pension accounting gasb pension accounting and financial reporting - overview saaaba annual business...

Pension AccountingPension AccountingGASB Pension Accounting and Financial Reporting -Overview

SAAABA Annual Business Seminar– April 18, 2012Cindy Peters – Accountant Manager, Dept. of Technology, Management & Budget

Financial Services, Fiscal Management Division

AgendaAgendaSummary of Exposure Draft provisions –

Pension ReportingProject Plan for Exposure Draft – Other

Postemployment Benefit (OPEB) ReportingOverview of Preliminary View – Economic

Condition ReportingNews Release – Statements No. 65 and No. 66Questions

2

Summary of Exposure Draft provisions – Summary of Exposure Draft provisions – Pension ReportingPension ReportingProject Objective:◦ Improve accounting and financial reporting by state

and local governments whose employees are provided with pensions to create additional transparency. Establish procedures for measuring and recognizing the

obligations associated with pensions. Identify the methods and assumptions that would be used to

project pension payments, discount projected payments to their present values, and attribute those present values to periods of employee service.

3

Pension Reporting – continuedPension Reporting – continued

Details the recognition and disclosure requirements for employers with liabilities to a pension plan administered through a qualified trust including:

◦ Single employers

◦ Agent employers

◦ Cost-sharing employers

4


Key Components of employer exposure draft◦ Conceptual shift in reporting pension liabilities and

expenses from a “funding” approach to an “earnings” approach:

Currently - no liability is reported if government fully funds its annual required contribution

Under proposed approach: Pension liability will be reported as employees earn their pension benefits

by providing services Changes in pension liability will be immediately recognized as pension

expense or reported as deferred outflows/inflows of resources

5


Substantial changes to methods and assumptions used to determine actuarial information for GAAP reporting◦ The actuarial methods and assumptions allowable under current

standards may continue to be used to determine funding amounts

Defined benefit pension plans will be required to determine the following as of the employer’s fiscal year:◦ Net pension liability (asset) ◦ Pension expense◦ Pension deferred outflows and inflows of resources

6


Employers participating in single-employer or agent multiple-employer plans will recognize 100 percent of the amounts identified above for each plan.

Employers participating in cost-sharing, multiple-employer plans will recognize their proportionate share of the collective amounts for the plan as a whole.

7


Timing, frequency and measurement of total pension liability:◦Measurement – should be determined as of the

employer’s fiscal year end Through an actuarial valuation, or The use of update procedures to roll forward amounts from

an actuarial valuation to the employer’s year-end Actuarial valuation of total pension liability should be

performed at least biennially Use professional judgment to determine the extent of update

procedures

8


Plan Net Position:◦Measurement – should be as of the employer’s fiscal

year end Use same valuation methods as used for Plan’s GAAP financial

reporting If the plan and employer year-ends are different, procedures

to roll forward (or backward) the plan financial statement amounts to the employer’s year-end will be required Would require measurement as of the year-end of each employer

participating in a cost-sharing plan

9


Determine pension expense and deferred outflows/inflows of resources:◦ Certain aspects of the change in net pension liability

should be recognized as pension expense and others should be recognized as deferred outflows/inflows and amortized into pension expense over time

◦ Employers participating in single- or agent multiple-employer plans will recognize 100 percent of the pension expenses and deferrals

◦ Employers participating in cost-sharing multiple-employer plans will recognize their proportionate share of the collective pension expenses and deferrals of the plan as a whole

10


Net Pension Liability:◦ Total pension liability (actuarially calculated), less any

plan net position changes◦ Total pension liability is calculated by:◦ Projecting future benefits◦ Discounting projected benefits to actuarial present value◦ Attributing the present value to past and future years

11


Projecting future benefits:◦ Based on actuarial assumptions:◦ Number of employees expected to receive benefits◦ How long employees are expected to work◦ What salaries will be and how fast they will grow◦ Life expectancy after retirement (how many years benefits

will be paid)◦ What (if any) cost of living adjustments (COLA) will be made

to retirement benefits

12


Discounting projected payments:◦ Based on discount rate:◦ If the Annual Required Contribution (ARC) is being fully

funded, use the expected long-term rate of return on plan assets

◦ If not fully funded, use the proposed rate of return (tax-exempt, high-quality 30-year municipal bond index)

◦ If the ARC is being partially funded, the two rates should be blended

13


Attribute present value to specific periods:◦ Based on actuarial methods:◦ Specified by the GASB to be◦ Entry age normal◦ Level percent of payroll

◦ If differ from funding method, would require separate valuations for the different purposes

◦ Must be as of the government’s/employer’s fiscal year end

◦ If differ from government/employer’s fiscal year, update procedures will be required

14


Recognition of changes in total pension liability:◦ Immediately recognized as pension expense:

Current year – value of benefits earned Interest on any outstanding pension liability Changes in total pension liability caused by changes in terms

of pension benefits Changes in plan assets caused by projected earnings on plan

investments Amortization of deferred outflows/inflows Effects of actuarial differences and changes in assumptions

inactive/retired employees

15


Recognition of changes in plan net position:◦ Recognize as deferred outflow/inflow and amortize:

Effects of actuarial differences and changes in assumptions active employees

Changes in the amount of plan assets due to differences between projected and actual investment earnings (amortized over 5 years)

◦ All other changes in plan net position should be included in pension expense in the period of the change

16


Participation in cost-sharing multi-employer plans:◦ An employer’s proportion of a cost-sharing multi-

employer plan should be: A measure of the employer’s expected long-term contribution

effort to the plan as compared to the total of all expected long-term contributions of the employers

Established at the actuarial valuation date and may be used to roll forward pension amounts to the employer’s fiscal year-end assuming no significant changes to the employer’s expected proportion

17


◦ Application of this proportionate share concept results in two types of potential changes in the employer net pension liability unique to cost-sharing multi-employer plans: Net effect of a change in the employer’s proportion of the

plan Difference between actual employer contributions and the

employer’s proportionate share of collective employer contributions

18


◦ Difference between actual employer contributions and the employer’s proportionate share of collective employer contributions: Recognized by the employer as a deferred outflow/inflow of

resources in the period of the difference Recognized as part of pension expense beginning in the

period of the difference over a closed period using a systematic and rational method Closed period is representative of employees’ expected remaining

service lives Use the same period as that used for differences between

expected and actual experience related to economic or demographic factors

19


Note Disclosures – all plans◦Most of the note disclosures remain the same. Below

are a few of the new disclosures required by the exposure draft: Assumptions used to measure total pension liability

Detailed disclosure requirements for the discount rate – which have changed

Brief description of changes in benefit terms and assumptions that affect the measurement of the total pension liability

Date of actuarial valuation on which the recognized information is based and whether update procedures were used to roll forward measurements to the employer’s fiscal year-end.

20


Note Disclosures – single or agent multi-employer plan◦ Below are a few of the new disclosures required by

the exposure draft: Detail of changes in net position liability (asset)

Information about components of pension expense

Reconciliation of beginning and ending balances of deferred pension outflows and inflows, with separate identification of applicable categories of changes

21


Note Disclosures – cost-sharing multi-employer plan◦ Below are a few of the new disclosures required by

the exposure draft: Employer’s portion of the collective plan Amounts of the net pension liability, deferred outflows and

inflows, and pension expense recognized in the financial statements

The effect of net pension liability (asset), deferred outflows and inflows, and pension expense recognized by the employer attributable to: Changes in the employer’s proportion of the collective plan Difference between actual employer contributions and employer’s

proportionate share of collective employer contributions

22


Required Supplementary Information (RSI) – new◦ Single and agent multi-employer plan

Notes to RSI, factors that significantly affect the identification of trends in the amounts reported

◦ Cost-sharing multi-employer plan RSI – similar to single and agent multi-employer plans as they relate to

the collective plan RSI – as it relates to the employer’s proportion of the plan Notes to RSI as appropriate

Other aspects of the Employer ED Special funding situations Liabilities to a defined benefit pension plan Insured pension benefits Defined contribution benefits

23


What is the impact of these changes:◦Government (Employer) financial statements

A significant liability will be brought onto the face of the financial statements May cause deficits May distort other information

May require two actuarial valuations or require significant effort to develop update procedures Increased cost / effort

Result in increased audit effort

24

Pension Plan Financial StatementsPension Plan Financial Statements

Key Components of plan financial statement exposure draft◦ Recognition, measurement and presentation of

financial statement amounts generally similar to current guidance Note disclosures and RSI:

Similar to disclosures for employers with addition of information on investment policies and actual rates of return on plan assets

Requirements regarding measurement of net pension liability (asset) are similar to those for employers: Net pension liability (asset) not recognized by pension plans

25

Pension Plan Financial Statements – cont’dPension Plan Financial Statements – cont’d Plans should present on the accrual basis of accounting:

◦ Statement of Plan Net Position◦ Statement of Changes in Net Position

Statement of Plan Net Position:◦ Plan assets subdivided by major category and principal components of

receivables and investments◦ Investments generally reported at fair value◦ Liabilities such as benefits and refunds recognized when due◦ Equity reported as net position restricted for pensions

Statement of Changes in Plan Net Position:◦ Separate display of contributions from employers, employees, and non-

employer contributing entities◦ Separate display of components of net investment income◦ Separate display of benefits and refunds paid to plan members and

administrative expenses◦ Report net increase/decrease in plan net position

26

Pension Plan Financial Statements – cont’dPension Plan Financial Statements – cont’d

Note disclosures are similar to employer disclosures

Effective date of Employer and Plan EDs◦ In general the ED proposes the future standard be

effective for financial statements with a fiscal year beginning after June 15, 2012

◦ Criteria are provided in the ED related to size and type of government or plans that would impact the effective date

◦ Earlier application of the standard is encouraged

27

Project Plan for Exposure Draft – Other Project Plan for Exposure Draft – Other Postemployment Benefit (OPEB) ReportingPostemployment Benefit (OPEB) Reporting As a result of the staffing requirements associated with the

pension project, further Board deliberations on this project will not be conducted until July 2012

The Board will continue deliberations related to differences between pensions and OPEB and determine the overall approach to OPEB standards – July – November 2012

Issue Exposure Drafts on employer and plan OPEB accounting and financial reporting issues – August 2013

Comment period – September to November 2013 Public hearing – December 2013 Issue Statements – June 2014

28

Overview of Preliminary View – Economic Overview of Preliminary View – Economic Condition Reporting – Financial ProjectionsCondition Reporting – Financial ProjectionsProject focus:◦ Forward-looking information that would provide

users of governmental financial reports with information they need to assess a government’s current financial health and its ability to meet its commitments going forward

Project objective:◦ To better enable taxpayers, bond holders, and other

interested parties to assess a government’s financial health

29

Economic Condition Reporting – continuedEconomic Condition Reporting – continued

The Big Picture:◦ Improve the communication of decision-

useful information about a governmental entity’s overall economic condition, defined in terms of: financial position fiscal capacity and service capacity

30


Financial position:◦ The status of assets, liabilities, deferred outflows and inflows of

resources, and net position, as of a point in time

Fiscal capacity:◦ The ability and willingness to meet financial obligations as they

come due on an ongoing basis

Service capacity:◦ The ability and willingness to meet commitments and provide

services on an ongoing basis

31


Fiscal sustainability:◦ The ability and willingness to generate inflows of resources

necessary to honor current service commitments and to meet financial obligations as they come due, without transferring financial obligations to future periods that do not result in commensurate benefits

This last component has been described by the Board as being the forward-looking aspect of economic condition reporting

32


Five components of information necessary to assess a governmental entity’s fiscal sustainability:◦ Projections of total cash inflows and major individual

cash inflows, in dollars and as a percentage of total cash inflows, with explanations of the known causes of fluctuations

◦ Projections of the total cash outflows and major individual cash outflows, in dollars and as a percentage of total cash outflows, with explanations of the known causes of the fluctuations

33


Five components - continuedoProjections of total financial obligations and major individual financial obligations, including bonds, pensions, other postemployment benefits, and long-term contracts, with explanations of the known causes of fluctuations in financial obligationsoProjections of annual debt service payments (principal and interest)oA narrative discussion of major existing inter-governmental service interdependencies and their natureNOTE: Projections would use historical and known information and extrapolate that information into the future. Accompanying narrative discussions would provide context to better understand why the changes are expected.

34


All components of fiscal sustainability, in the Board’s view, would be required to be included the RSI of all governmental entities’ comprehensive annual financial reports and annual financial reportsWith the exception of projections for outstanding debt service payments (required currently), all of the components are new components of fiscal sustainability information

35


Projections of outflows and inflows of resources are essential to assessing interperiod equity, or a government’s ability to meet annual spending needs with current-period resources, rather than delaying to the future or consuming accumulated resources

36


Projections – how they would be calculatedBased on current policy, informed by historical information, and adjusted for known events and conditions that affect the projection periodsOutflows and inflows – projected on a cash basis of accounting to assess fiscal sustainabilityFinancial obligations – projected on an accrual basis of accounting for more complete projected information on obligations incurred than the cash basisAssumptions – would not be prescribed, but would be 1) consistent with each other and the information used as the basis of the assumptions and 2) comprehensive by considering significant trends, events and conditions

37


Disclosures – requirementsDisclosures of assumptions would be required in order to help users understand how the financial projections were made and assess how reasonable they areFinancial projections – made for a minimum of five individual years beyond the reporting period for external reporting purposesComponents of fiscal sustainability information – reported for the primary government, including both governmental activities and business-type activities, with net subtotals (inflows less outflows) Cautionary notice – should precede the financial projections and related narrative discussion to provide context and inform readers that the projections do not represent a forecast or prediction of the most likely outcome and that actual future financial results may differ significantly from those reported

38


Next Steps in the process

◦When the GASB has reviewed the comments they will, if there is sufficient agreement to proceed, publish an exposure draft

39

News Release – 04/02/12News Release – 04/02/12

GASB Issues Statements No. 65 and No. 66◦ Statement 65, Items Previously Reported as Assets

and Liabilities◦ Clarifies the appropriate reporting of deferred outflows of

resources and deferred inflows of resources to ensure consistency in financial reporting

◦ Statement 66, Technical Corrections - 2012◦ Enhances the usefulness of financial reports by resolving

conflicting accounting and financial reporting guidelines that could diminish the consistency of financial reporting

◦ Effective dates◦ The provisions for both Statements are effective for periods

beginning after December 15, 2012, and would be applied on a prospective basis

40

Thank you!Thank you!

Questions?

Email: [email protected]: 517-241-5042

More information can be found at:www.gasb.orgwww.gfoa.org

41

pension accounting gasb pension accounting and financial reporting - overview saaaba annual business...

Documents

pension payments

pension benefits

reporting pension liabilities

valuation methods

employers fiscal year

reportingproject plan

employer yea

agent multipleemployer