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The Unique Alternative to the Big Four®

Audit | Tax | Advisory | Risk | Performance © 2014 Crowe Horwath LLP

Overview of GASB 67 and 68Community College Internal AuditorsMay 7, 2015Crowe Horwath LLPJeff Jensen, Partner


Audit | Tax | Advisory | Risk | Performance © 2014 Crowe Horwath LLP 2

Implementation Dates

When will the changes be reflected?

For a Pension Plan: The standards will be implemented beginning with the June 30, 2014 year end and going forward. (September 30, 2014, November 30, 2014, December 31, 2014 and so on)

For an Employer: The standards will be implemented beginning with the June 30, 2015 year end and going forward.

Not an optional standard.



Why are there new standards?

Improve the accounting and financial reporting of public employee pension plans for state and local governments.

Increase the transparency and comparability of these plans for the users of the financial statements, as the financial statements relate to pension information.

Does not affect the “cash” in and out. This relates to the accounting and financial reporting treatment only. This does not change plan funding or how much is contributed to the plan.

Net pension liabilities will be reported on the government’s statement of net position.



Changes to the Liability

New Terminology: Net Pension LiabilityOld Terminology: Net Pension Obligation

Primary Change – Accounting for pensions will no longer be based on the funding process. The net pension liability amount is the difference between the total pension liability and the assets set aside to pay for the benefits.

Other changes to provide consistency across plans: only one actuarial cost method now allowed, automatic COLA’s must be included, rules around discount rate were tightened



GASB 67/68 Applicability

State and local government pension plans administered through a trust or equivalent arrangement: Employer/non-employer contributions irrevocable Plan assets dedicated to providing pension benefits Plan assets legally protected from creditors

Defined benefit plans Single employer Agent multiple employer Cost sharing multiple employer

Defined contribution plans



Liabilities

Total Pension Liability (TPL)– Pension Plan’s Fiduciary Net Position

Net Pension Liability (NPL)

TPL – Actuarial present value of projected benefit payments Single/agent employers recognize 100% of NPL Cost-sharing employers recognize proportionate shares of collective NPL



Statement changes

Larger liability will be recorded on the government-wide statements and/or enterprise fund statements

Unrestricted Net Position may go negative

THIS DOES NOT CHANGE GENERAL FUND ACCOUNTING. The amount that is recorded in this fund will still be the actual paid contribution

expense.

Enterprise Funds may also be impacted with a liability being recorded

What is the amount?



The World Isn’t Ending

GASB is not establishing requirements on how to fund pension liabilities.

Long-term perspective should be used for the liabilities.

Bond ratings, in most cases, won’t take a nosedive.

The plans are not changing.



NPL: Measurement – General

Three broad steps Project benefit payments Discount projected benefit payments to actuarial present

value Attribute actuarial present value to periods

Methods and assumptions Generally, assumptions in conformity with Actuarial

Standards of Practice Fewer alternatives than in Statement 27 for methods

and assumptions for GAAP reporting purposes



Valuation Date

Date as of which census data is collected and the initial Total Pension Liability (TPL) is measured

Performed by an actuary

Process may be driven by pension or employer, but ultimately is employer’s responsibility to ensure information is available for reporting

Valued as early as 24 months before pension year end and 30 months before employer’s year end

Actuarial valuations of TPL must be performed at least every two years



Timing and Frequency of Measurement of Total Pension Liability The measurement date used should be consistently applied from period to

period As of date no earlier than end of prior fiscal year Measurement date will most likely correspond to year-end of plan. In this case,

employers with same year-end as plan should choose measurement date as of their prior or current year-end Both components (TPL/plan net position) as of the same date

Measurement of the total pension liability is determined 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 year-end 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

Actuarial valuation of total pension liability should be performed at least biennially



Impact of Measurement Date

6/30/13 12/31/13 6/30/14 12/31/14 6/30/15

Plan FYEEmployer FYE

Measurement Date

Pension Expense(Measurement Period)

Deferred Outflows

of Resources



Impact of Using Prior Year Measurement Date

6/30/13 6/30/14

6/30/14 6/30/15


Measurement Date


Deferred Outflows of Resources



Impact of Using Current Year Measurement Date

6/30/13

6/30/14

6/30/14

6/30/15

6/30/15


Measurement Date




Reporting Date

For pension plan reports (67), end of plan year For employers (68), end of fiscal year Reporting date for plans can be different In year of implementation, will need the NPL for the beginning of the fiscal year

as well



Different Type of Liabilities

Pension liability is not the same as accounts payable or payment of vacation time. Accounts payable are bills that are expected to be paid within 30 days. Bond payments are scheduled out and usually have a very specific funding source Payroll – occurs on a regular schedule and are expected to be paid from current funds Sick/Vacation time – not funded in advanced as they are budgeted with payroll Pension – funded over the lifetime of an employee and has multiple variables

including: market fluctuations, changes in contracts, changes in contribution rates and changes in outside statutes/legislation.

Pension liabilities are meant to be funded over time following actuarially determined contributions. Issues arise when the actuarially determined contributions are not made.



Statement Example – Year 1

CityStatement of Net PositionDecember 31, 2015

Before AJEs AfterAssetsCash & Cash Equivalents 1,225,599$ 1,225,599$ Accounts Receivable 105,595 105,595 Capital Assets Being Depreciation, Net 1,556,644 1,556,644

Total Assets 2,887,838 2,887,838

LiabilitiesAccounts Payable 45,667 45,667 Long‐Term LiabilitiesBonds Payable 456,450 456,450 Net Pension Obligation 45,989 (45,989) ‐ Net Pension Liability ‐ 751,746 751,746

Total Liabilities 548,106 1,253,863

Deferred Inflows of ResourcesDifference Between Projected and Actual Earnings ‐ 36,924 36,924 Difference Between Expected and Actual Experience ‐ 35,042 35,042

Total Deferred Inflows of Resources ‐ 71,966

Net PositionNet Investment in Capital Assets 1,100,194 1,100,194 Unrestricted 1,239,538 (777,723) 461,815

Total Net Position 2,339,732$ 1,562,009$



Statement Example – Year 2CityStatement of Net PositionDecember 31, 2016

Before AJEs AfterAssetsCash & Cash Equivalents 1,225,599$ (45,555) 1,180,044$ Accounts Receivable 105,595 105,595 Capital Assets Being Depreciation, Net 1,556,644 1,556,644

Total Assets 2,887,838 2,842,283

Deferred Outflows of ResourcesDistrict Contributions Subsequent to Measurement Date ‐ 45,555 45,555 Difference Between Expected and Actual Experience ‐ 19,922 19,922

Total Deferred Outflows of Resources ‐ 65,477

LiabilitiesAccounts Payable 45,667 45,667 Long‐Term LiabilitiesBonds Payable 456,450 456,450 Net Pension Liability 751,746 12,474 764,220

Total Liabilities 1,253,863 1,266,337

Deferred Inflows of ResourcesDifference Between Projected and Actual Earnings 36,924 12,113 49,037 Difference Between Expected and Actual Experience 35,042 (2,503) 32,539

Total Deferred Inflows of Resources 71,966 81,576

Net PositionNet Investment in Capital Assets 1,100,194 1,100,194 Unrestricted 461,815 (2,162) 459,653

Total Net Position 1,562,009$ 1,559,847$



Plan Specific Items

Implementation of GASB 67/68 does not cause a change to the Statement of Fiduciary Net Position or the Statement of Changes in Fiduciary Net Position

Changes in footnotes, RSI and supplemental schedules



Special Funding Situation

Specifically identified in the GASB Standards

Definition – Certain governments are legally responsible for making contributions to a pension plan that is used to provide pension benefits to employees of another government.

The government that is legally responsible for making the contribution is the entity that recognizes in their financial statements the net pension liability.

The government with the employees earning the pension should record a revenue and expense/expenditure on the financial statements for the amount of the contribution.



Statement 67: Q & A

Q—If, at the end of a pension plan’s fiscal year, a contractually required contribution due from a cost-sharing employer for the last month of the year is unpaid, should the amount of the contribution be recognized as a receivable under the requirements of paragraph 16 of Statement 67? That is, is a contractually required contribution considered to be “due pursuant to legal requirements”?

A—Yes. The reference to legal requirements in paragraph 16 is intended to broadly describe circumstances in which the pension plan has a legally enforceable right to the resources that are due to it. Concepts Statement No. 4, Elements of Financial Statements, defines assets as “resources with present service capacity that the government presently controls.” One embodiment of control over the present service capacity of resources is a legally enforceable right to the resources. Contractual provisions or statutory requirements for employer contributions create a legally enforceable right of the pension plan to the resources due. Therefore, the plan should recognize a receivable for unpaid contractually required contributions at its fiscal year-end.



Statement 67: Q & A

Q—When a single-employer or cost-sharing multiple-employer pension plan has biennial actuarial valuations, does Statement 67 require an update in the intervening year for financial reporting purposes?

A—Yes. Statement 67 requires that information presented in notes and in schedules of RSI about the net pension liability for benefits provided through a single-employer or cost-sharing multiple-employer pension plan be measured as of the end of the pension plan’s fiscal year. That requirement can be met through the use of the results of an actuarial

valuation as of the plan’s fiscal year-end or through the use of update procedures to roll forward the results of an actuarial valuation performed as of a date no earlier than 24 months prior to the fiscal year-end of the pension plan.



Statement 68: Q & A

Q—What guidance does Statement 68 provide regarding recognizing a portion of the net pension liability in fund financial statements if a portion of the net pension liability of a cost sharing employer will be paid from an enterprise, internal service, or fiduciary fund?

A—Except for blended component units, which are discussed in Questions 34 and 35, Statement 68 does not establish specific requirements for allocation of the net pension liability or other pension-related measures to individual funds. However, for proprietary and fiduciary funds, consideration should be given to National Council on Governmental Accounting (NCGA) Statement 1, Governmental Accounting and Financial Reporting Principles, paragraph 42, 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.



Statement 68: Q & A

Q—If the total pension liability is less than the pension plan’s fiduciary net position, should the net balance be displayed in a single or agent employer’s statement of net position as a negative net pension liability or as a net pension asset?

A—A net pension liability that is negative is, and should be displayed as, an asset in the employer’s statement of net position.



Statement 68: Q & A

Q—What are the components of the prior-period adjustment to beginning net position when Statement 68, as amended, is first implemented?

A—The prior-period adjustment should (a) remove the net pension obligation (asset) balance determined in accordance with Statement 27, and any payables to the pension plan, associated with formal commitments; (b) add the balance of the net pension liability (or proportionate share of the collective net pension liability), as of the beginning of the initial period of implementation (c) add a deferred outflows of resources balance for the government’s contributions to the pension plan made between the measurement date of the beginning net pension liability and the beginning of the government’s fiscal year; and (d) add balances associated with all other deferred outflows of resources and deferred inflows of resources, if applicable, determined as of the same date as the beginning net pension liability.



Other Auditors – Cost Sharing Plans

Limitations with the Audited Statements of the Plan Only net pension liability for the plan as a whole included Deferred outflows and deferred inflows by category is not included Pension expense for all participating employers is not included Each employer’s share of the collective pension amounts is not included

Methods of Allocation Should be consistent with the manner in which contributions to the plan are

determined.

Best Practice Solution for Allocation of Pension Amounts Cost Sharing plans calculate the employer’s allocation percentage and collective

pension amounts.




Schedule of Employer Allocations AICPA recommends cost sharing plans prepare a schedule of employer allocations

and related notes. Include each employer’s allocation percentage AICPA recommends that the cost sharing plan’s auditors provide an opinion on this

schedule. An in-relation to opinion only provides limited assurance and is not sufficient for

employers and their auditors to use for purposes for determining that allocation percentages are accurate and reliable.




Schedule of Pension Amounts by Employer AICPA recommends cost sharing plans prepare a schedule of pension amounts by

employer. Include total net pension liability, total deferred outflows, total deferred inflows and total

pension expense for the sum of all entities. Also include net pension liability, the various categories of deferred outflows of

resources and deferred inflows of resources, and pension expense for all participating employers including differences between expected and actual economic experience; differences between projected and actual investment earnings, net; and changes of assumptions AICPA recommends that the cost sharing plan’s auditors provide an opinion on this






Schedule of Collective Pension Amounts AICPA recommends cost sharing plans prepare a schedule of collective pension

amounts if a schedule of pension amounts by employer is not prepared. Include total net pension liability, total deferred outflows excluding employer specific

amounts, total deferred inflows excluding employer specific amounts and total pension expense for the sum of all entities. Each employer would need to calculate two additional deferred outflows and deferred

inflows which are employer specific: Net impact from changes in proportion (allocation percentage between periods) Differences between actual contributions made and total contributions calculated based on the

allocation percentage AICPA recommends that the cost sharing plan’s auditors provide an opinion on this






Schedule of Collective Pension Amounts




Employer Responsibilities Financial Statements Evaluating information used to recognize and disclose pension amounts

Employer Auditor Responsibilities Audit of employer financial statements Determine the sufficiency and appropriateness of audit evidence necessary to reduce

audit risk to an appropriately low level.

May use plan auditor’s report on the schedules to provide evidence that the pension amounts allocated to the employer and included in the employer financial statements are not materially misstated.



Reporting: Financial Statements

Basic Statements NPL recorded on Statement of Net Position (Balance Sheet)

Pension Expense calculated differently

New RSI Ten year schedule of NPL changes, funding status, and unfunded liability as

% of payroll

Ten year schedule of actuarial/non-actuarially calculated contributions

Differences between PERS and STRS disclosure requirements.



Reporting: Footnotes

Tell us everything! Air out all the information about your pensions

Descriptive information Type of plan, identification of administrator Benefit terms—types of benefits, key elements of benefit formula, classes of

employees covered, legal authority Contributions—basis, authority, rates ($ or % of pay), contributions in

reporting period Availability of plan report Significant assumptions and rates used Special funding situations – Yes this applies to you



Reporting: Footnotes (Continued)

Discount Rate Disclosure – Example

Discount rate. The discount rate used to measure the total pension liability was 7.75 percent. The projection of cash flows used to determine the discount rate assumed that employee contributions will be made at the current contribution rate and that contributions from the District will be made at contractually required rates, actuarially determined. Based on those assumptions, the pension plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability.

Sensitivity of the District’s proportionate share of the net pension liability to changes in the discount rate. The following presents the District’s proportionate share of the net pension liability calculated using the discount rate of 7.75 percent, as well as what the District’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage-point lower (6.75 percent) or 1-percentage-point higher (8.75 percent) than the current rate:

1% Decrease (6.75%)

Current Discount Rate (7.75%)

1% Increase (8.75%)

District’s share of NPL $16,476 $14,910 $13,091




Info regarding pension plan’s fiduciary net position or reference to plan report

Key Dates Measurement date Valuation date

Changes in: Assumptions Benefit terms Activity after the measurement date

Pension expense in current reporting period

Deferred outflows/deferred inflows of resources



A Sneak Peek at Future Disclosures:




Questions?

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