Copyright © 2013 GRS – All rights reserved.

The Devil’s in the Details

(GASB 67 & 68)

Presented By:

James J. RizzoPiotr Krekora

Gabriel, Roeder, Smith & CompanyJim.Rizzo@gabrielroeder.com

Piotr.Krekora@gabrielroeder.com

Florida Government Finance Officers Association

Nature Coast Chapter

Citrus Hills Golf & Country ClubApril 16, 2014

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Who is this Guy?

“The budget should be balanced, the treasury should be refilled, the public debt should be reduced and the arrogance of public officials should be controlled.”

“If you see a snake, just kill it - don't appoint a committee on snakes.” “The devil is in the details.”

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Get Ready for GASB 67 and 68 !!!

No more procrastinating !

Think ahead !

Get your tools in place !

He who hesitates is __________ !

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Lions and tigers and bears! Oh my!

Throw away everything you knew about Pension Accounting!

Nothing is the same.

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Accountants in GASB-land!

“It would seem so nice if something would make sense for a change.”

“Speak English! I don’t know the meaning of half those long words, and I don’t believe you do either!” “There is a place like no other place on earth. A land of wonder, mystery and danger! Some say to survive it you have to be as mad as a hatter, which luckily I am.”

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Agenda

Effective Dates Scope High-level View Timing and Linkage Puzzles Pension Expense Deferred Outflows and Inflows of Resources GASB Note Disclosures Nudges Cost-sharing Employers

We will not be able to cover everything. No surprise there! But we’ll leave some Q&A time.

Effective Dates

GASB Statement No. 67 is effective for fiscal years beginning after June 15, 2013 (mostly for 2014 year-ends)

GASB Statement No. 68 is effective for fiscal years beginning after June 15, 2014 (mostly for 2015 year-ends)

Myth:

►Plans’ financial statements (FS) implement for their 2014 year-end

►Employers’ financial statements (FS) implementfor their 2015 year end

Effective Dates – This May Surprise You

If plan issues a stand-alone GAAP-basis financial statement (FS):► GASB 67 will be implemented in the plan’s 2014 FS

► But if an employer’s GAAP-basis 2014 FS presents the plan as a fiduciary fund, then include any GASB 67 disclosures “essential to a fair presentation”, along with its GASB 27 compliance

If plan does not issue a stand-alone GAAP-basis FS:► And if an employer’s GAAP-basis 2014 FS presents the

plan as a fiduciary fund, then include all GASB 67 disclosures along with its GASB 27 compliance

Paragraph 5, Footnote 9 and 11 of GASB 67, Q&A 2 of GASB 67 IG, and GASB 14

Scope

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Counties, Cities, School Districts, Tax Districts, etc.► Employees in FRS, in one or more single employer

plans, in both► In Special Funding Situations (contributions for pension

benefits of non-employees) Component Units

► Some issue their own GAAP-basis FS.► Some might not.► If they do and if they have employees participating in

pension plans, their FS will need to include GASB 68 recognition and disclosures.

County Constitutional Offices► Do not, generally, issue GAAP-basis FS; i.e., no long-

term liabilities, etc.

Scope

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Defined benefit pension plans► Massive changes from GASB 27

Defined contribution plans► Very little change from GASB 27

Cost-sharing plans► FRS► Other plans that cover a couple separate employers

Single employer plans► Local plans for police, fire and general employees

OPEB► Not yet - scheduled for FYE 2018

High-level View

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The Net Pension Liability (NPL) is the new, different, much larger and volatile balance sheet liability – it is the entire Unfunded Actuarial Accrued Liability

NPL = Total Pension Liability (TPL) minus

Plan’s Fiduciary Net Position (PFNP) (aka fair value of plan assets)

TPL is calculated using only one actuarial cost method, to achieve better comparability

High-level View

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Total Pension Liability (TPL) = Actuarial Accrued Liability (AAL)

determined under the traditional Entry Age normal (EA) actuarial cost method

Not the so-called Ultimate EA cost method Not the Frozen Entry Age or Frozen Initial

Liability cost method Not the Aggregate cost method Not the Projected Unit Credit cost method

High-level View

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Pension Expense (PE) is “based on” the change in the NPL from one year to the next

There are many reasons for the NPL changing from one year to the next

There are many different components of the change in NPL from one year to the next; and different components are treated differently

High-level View

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NPL = TPL minus PFNP

The total change in NPL is separated into:

► Changes in the TPL from one year to the next and

► Changes in the PFNP from one year to the next

High-level View

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Liabilities:► Net Pension Liability (NPL),► Short-term payables for legally or contractually

required contributions, and► Long-term liabilities for pension-related debt

Deferred outflows of resources (appears below assets):► Unrecognized portions of expense charges

Deferred inflows of resources (appears below liabilities):► Unrecognized portions of expense credits

Timing and Linkage Puzzles

• Dates to consider:• Valuation Date Measurement Date Reporting

Date

• Periods to consider:• Valuation Year Measurement Period Reporting

Period

• Reporting entities to consider:• Plan’s FS reporting Employer’s(s’) FS

reporting

Timing and Linkage Puzzles

• Three Dates and three Periods for at least two Reporting entities all need to be linked together in a manner that:• Cooperates with (or dictates) the needs and deadlines

of the plan’s FS preparers and auditors

• Cooperates with (or dictates) the needs and deadlines of the employer’s FS preparers and auditors

• Coordinates with (or dictates) the needs and deadlines of the actuaries

• If not yet worked out for each plan, it may need to be one of the first things to get settled with actuaries, preparers and auditors for efficient project management.

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Plan Reporting Timing and Linkage

RD1Timing/Linkage A(No Roll-forward)

VD1

AAL1 RD1Timing/Linkage B(With Roll-forward)

Downside: Big timing challenges for doing all funding and accounting calculations

Roll-forward

Upside: Obtain a preliminary TPL early

9/30/149/30/13Upside: More current TPL calc’d, all at once

Downside: Update AAL for actual benefits and significant changes

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Plan Reporting (1st Year Only)To obtain a TPL for BOY

RD1Timing/Linkage A(No Roll-forward)

VD1

AAL1= TPL0 RD1Timing/Linkage B(With Roll-forward)

Roll-forward

9/30/149/30/13

Roll-back

TPL0 (after rolling back) is the TPL for

BOYin the RSI Schedule

(Q&A 99 GASB 67)

AAL0=TPL0

TPL0 (before rolling forward) is the TPL for

BOYin the RSI Schedule

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Plan Reporting (2nd Year)

RD1Timing/Linkage A(No Roll-forward)

VD1

AAL1= TPL0 RD1Timing/Linkage B(With Roll-forward)

Roll-forward

9/30/149/30/13

RD2

MD2

TPL2

Roll-forward

RD2

MD2

TPL2

VD2 (AAL2=TPL2)

VD2

AAL2

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Employer CAFR Timing and Linkage

VD1

AAL1 Plan’s RD1Timing/Linkage B(With Roll-forward)

Roll-forward

9/30/1410/1/13

Now for the NPL on the Employer’s balance sheet

Recall the timing and linkage for the Plan’s FS

TPL1-PFNP1=NPL1

9/30/15

Employer’s RD1

Employer’s Balance Sheet

NPL1

No Roll-forward (same $)

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Employer CAFR Timing and Linkage

NPL0Timing/Linkage

9/30/1410/1/13

Now what about the employer’s pension expense?

Recall, it’s based on the changebetween two NPLs

9/30/15

Employer’s RD1

Employer’s Pension Expense(During Reporting Periods)

No Roll-forward (same $)

Change in NPL(During Measurement Period)

Change in NPL from 9/30/13’s NPL to the9/30/14’s NPL (their MDs) forms the basis for the employer’s CAFR pension expense for ye 9/30/15 RD

DETERMINES

Pension Expense

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Recall the change in NPL drives the pension expense► Under GASB 27, the pension expense (the ARC and

APC) was determined first and drove the balance sheet liability (the NPO)

► Under GASB 68, the balance sheet liability (NPL) comes first and drives the pension expense (PE)

There is much focus on the change in NPL from period to period► That change forms the basis for the employer’s pension

expense ► That change in presented in a schedule in the Notes

and RSI

Pension Expense

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Immediate recognition in PE of all types of changes in the NPL except:

Type change in NPL recognized over time

Straight line* recognition period

Differences between expected and actual experience (aka actuarial liability gain/loss)

Average remaining service life of active and inactive members

Change of assumptions

Average remaining service life of active and inactive members

Difference between projected and actual earnings on investments 5 years

* Other methods are permitted, but straight-line amortization of principal is expected to be the rule rather than the exception; delayed recognition will result in layered amortization bases.

Deferred Outflows and Inflows

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The portion of NPL changes that are not yet recognized in pension expense are set up and added to:► A deferred outflows of resources account (DOR) or► A deferred inflows of resources account (DIR)

DOR/DIR accounts are established (or added to) whenever any one or more of these three types of changes in NPL occur

Deferred Outflows and Inflows

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Each year► DOR amounts (if any) will be recycled out and charged

to pension expense► DIR amounts (if any) will be recycled out and credited

to pension expense

DOR/DIR-related pension expense charges and credits come from either:► The portion of a current year’s NPL change that is

recognized in the first year► A portion of previous years’ NPL changes that had not

yet been fully recognized

GASB Note Disclosure Nudges

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There are disclosure requirements that some consider nudges, but here are my four:

Nudge 1: Dates of experience studies for significant assumptions

Nudge 2: Price inflation assumption

Nudge 3: Long-term expected rate of return assumption► And a description of how it was determined,► Including significant methods and assumptions used

GASB Note Disclosure Nudges

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Nudge 4: For each major asset class:

► The asset allocation and the expected real rate of return (before price inflation) net of investment expenses and whether they are arithmetic or geometric expectations.

► Geometric version is more appropriate for pensions and is approximately 50 bps to 150 bps less than arithmetic

GASB Note Disclosure Nudges

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Nudge 4 Table:

Users will check out your LTeROR against your table► They’ll multiply the two columns together and get 4.98%► They’ll add your price inflation of 2.4% back in and get

7.38%► Should be lower for geometric expected means

Asset Class Asset Allocation

Net Real Expected Return

(Arithmetic)

Domestic Stocks 31% 5.75%

Foreign Stocks 19% 6.15%

Private Equity 22% 5.85%

Real Estate 7% 4.35%

Foreign Bonds 9% 2.75%

Domestic Bonds 12% 1.55%

Cost-sharing Employers

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Employers with employees in FRS pension program

Employers that contribute to a pension plan that covers employees of more than one employer

FRS’s total collective PE, NPL, DOR and DIR will need to be allocated to each participating employer (and their component units) based on the participating entity’s proportionate share of either:► Actual contributions, or► Long-term contribution effort (e.g., actuarial present

value of future contributions)

Cost-sharing Employers

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Additional entries will need to be made by the employer for contributions made after the measurement date

Hopefully, FRS will provide you with a package each year► Containing all you need to make all your required

entries and note disclosures► In time for you to prepare your annual CAFR and audit► But don’t hold your breath

Cost-sharing Employers

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Timing may be an issue for counties and any other participating employers with a September 30 year end

Here’s why: Consider the 9/30/15 implementation year► Per GASB 68, measurement date (assets and liabilities)

must be anywhere from 9/30/14 through 9/30/15► FRS currently values assets and liabilities each 6/30► Using a measurement date of 6/30/14 will be too early► Using a measurement date of 6/30/15,

• All their work and package to employers will not likely be completed by 9/30/15

• And may not be completed in time for employers to prepare their CAFR and audit by the due date

► They might consider a second measurement date, but expensive

Cost-sharing Employers

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Audits may be an issue for all participating employers► Local auditor education► AICPA’s recent White Paper relating to Information for

Employer Reporting• http://www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Re

sources/gasbmatters/DownloadableDocuments/AICPASLGEP_CS_ER_Reporting_Whitepaper.pdf

► AICPA’s recent White Paper relating to Plan Reporting and Testing Census Data

• http://www.aicpa.org/interestareas/governmentalauditquality/resources/gasbmatters/downloadabledocuments/aicpaslgep_cs_census_data_whitepaper.pdf

► AICPA will soon release four auditing interpretations

Cost-sharing Employers

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FRS’s auditor may need to express an opinion on a schedule prepared by FRS as of the measurement date showing employer proportionate share allocations of the collective PE, NPL, DOR and DIR

Testing the census data of participating employers will be an issue► For the FRS auditor► And possibly for the participating employer’s auditor

Cost-sharing Employers

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For more information view KPMG archived webcast on this subject: http://www.kpmginstitutes.com/government-institute/events/critical-issues-in-implementing-gasb-pension-standards.aspx

A few weeks ago, the GASB considered and deliberated whether to delay the effective date of GASB 68 due to requests from major preparer and auditor organizations and from others

The GASB decided not to delay the effective date.

Single Employer Plans

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These audit issue may come into play on a smaller scale, but problematic nonetheless, for single employer plans for which:► One auditor opines on the plan’s standalone financial

statement► Another auditor opines on the single employer’s

financial statement

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Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related matter addressed within. Each taxpayer should seek advice based on the individual’s circumstances from an independent tax advisor.

This presentation shall not be construed to provide tax advice, legal advice or investment advice.

Readers are cautioned to examine original source materials and to consult with subject matter experts before making decisions related to the subject matter of this presentation.

This presentation does not necessarily express the views of conference sponsor, nor Gabriel, Roeder, Smith & Company, and may not even express the views of the speaker.

Disclaimers

Acknowledgement

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Thank you to David Kausch and Paul Zorn who checked and peer reviewed parts of this

presentation.

Questions

and

Answers ?

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