Navigating Through GASB 68
Government employers are facing many questions regarding the implementation of Governmental Accounting Standards Board (“GASB”) Statement No. 68, Accounting and Financial Reporting for Pensions, an amendment of GASB Statement No 27. Following is an overview of the applicability of the statement and its effect on financial reporting for employers.
Implementation of GASB 68 is required for fiscal years beginning after June 15, 2014. The statement covers the specific accounting and financial reporting requirements for employers (state and local governments) who have established pension plans that are administered through a trust or equivalent arrangement.
What Type of Employer Are You?
As an employer, you can be considered a single-employer, agent employer or a cost-sharing employer. The statement defines the categories as follows:
- Single-Employer: pension plan in which pensions are provided to the employees of only one employer.
- Agent Employers: pension plans in which 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.
- Cost-Sharing Employers: pension plans in which the pension obligations to the employees of more than one employer are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan (ex: employers participating in the Florida Retirement System).
It is important for the employer to properly identify themselves as there are differences in the requirements for each type of employer.
The Big Picture
For the first time, employers (single, agent, and cost-sharing employers) will be required to recognize a liability equal to the net pension liability. In addition, the implementation of GASB 68 will result in more robust disclosures and newly presented required supplementary information (RSI) for the employer. We first learned about what a net pension liability was and how it was to be calculated through GASB Statement No. 67 – Financial Reporting for Pension Plans (effective for plan fiscal years beginning after June, 2013). The net pension liability which will be recognized by the employer will equal to the total pension liability, net of the pension plans fiduciary net position.
Measurement Date vs. Reporting Date
An employer’s reporting date is the date of their financial statement (year-end). The employer’s measurement date is the date they will use to measure their net pension liability. As an employer, you can decide for both your measurement date and reporting date to be the same. GASB 68 allows the employer to select a measurement date no earlier than end of the employer’s prior fiscal year. This means you can have a reporting date of September 30, 2015 and measurement date as early as September 30, 2014. When selecting your measurement date, you should consider your involvement in the pension plans reporting and the availability of financial data and actuarial results which can result in timing issues if you were to decide for both your measurement date and reporting date to be the same.
Underlying Specifics – All Employers
Actuarial valuations of the total pension liability are required to be performed at least every two years, with more frequent valuations encouraged. In the event that the valuation reports have not been done as of the measurement date the reports may be rolled forward. One important item to note is that the reports have to be dated within a period as of a date no more than 30 months and 1 day prior to the employer’s most recent year-end. What this means is that if your report date is September 30, 2015 the valuations can be dated no earlier than March 31, 2013 in order for the information to be rolled forward.
Once the actuarial valuations are received, the employer will need to record deferred outflows of resources and/or deferred inflows of resources for the pension activity that will be amortized either over 5 years or the remaining service life of active employees (the remaining service life is included in the actuarial valuation report). The conditions that would warrant amortization for employers participating in a single-employer plan are items such as differences between expected and actual experience in the measurement of the total pension liability, changes of assumptions or other inputs, and net difference between projected and actual earnings on pension plan investments (this is the only item amortized over 5 years). The conditions that would warrant amortization for cost-sharing employers include all the items just mentioned for employers participating in a single-employer plan as well as changes in the employer’s proportion and differences between the employer’s contributions and the employer’s proportionate share of contributions.
The employers financials statements (ex: Reporting Date: September 30, 2015) will reflect a net pension liability (NPL) as of their measurement date (ex: date as early as September 30, 2014 or any given date through September 30, 2015). GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date provides further guidance and clarification regarding amounts associated with contributions, made by the employer to a defined benefit pension plan after the measurement date of the employers beginning net pension liability. The provisions of GASB 71 are required to be applied simultaneously with the provision of Statement 68.
But before the NPL is recorded, the employer would need to record opening balances. These opening balances would be reflected in the employer’s financial statements as a prior period adjustment to equity (Net Position). The adjustment will reflect the elimination of any previously recorded Net Pension Asset or Net Pension Obligation per GASB Statement No. 27 and the opening balance of the Net Pension Liability (as of the employer’s previous measurement date) and any identified deferred outflows or deferred inflows. For example, if the employers reporting date is September 30, 2015, and the measurement date is September 30, 2014, the prior period adjustment would reflect the opening NPL as of September 30, 2013. In addition, equity (net position) will be adjusted to reflect any contribution made subsequent to the employer’s previous measurement date as the opening balance for deferred outflows.
In the reporting period, the opening net pension liability is adjusted by the recording of pension expense. Changes in the total pension liability resulting from current period service cost, interest on the total pension liability, results from changes of benefit terms and results from projected earnings on the pension plans investments are required to be included in pension expense immediately. The employer will also need to recognize portions of deferred inflows and deferred outflows over certain periods of time. As such, any recognized amount would be part of pension expense.
Deferred outflows and deferred inflows will result from current year activity. For example, any employer contributions subsequent to the measurement date of the net pension liability will result in a deferred outflow of resources. Also, changes of economic and demographic assumptions or of other inputs and differences between expected and actual experience will be recorded as deferred inflows or outflows (as applicable) and recognized as pension expense (amortized) over a period equal to the average expected remaining service lives of the employees.
Paragraphs 37 through 45 of GASB Statement No. 68 detail the items required to be included in the notes to the financial statements for employers participating in a single-employer pension plan. The notes should include the name of the plan, who administers it, and what type of plan it is. It should also include a description of the benefit terms along with the number of employees covered by such terms, current year sources of changes in net pension liability, significant assumptions and other inputs used to calculate the total pension liability, and the date of the actuarial valuation used to determine the total pension liability. You will also be required to disclose current year activity of deferred outflows of resources and deferred inflows of resources related to pensions as well as amounts to be recognized in pension expense in subsequent years (amortization schedule). Paragraphs 46 through 47 of GASB Statement No. 68 detail the items required to be included as RSI. The RSI should include a 10-year schedule of changes in the net pension liability as well as a 10-year schedule presenting the components of the net pension liability and related ratios including the pension plan’s fiduciary net position as a percentage of the total pension liability, and the net pension liability as a percentage of covered-employee payroll.
The guidance and requirements for cost-sharing employers is very similar to what has been discussed for single-employer plans however, you’ll note that reference is made to the “proportionate share” of the “collective” amounts. This proportionate share calculation is required since the employers participate in a plan where the obligations and assets are pooled (collective amounts). The percentage utilized to determine the employer’s share of the collective net pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense would be consistent with the manner in which contributions to the pension plan are determined. The cost-sharing plan (ex: Florida Retirement System) is in the best position to perform this calculation because the plan has all necessary information to do so, including the data supporting the allocation measure for each individual employer and for all employers. As such, the cost-sharing plan will typically engaged their auditor to report on the schedule of employer allocations and schedule of pension amounts.
In financial statements prepared using the economic resources measurement focus and accrual basis of accounting (Government-wide and fund level for enterprise funds), cost-sharing employers will record a liability for the proportionate share of the collective net pension liability. The employers will also record their proportionate share of the collective deferred outflows of resources, deferred inflows of resources, and pension expense. If there is a change identified in the employer’s proportionate share (allocation percentage) from one year to the next, the difference should be recognized as a deferred outflow/inflow and be amortized beginning with the current fiscal year over the expected remaining service lives of all employees that are provided with pensions through the pension plan determined as of the beginning of the measurement period.
In addition to the note disclosures discussed above for single-employers, paragraphs 74 through 80 of GASB Statement No. 68 detail the items required to be included in the notes to the financial statements for employers participating in a cost-sharing pension plan. The employer’s proportionate share (the amount) of the collective net pension liability should also be disclosed along with the employer’s proportion (the percentage) of the collective net pension liability, the basis on which its proportion was determined, and the change in its proportion since the prior measurement date.
Paragraphs 81 through 82 of GASB Statement No. 68 detail the items required to be included as RSI. The RSI should include a 10-year schedule which includes the employer’s proportion (percentage) of the collective net pension liability, the employer’s proportionate share (amount) of the collective net pension liability, the employer’s covered-employee payroll, the employer’s proportionate share (amount) of the collective net pension liability as a percentage of the employer’s covered-employee payroll and the pension plan’s fiduciary net position as a percentage of the total pension liability. If the contribution requirements of the employer are statutorily or contractually established, a 10-year schedule is required presenting the statutorily or contractually required employer contribution, the amount of contributions recognized by the pension plan in relation to the statutorily or contractually required employer contribution, the difference between the required contribution and the amount recognized as contributions by the plan, the employer’s covered-employee payroll, and the amount of contributions recognized by the pension plan in relation to the statutorily or contractually required employer contribution as a percent of covered payroll.
For questions and additional information about compliance with GASB 68, contact your Marcum Governmental Entities professional.
About Marcum LLP: For more than 60 years, Marcum LLP has successfully provided professional auditing, accounting, financial reporting, and management advisory/consulting services to a broad spectrum of governmental entities. Marcum is one of the largest independent public accounting and advisory services firms in the United States. Headquartered in New York City, Marcum offers the resources of 1,400 professionals, including more than 180 partners, in 25 full-service offices in major business markets throughout the U.S., Grand Cayman and China. For more information, visit www.marcumllp.com.