ae&c�d= i 1?5163528972 For employers participating in the state-administered ERS and • Implementation toolkit MERS plans, the data needed to meet the new net pension "�Pr,;:,','we�,�n� 4as� 6' "r.',�52 %9�� liability, pension expense, and note disclosure requirements will be provided by the Employees' Retirement System of Rhode The Government Finance Officers Association (GFOA) has the Island (ERSRI) and the Office of the Auditor General (OAG). following document available for purchase: ERSRI's actuary will calculate and provide the new GASB required information including each participating employer's An Elected Official's Guide: The New Pension AccountinQ proportionate amounts. ERSRI's actuary will also provide the new nttp!lafoa.orq;downloads/GF0A2013E0GNewPensionAccountinq.pdf information for each participating employer in the MERS plan (an agent plan). The OAG will audit and opine on the data provided by ERSRPs actuary. This will allow the auditor of a municipality's financial statements to rely on the audited data provided by ,: This newsletter is intended to provide municipal ERSRI with only minimal tests of the data. officials and other�interested paRies with general information on matters of irrterest to municipalities. It is neither designed nor intended to address Planning between ERSRI, ERSRI's actuary, and the OAG is �mplex issues in detail. Accordingly, guidance provided in this newsletter cannot replace specific guidance provided to a municipality. underway to coordinate specific responsibilities and the timeline to ensure that employers participating in plans administered by This newsletter will typically be published quarterly. ERSRI have GASB compliant, audited data available to meet their �nquiries about matters included in the newsletter can be directed to: financial reporting needs for fiscal 2015. Division of Municipal Finance, Department of Revenue For locally-administered plans, the data needed for fiscal 2015 One Capitol Hill financial reporting will again largely be provided by the plan's Providence, RI, 02908 actuary. Planning decisions made to meet the fiscal 2014 te1.401.574.9900 emaii: Susanne.Greschner@dor.ri.gov> financial reporting considerations for a municipality with a locally- web: .a,��e� r,,unid�}air_i>>�r,c�� administered plan should facilitate obtaining the information needed to record the net pension liability and pension expense. �ffice of the Auditor General 86 Weybosset Street Providence, RI 02903 4 ' � te1.401.222.2435 email: a c�c�� ri y_ov Due to the complexity of these new pension accounting standards, web: oa�.ri.qov municipalities should immediately begin planning with their 2� ; i.�,��Fi�� :.� Understanding New Public Pension Funding Guidelines and Calculations ,.,. � ... The importance of properly financing state and local government retirement systems has never been greater. Sound pension funding policies not only help ensure costs and benefits remain sustainable, but ��i also strengthen the financial position and credit rating of the sponsoring governments. rniii ��.�.. �.., State and local governments soon will need to distinguish several separate pension calculations that will be derived in different manners far distinct purposes: • Books - computing an annual position regarding pensions for frnancial statements • Bonds - calculating how pension obligations affectagovernment's creditworthiness �� • Budgets - determining the appropriate annual contribution to the retirementsystem forsound funding : ar ��' "' The Governmental Accounting Standards Board (GASB) has released new standards for how governments should report pensions on their books or income statements. Some credit ratings agencies have announced that they will make new adjustments to governmental pension data for bond ratings. However, none of these computations is intended to determine the appropriate annual pension �j .. �.,, °� contribution a government should appropriate to ensure sound funding. 1... -.._ .�. , ;�_,, ,_ To guide lawmakers in reviewing the effectiveness of existing funding policies and practices, national organizations representing the nation's governors, state legislatures, state and local officials, and public finance professionals jointly formed a Pension Funding Task Force and released i�cr��inr�a�_r��r?c�`ir�c�;.�i NATIONAL / aic1�`i�I;'l� r>r� C�1a� rtrls. LEAGUE � � CIT1E5 '�i� These guidelmes urge policymakers to ensure pension contributions are actuarially determined within sound parameters. Doing so ensures that pension promises can be paid, employer costs can be managed, and the policy to finance pensions is clear to all stakeholders. .; 4�1A\'�F �,t' � q� � ' 1. �' 1 �• 1 : 1 1 : 1 1 1 1 J r y . . � ,� rj �� ' � ,�'' Books Bonds Budgets �`�+c . 4 � - - - _-------- _ - — - - ------ -- -- -- � Stress testing the degree Standardized financial to which pension i Determining an annual pension Purpose reporting of pensions for obligations may affect a contribution to properly fund benefits ' CM� accounting government's ability to tedders dt fht CMe ol Battt� Lonxnonitils repay bonded debt Primary Users of government Ratings analysts State/local policymakers c��TER FoR STATE $ audience financial statements .,. L��C�ALGOVERNMENT _s..._.__.�,-'..�._.__Y__ �_�e_�,-�_�_._-_-,..� E"`"_`E"cE Accounting standards set 5ource of by the Governmental Practices established by State/local statutory, administrative i � 59 � C'•, �� calculation Accounting Standards � g��dual credit rating and procedural rules p;/„NA=ACT ; Board(GASB) a encies � � � _�.�- __ _____---_ -� ----� '' � � Pensions are accounted for �'\\ ,a�' °°��,�,,,..� through the computation Most governments make actuarially of a Net Pension Liability, Varies by rating agency, determined contributions, calculated Methodology i.e., the difference between as pensions are just one within established parameters as a level the market value of of many metrics used to percentage of payroll to fully fund pension fund assets and determine a bond rating benefits earned each year and to benefit obligations as of a amortize unfunded liabilities � specific date The Net Pension Liability is Some ratings agencies r a new figure that will be have announced that in New GASB standards wili no longer placed on basic their credit analytics, include parameters for calcularing an government financial they will adjust pension annual reyuired contribution. Although WhaYs statements and is expected data using uniform, this does not necessitate a change to changing to create unprecedented generally more existing funding policies or statutes, = volatility and, in some conservarive governments are urged to follow -�- cases, could dwarf other assumptions regarding recommended guidelines established by items on the financial amortization periods the Pension Funding Task Force statement and investment returns NASRA "��•.�,Gc>vf iii�ok� ,,.. For More Information , �II�■ �`l.�flC�hA-. L.A�NFt.AfYl.l IIIIII �vl ti1.11! zL;.1::F.�::l�:f� ". `"..' `". ,"-" . ;", National Governors Association Barry Anderson • (202) 624 • bandersonC�nga.eov �� National Conference of State Legislatures r�,,. ;_<;:.;;:,.;,:;r��ar.n,<T�:��,�,,. �•; Sheri Steisel •(202) 624-8693 • sheri.steisel@ncsl.org <,�,,.��,.,�� :_,c;�„� F �:,:, Jeff Hurley • (202) 624-7753 • jeff.hurley@ncsl.org The Council of State Governments NAI'�� Chris Whatley •(202) 624-5460 • cwhatley@csg.org ��.�,�..�,:� , National Association of Counties NATIONAL Michael Belarmino •(202) 942 • mbelarmino@naco.org LEAGUE I �rCITIES � National League of Cities Neil Bomberg • (202) 626 • bombergCa�nlc.org �� `�. The U.S. Canference of Mayors �`�+ Larry ]ones •(202) 202-861-6709 • ljones@usma ov rs.org �;:..� i �z .�' i International City/County Management Association I Joshua Franzel •(202) 682-6104 • ifranzel@icma.org I �CMn Center for State and Local Government Excellence ��doe�5�rrh�c�are�Kc«�,�� Elizabeth Kellar •(202) 962 • ekellar@slge.org National Association of State Auditors, Comptrollers and Treasurers ? CENTER FOit STATE Bt ;: �o�A� co��NNMENT Cornelia Chebinou •(202) 624-5451 • cchebinouC�nasact.org ��"��. E�xCEILENCE Government Finance Officers Association ' S90�4T�p ; � zo �i � � Barrie Tabin Berger •(202) 393-8020 • btberger@gfoa.org $�;�,,'''�' �.� National Council on Teacher Retirement '"�F�«�' Leigh Snell • [540) 333-1015 • lsnell@nctr.or� National Association of State Retirement Administrators � Jeannine Markoe Raymond •(202) 624-1417 • jeannineC�nasra.org � ♦; �' : June 2013 � � �tASRA