LEARNING OBJECTIVES

After completing this chapter, you should be able to do the following:

• Recognize the accounting and reporting for pension plan financial statements.
• Identify best practices related to census data.
• Identify methods used to calculate pension liability.
• Recognize the accounting and reporting for postemployment benefits other than pensions (OPEB) plan financial statements.

INTRODUCTION

Governments often establish plans to provide postemployment benefits for employees. A common approach is to use a public employee retirement system (PERS). A PERS is a special-purpose government that administers one or more defined benefit pension plans and sometimes other types of employee benefit plans, including defined contribution, deferred compensation, and defined benefit postemployment benefit other than pension (OPEB) plans. This chapter focuses on defined benefit pension plans and OPEB plans.

GASB Statement No. 67, Financial Reporting for Pension Plans, an amendment of GASB Statement No. 25, addresses accounting and financial reporting for pension plans that are administered through trusts or equivalent arrangements in which

• contributions from employers and nonemployer contributing entities to the pension plan and earnings on those contributions are irrevocable.
• pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms.
• pension plan assets are legally protected from the creditors of employers, nonemployer contributing entities, and the pension plan administrator. If the plan is a defined benefit pension plan, plan assets also are legally protected from creditors of the plan members.

GASB Statement No. 68, Financial Reporting for Pensions, an amendment of GASB Statement No. 27, addresses accounting and financial reporting for pension trusts that have the three characteristics described previously. Amendments to GASB Statement No. 68 that address pensions that are not in a trust or equivalent arrangement that meet specified criteria are discussed later in this chapter.

KNOWLEDGE CHECK

1. GASB Statement No. 67 changed reporting relating to which?
   1. Government defined benefit plans only.
   2. Government defined contribution plans only.
   3. Most government pension plans.
   4. All government pension plans.
2. GASB Statement No. 68 affects which?
   1. State governments only.
   2. Local governments only.
   3. State and local governments.
   4. Reporting by pension plans.

TYPES OF DEFINED BENEFIT PENSION PLANS

Defined benefit pension plans are classified according to (a) the number of employers whose employees are provided with pensions through the pension plan, and (b) whether pension obligations and pension plan assets are shared. For purposes of this classification, a primary government and its component units are considered to be one employer. Accordingly, plans are classified in one of the following categories:

• Single-employer—Those in which pension benefits are provided to the employees of only one employer.
• Cost-sharing multiple-employer (cost-sharing)—Those in which the pension obligations to the employees of more than one employer are pooled and pension plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan.
• Agent multiple-employer (agent)—Those in which pension plan assets are pooled for investment purposes but separate accounts are maintained for each individual employer so that each employer's share of the pooled assets is legally available to pay the benefits of only its employees.

PART 1—ACCOUNTING AND REPORTING FOR DEFINED BENEFIT PLANS (GASB STATEMENT NO. 67)

The financial statements of a defined benefit plan should include the following:

• A statement of fiduciary net position, which includes information about assets, deferred outflows of resources, liabilities, deferred inflows of resources, and fiduciary net position, as applicable, as of the end of the pension plan's reporting period.

—     Assets should be presented in major categories.

—     Receivables should be short-term and consist of contributions due in accordance with legal requirements.

—     Investments should be recorded at fair value but unallocated insurance contracts should be recorded at contract value.

—     Net position should be reported as restricted for pensions.

• A statement of changes in fiduciary net position, which includes information about the additions to, deductions from, and net increase (or decrease) in fiduciary net position of the pension plan's reporting period.

—     Additions should separately display contributions from employers, nonemployer contributing entities, plan members, and net investment income.

—     Deductions should separately display benefit payments and administrative expenses.

KNOWLEDGE CHECK

3. Contributions receivable should be reported in the statement of fiduciary net position when
   1. The payment is due pursuant to legal requirements.
   2. The employer intends to pay the amount.
   3. Past practice indicates the employer will make the payment.
   4. In accordance with federal guidelines.

ADDITIONAL NOTE DISCLOSURES

Single and agent plans must disclose information on the discount rate such as the rate used for the total pension liability (TPL), money-weighted rate of return, fiduciary net position, net pension liability (NPL), and significant assumptions used to measure the NPL.

Cost-sharing plans are required to disclose similar information to that disclosed by single and agent plans. Cost-sharing plans must disclose information on the discount rate such as the rate used for the TPL, money-weighted rate of return, pension plan fiduciary net position, and other information.

REQUIRED SUPPLEMENTARY INFORMATION

Single and agent plans must include the following as required supplementary information (RSI):

• A 10-year schedule of changes in the net pension liability and related key ratios
• A 10-year schedule presenting the actuarially determined contribution, difference between actuarially determined contributions and amounts actually contributed, covered payroll, and contributions as a percentage of covered payroll

Cost-sharing plans must also present 10-year schedules as follows:

• A 10-year schedule presenting the proportionate share of the net pension liability and related ratios
• A 10-year schedule presenting required contributions, difference between required contributions and amounts actually contributed, covered payroll, and contributions as a percentage of covered payroll

MEASUREMENT OF THE PENSION LIABILITY

Total pension liability is the actuarial present value of projected benefit payments attributed to past employee service.

To calculate the TPL, the actuary projects future benefit payments, discounts to present value, and then attributes the present value to past and future periods using the entry age actuarial cost method.

Actuarial valuation must be as of the pension plan's most recent fiscal year-end, or no more than 24 months earlier than pension plan's current fiscal year-end and updated using roll forward procedures.

DISCOUNT RATE

A single-blended discount rate should be used to discount projected future benefit payments based on the following:

a.     The long-term expected rate of return on pension plan investments that are expected to be used to finance the payment of benefits, to the extent that plan fiduciary net position is projected to be sufficient to make projected benefit payments and plan assets are expected to be invested using a strategy to achieve that return.

b.     A yield or index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher (or equivalent quality on another rating scale), to the extent that the conditions in (a) are not met.

The long-term expected rate of return should be based on the nature and mix of current and expected pension plan investments.

AUDITING CONSIDERATIONS

1. Understand the type of plan (single-employer, cost-sharing, or agent plan) and the controls and risks surrounding the activities.
2. For single-employer and cost-sharing plans, consider controls around the census data and how it will be tested.

   a.     For cost-sharing plans, the pension plan typically controls the census data for inactive and retired members while the employer controls census data for active members.

   b.     Plan management is responsible for completeness and accuracy of census data.

   c.     The AICPA State and Local Government Expert Panel (SLGEP) issued a whitepaper titled Single-Employer and Cost-Sharing Multiple Employer Plans: Issues Associated With Testing Census Data in and Audit of Financial Statements which addresses the roles and responsibilities for the census data and an illustration of the proposed risk-based approach to census data testing. This white paper is included in the AICPA Audit and Accounting Guide, State and Local Governments.

3. Auditors of agent plans generally do not need to test census data at participating employers because the plan financial statements do not include any actuarial liabilities. However, agent plans are responsible for administering the plan, including the payment of benefits based on the census data reported by the plan. Accordingly, the focus of testing is generally on the accumulation and maintenance of census data by the plan based on the plan's role as the record keeper.
   • SLGEP whitepaper, Governmental Employer Participation in Agent Multiple-Employer Plans: Issues Related to Information for Employer Reporting (included as a nonauthoritative appendix in the AICPA Audit and Accounting Guide, State and Local Governments) suggests a two-part approach for TPL, deferred outflows of resources and deferred inflows resources, and pension expense:

   —     The plan issues a separate actuarial valuation report specific to each employer which includes an actuarial certification letter addressed to employer management, and

   —     The plan engages its auditor to issue either a Type 2 SOC-1^® report on controls over census data maintained by the plan, or

   —     An examination engagement over selected management assertions related to census data maintained by the plan.

SPECIFIC ISSUES FOR COST-SHARING PLANS

Recognizing proportionate share of collective pension amounts in employer financial statements and obtaining sufficient appropriate evidence.

1. SLGEP Whitepaper, Governmental Employer Participation in Cost-Sharing Multiple-Employer Plans: Issues Related to Information for Employer Reporting (included as a nonauthoritative appendix in the AICPA Audit and Accounting Guide, State and Local Governments) addresses issues and suggests best practices.

   a.     Plan should calculate each employer's allocation percentage and collective pension amounts, based on a historical measure such as contributions.

   b.     The schedule of employer allocations and pension amounts needs opinion-level assurance.

2. AU-C section 9805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement: Auditing Interpretations of AU-C Section 805 (AICPA, Professional Standards) provides a sample report on this schedule.
3. AU-C section 500, Audit Evidence (AICPA, Professional Standards) requires audited information, absent which the employer auditor likely would not be able to accumulate sufficient appropriate evidence to support the pension amounts.

SPECIFIC ISSUES FOR AGENT PLANS

Recognizing specific pension amounts in employer financial statements and obtaining sufficient appropriate evidence.

1. SLGEP whitepaper, Governmental Employer Participation in Agent Multiple-Employer Plans: Issues Related to Information for Employer Reporting addresses issues and suggests a best practice for fiduciary net position.

   a.     Agent plan financial statements do not include specific pension amounts required to be reported by employers.

   b.     Best practice two-part approach includes the following:

   1. The plan prepares a schedule of changes in fiduciary net position by employer and related notes and engages its auditor to opine on the schedule either through
      1. (1) option 1: an opinion on the schedule as a whole combined with a Type 2 SOC 1 report on controls over the calculation and allocation of additions and deductions to employer accounts; or
      2. (2) option 2: an opinion on each employer column in the schedule.

PART 2—EMPLOYER ACCOUNTING AND REPORTING (GASB STATEMENT NO. 68)

Financial statements of governments that provide pension benefits administered through a trust or equivalent arrangement that meets specified criteria are required to report net pension liability, pension expense, and certain deferred outflows of resources and deferred inflows of resources.

ALLOCATION TO FUNDS

GASB Statement No. 68 does not establish specific requirements for allocation of the net pension liability or other pension-related amounts to individual funds.

In October of 2015, the AICPA State and Local Government Expert Panel issued “Article on Emerging Pension Issues” that addressed allocations of pension amounts to funds and departments. Generally, governments should use the allocation methodology for employers participating in cost-sharing plans.

However, proprietary and fiduciary funds are required to record long-term liabilities that are directly related to and expected to be paid from those funds. Accordingly, when allocating pension amounts to funds or departments (or both), governments should use the allocation methodology for employers participating in cost-sharing plans.

RECOGNITION AND MEASUREMENT IN FINANCIAL STATEMENTS PREPARED USING CURRENT FINANCIAL RESOURCES MEASUREMENT FOCUS AND MODIFIED ACCRUAL BASIS OF ACCOUNTING

In financial statements prepared using the current financial resources measurement focus and modified accrual basis of accounting, a net pension liability should be recognized to the extent the liability is normally expected to be liquidated with expendable available financial resources.

Pension expenditures should be recognized equal to the total of (a) amounts paid by the employer to the pension plan, and (b) the change between the beginning and ending balances of amounts normally expected to be liquidated with expendable available financial resources.

Net pension liabilities are normally expected to be liquidated with expendable available financial resources to the extent that benefit payments have matured—that is, benefit payments are due and payable and the pension plan's fiduciary net position is not sufficient for payment of those benefits.

EMPLOYER'S PRESENTATION OF NET POSITION

Many governments are reporting a negative unrestricted net position on the recognition of a relatively large net pension liability.

Unrestricted net position is a residual balance that results from the cumulative inflows and outflows since inception of the organization. A deficit unrestricted net position cannot be attributed to any one individual liability or expense.

The unrestricted net position should be reported in the aggregate on the face of the statement of net position.

A government may disclose additional details of the unrestricted net position in the notes to the financial statements or in MD&A.

ADDITIONAL NOTE DISCLOSURES

Single and agent employers are required to disclose significant assumptions used to measure the total pension liability, including the discount rate, the pension plan's fiduciary net position, and changes in the net pension liability, and additional information.

Cost-sharing employers must also disclose information about the employer's proportionate share of the collective net pension liability.

REQUIRED SUPPLEMENTARY INFORMATION (RSI)

Single and agent employers should include required supplementary information (RSI) as the following:

• A 10-year schedule of changes in the NPL that separately presents the information required by paragraph 44 of GASB Statement No. 68.
• A 10-year schedule presenting the actuarially determined (or statutorily determined) contribution of the employer, difference between actuarially determined contributions and amounts actually contributed, covered payroll, and contributions as a percentage of covered payroll.

Cost-sharing employers include similar RSI.

SUBSEQUENT GASB STATEMENTS

Subsequent to the issuance of GASB Statement No. 68, there have been statements issued that have amended this statement, affecting pension accounting and reporting currently and in the future.

GASB STATEMENT No. 71, PENSION TRANSITION FOR CONTRIBUTIONS MADE SUBSEQUENT TO THE MEASUREMENT DATE

This statement requires that contributions made between the measurement date and the end of the government's reporting period be reported as deferred outflows of resources. The statement is effective concurrently with GASB Statement No. 68.

GASB STATEMENT NO. 73, ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS AND RELATED ASSETS THAT ARE NOT WITHIN THE SCOPE OF GASB STATEMENT 68, AND AMENDMENTS TO CERTAIN PROVISIONS OF GASB STATEMENTS 67 AND 68

This statement establishes requirements for defined benefit pensions that are not within the scope of GASB Statement No. 68, Accounting and Financial Reporting for Pensions.

The statement extends the accounting and reporting requirements of GASB Statement No. 68 to all governmental pensions, including those not in a trust or equivalent arrangement meeting specified criteria.

This statement clarifies certain provisions of GASB Statement Nos. 67 and 68 to provide the following:

• Information about investment-related factors that affect trends should be limited to those factors over which the plan has influence (for example, change in investment policies).
• Information about external, economic factors should not be presented (for example, changes in market prices).
• Clarifies that payables to a pension plan of any unpaid financing obligations are not separately financed specific liabilities as defined by GASB 67 and 68.
• Revenue for support of nonemployer contributing entity (no special funding situation) recognized in period that the contribution of nonemployer contributing entity is recognized as change in NPL or collective NPL.

This statement is effective for fiscal years beginning after June 15, 2016, except for requirements that address reporting for assets accumulated for providing pensions are effective for fiscal years beginning after June 15, 2015. The corrections for GASB Statement Nos. 67 and 68 will be effective for fiscal years beginning after June 15, 2015.

GASB STATEMENT NO. 78, PENSIONS PROVIDED THROUGH CERTAIN MULTIPLE-EMPLOYER DEFINED BENEFIT PENSION PLANS

This statement amends the scope and applicability of GASB Statement No. 68 to exclude pensions provided to employees of state or local governmental employers through a cost-sharing multiple-employer defined benefit plan that

a.     is not a state or local government pension plan;

b.     is used to provide defined benefit pensions both to employees of state or local governmental employers and to employees of other entities; and

c.     has no predominant state or local governmental employers that provide pensions through the pension plan.

Example from GASB: A trade association administers a cost-sharing multiple-employer defined benefit plan. One of the 20 employers is a state or local governmental employer. Because the plan does not individually or collectively represent state or local governmental employers this plan is not subject to the provisions of GASB Statement No. 68.

This statement is effective for reporting periods beginning after December 15, 2015.

GASB STATEMENT NO. 82, PENSIONS ISSUES — AN AMENDMENT OF GASB STATEMENTS NO. 67, NO. 68, AND NO. 73

This statement was issued to address issues regarding

1. the presentation of payroll-related measures in required supplementary information,
2. the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and
3. the classification of payments made by employers to satisfy employee (plan member) contribution requirements.

The statement amends the provisions of GASB Statement Nos. 67 and 68 related to “covered-employee payroll” which is defined as the payroll of employees that are provided with pensions through the pension plan. GASB Statement No. 82 requires measures previously required to use covered-employee payroll to now use covered payroll, which is defined as the payroll on which contributions to a pension plan are based.

The statement also clarifies that a deviation from the Actuarial Standards of Practice, as defined by the Actuarial Standards of Practice, is not considered to be in compliance with GASB Statement Nos. 67, 68 and 73 for the selection of assumptions used in determining the total pension liability and related measures.

This Statement also clarifies that payments made by the employer to satisfy plan required member contributions should be classified as plan member contributions for purposes of GASB Statement No. 67, and employee contributions for GASB Statement No. 68. Employer expense and expenditures for those amounts are required to be recognized in the period of contribution assessment and classified similarly to compensation other than pensions.

The statement is effective for reporting periods beginning after June 15, 2016. The provisions specifically related to clarifications on the selection of assumptions are effective in the first reporting period in which the measurement date of the pension liability is on or after June 15, 2017.

SPECIAL FUNDING SITUATIONS

GASB Statement No. 68 defines special funding situations as circumstances in which a nonemployer entity is legally responsible for making contributions directly to a pension plan that is used to provide pensions to the employees of another entity or entities and either

a.     the amount of contributions for which the nonemployer entity legally is responsible is not dependent upon one or more events unrelated to pensions, or

b.     the nonemployer is the only entity with a legal obligation to make contributions directly to a pension plan.

An employer that has a special funding situation for defined benefit pensions is required to recognize a pension liability and deferred outflows of resources and deferred inflows of resources related to pensions with adjustments for the involvement of nonemployer contributing entities.

The employer is required to recognize its proportionate share of the collective pension expense, as well as additional pension expense and revenue for the pension support of the nonemployer contributing entities.

The employer is required to disclose, in the notes to the financial statements, information about the amount of support provided by nonemployer contributing entities and to present similar information about the involvement of those entities in 10-year schedules of RSI.

OPEB ACCOUNTING

Subsequent to the issuance of GASB statements addressing accounting for pension plans and benefits, GASB issued statements that largely extend the accounting and reporting approach to pensions established in GASB Statement Nos. 67 and 68 to OPEB accounting and reporting.

GASB STATEMENT NO. 75, ACCOUNTING AND FINANCIAL REPORTING FOR POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS

The statement replaces the requirements of GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and GASB Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, for OPEB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, establishes new accounting and financial reporting requirements for OPEB plans.

This statement closely mirrors the requirements of GASB Statement No. 68 for employer reporting of pensions.

This statement addresses accounting and financial reporting for OPEB that is provided to the employees of state and local governmental employers. This statement establishes standards for the following:

1. Recognizing and measuring liabilities.
2. Deferred outflows of resources.
3. Deferred inflows of resources.
4. Expenses and expenditures.

This statement also identifies the methods and assumptions that are required to be used by defined benefit OPEB in projecting benefit payments, discounting benefit payments to their actuarial present value, and attributing that present value to periods of employee services.

The statement addresses note disclosures and required supplementary information for the OPEB benefits and details the recognition and disclosure requirements for employers with payables to the plans.

It is effective for fiscal years beginning after June 15, 2017.

KNOWLEDGE CHECK

4.     GASB Statement No. 74 affects which of the following?

1. State governments only.
2. Local governments only.
3. State and local governments.
4. Reporting for pension plans.