Article Summary
Pensions
By Joseph E. Seibert, CPA
Government Obligations to Appear in Financial Statements
Pennsylvania CPA Journal | Spring 2015 | www.picpa.org24
Pension Plans To pinpoint the appropriate accounting under Statement No. 68 and the related information that will need to be obtained, the type of defi ned benefi t pension plan fi rst must be deter- mined. Defi ned benefi t pension plans are classifi ed according to the number of employers whose employees are provided with pensions through the pension plan and whether pension obligations and pension plan assets are shared. For purposes of this classifi cation, a primary government and its component units are considered to be one employer. Accordingly, plans are classifi ed in one of the following categories:
these include the plans of counties, many cities, and other municipalities.
employer are pooled and plan assets can be used to pay the benefi ts of the employees of any employer that provides
plan in which local school districts participate.
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
in which many local governments participate.
Pension Amounts in Accrual Basis Statements When Statement No. 68 is implemented, employers will be required to recognize a liability as employees earn their pension
For the fi rst time, employers participating in single and agent plans will recognize their specifi c pension amounts, which include net pension liability, deferred outfl ows of resources,
sharing plans will recognize their proportionate share of the collective pension amounts for the plan.
In many cases, the net pension liability will be material to the fi nancial statements, resulting in a signifi cant increase in reported liabilities with a corresponding decrease in net posi-
include appropriate discussion of the impact of these changes in the management’s discussion and analysis section of the comprehensive annual fi nancial report. Employer governments may also consider developing a communications plan to edu- cate elected offi cials and those charged with governance about the new reporting requirements.
Selecting Measurement Date In accrual basis fi nancial statements, the net pension liability is required to be measured as of a date no earlier than the end
consistently applied each year. As a practical matter, based on the need for information from the plan, the measurement date for the net pension liability will almost always coincide with
The Governmental Accounting Standards Board’s (GASB) Statement No. 68, Accounting
and Financial Reporting for
Pensions, becomes effective for
years ended June 30, 2015, and
beyond. This standard trans-
forms the way governments
report their pension obligations
in their fi nancial statements,
which will present challenges
for employer governments and
their auditors during implemen-
tation. This feature discusses
some of the key considerations
for Pennsylvania local govern-
ments and their auditors to
consider.
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the year-end of the plan. In these circumstances, the employer will need to use the plan year-end that falls within the preceding 12 months of the employer’s year-end. When the employer and the plan have the same year-end, the employer may choose to use either the current or prior year-end of the plan as the measure- ment date. However, once selected, the employer must follow the measurement date consistently. For example, assume an employer with a June 30 year-end is implementing Statement No. 68 for the year ended June 30, 2015. Assume further that the employer participates in a cost-sharing plan that also has a June 30 year- end. In this case, the employer can select either June 30, 2014, or June 30, 2015, as the measurement date to report the net pension liability in the employer’s financial statements for the year ended June 30, 2015. Employers should carefully consider the timeliness of the information being provided by the plan in selecting the measurement date to avoid unnecessary delay in the issuance of the employer’s financial statements.
Governmental Fund Financial Statements In governmental fund financial statements, a net pension liability should only be recognized to the extent the liability is normally expected to be liquidated with expendable available financial
the employer to the pension plan and the change between the beginning and ending balances of the liability to be liquidated with expendable available financial resources. Statement No. 68 clarifies that pension liabilities are normally expected to be liqui- dated with expendable available financial resources to the extent
are due and payable and the pension plan’s fiduciary net position is not sufficient for payment of those benefits. In most circum- stances, this means pension expenditures will be recognized when
paid, similar to the cash basis of accounting. This may be a change for some governments that previously recognized pension expen- ditures for contributions made to the plan shortly after year-end.
Allocation of Pension Amounts Statement No. 68 does not establish specific requirements for allocation of the net pension liability or other pension-related measures to individual funds. However, question 37 of the imple- mentation guide for Statement No. 68 states “For proprietary and fiduciary funds, consideration should be given to National
paragraph 42, as amended, which requires that long-term liabili- ties 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.” Most governments likely will allocate a portion of the net pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense using the allocation methodology for employers participating in cost- sharing plans. This allocation will likely result in the recognition of additional deferred outflows of resources or deferred inflows of resource related to changes in proportion from year to year.
Cost-Sharing Employers For the first time, employers participating in cost-sharing plans
their proportionate share of the collective pension amounts for the plan. A major challenge faced by each employer is how they will obtain all the necessary information to support their proportion- ate share of these collective pension amounts. Similarly, employer auditors will be challenged in obtaining sufficient appropriate evidence to opine on the pension amounts included in employer financial statements.
Governmental Employer
Participation in Cost-Sharing Multiple-Employer Plans: Issues
Related to Information for Employer Reporting . This cost-sharing plan white paper addresses these issues and recommends that cost-sharing plans calculate each employer’s allocation percentage and collective pension amounts. The following are the schedules
employer to all employers and each allocation percentage. The plan will engage its auditor to opine on the schedule of employer allocations and related notes to the schedule.
- culate amounts to be recorded in the financial statements of the employer, including net pension liability, deferred inflows and outflows, pension expense, and changes in proportion share. The plan should engage its auditor to opine separately on the four following elements: total net pension liability, total deferred outflows of resources, total deferred inflows of resources, and total pension expense for the sum of all partici- pating entities included in this schedule.
The white paper discusses a number of employer auditor responsibilities when relying on the information and related audit assurance provided by the plan. Specifically, the employer auditor should review the plan auditor’s report and any related opinion modifications and assess other matters discussed in the report. Additionally, the employer auditor should evaluate whether the plan auditor has the necessary competence and independence for the school auditor’s purposes. Further, the school and its audi- tor have a responsibility to verify and recalculate amounts specific to the applicable employer, including the employer amount used
recalculate the allocation percentage for the employer, and recal- culate the pension amounts allocated to the employer based on the allocation percentage.
When Statement No. 68 is implement- ed, employers will be required to rec- ognize a liability as employees earn their pension benefits.
Pennsylvania CPA Journal | Spring 2015 | www.picpa.org 27
Th e AICPA issued a census data white paper that addresses the plan auditor’s responsibility to obtain suffi cient appropri- ate evidence regarding the completeness and accuracy of census data underlying certain fi nancial statement elements of the cost- sharing plan fi nancial statements. Th e suggested audit procedures performed by the plan auditor include selecting a risk-based repre- sentative group of participating employers each year on a rotating basis for testing underlying payroll records of active employees for completeness and accuracy of the signifi cant elements of cen- sus data reported to the plan. As a result, employer auditors may receive requests to perform procedures to assist the plan auditor in obtaining suffi cient appropriate evidence over the completeness and accuracy of census data or the plan auditor may reach out to employers to complete these procedures themselves. If the partici- pating employer’s auditor does the procedures, an AT Section 101 attestation examination would be conducted.
Agent Employers For the fi rst time, employers participating in agent plans (such as local governments participating in PMRS) will recognize their specifi c pension amounts, including net pension liability, deferred outfl ows of resources, deferred infl ows of resources, and pension expense. A challenge faced by each employer (and its auditor) par- ticipating in an agent plan is how the employer will obtain all necessary information to support the specifi c pension amounts, including net pension liability, deferred outfl ows of resources, deferred infl ows of resources, and pension expense. Th is is because specifi c pension amounts are dependent on certain accounting records maintained by the plan, the controls and processes of the plan, and calculations by the plan’s actuary. Th e AICPA white paper on agent plans recommends addressing total pension liabil- ity, deferred outfl ows of resources, deferred infl ows of resources, and pension expense as a best practice solution. Another best practice solution is to address the employer’s specifi c interest in the agent plan’s fi duciary net position as follows:
deferred infl ows of resources, and pension expense – Th e plan actuary issues a separate actuarial valuation report specifi c to each employer that includes a certifi cation letter addressed to employer management. Also, the plan engages its auditor to issue either a service organization controls (SOC 1) Type 2 report on controls over census data maintained by the plan, or an examination engagement over selected management’s assertions related to census data maintained by the plan.
changes in fi duciary net position by the employer and related notes to the schedule. Also, the plan engages its auditor to opine on the schedule of fi duciary net position by employer either through an opinion on the schedule as a whole com- bined with a SOC 1 Type 2 report on the controls over the calculation and allocation of additions and deductions to employer accounts, or an opinion on each employer column in the schedule.
Th e agent plan white paper discusses a number of employer auditor responsibilities when relying on the information and related audit assurance provided by the plan. Specifi cally, the employer auditor retains the responsibility of evaluating whether the underlying census data is complete and accurate, and should consider the following: confi rm census information with the
actuary, review roll forward of census data, compare census to prior-year values and employee base, sample participants and review personnel fi le for accuracy of census data, sample from payroll system to verify completeness of census fi le, and evaluate plan auditor and its reports.
Additionally, the employer auditor will need to perform procedures related to the employer-specifi c amounts in the schedule of changes in fi duciary net position, including verifying the completeness and accuracy of the employer and employee contributions attributed to the individual employer, and ana- lytical procedures on investment income and administrative expenses and benefi t payments by developing an expectation and validation of the expectations. Additionally, the employer auditor should evaluate whether the auditor’s report and accom- panying schedule are adequate and appropriate for the employer auditor’s purposes.
Communication Communication between pension plans, government employers, and their auditors is essential in implementing Statement No. 68. Th is communication may be challenging because of the complex- ity of the standards and the potential lack of awareness about some of the more diffi cult provisions. Nonetheless, timely communica- tion is essential in the employer government’s implementation. Employers and their auditors need to understand what informa- tion and associated audit assurance the plan will provide and the expected timing. Employers should not take for granted that the plan will provide the necessary information and associated audit assurance as discussed in the applicable AICPA white papers.
Key Planning Actions As a result of the complexity of the pension environment in gov- ernments and the new requirements of the GASB standards and resulting AICPA white papers, the following are key steps that governmental entities should be taking in conjunction with their actuary and auditor to be ready for a successful implementation:
All Employers
ment date.
Single Employers
sync with rate of return assumptions in the valuation.
Cost-Sharing Employers
employee census testing requirements and AICPA schedules.
Agent Employers
census testing and review of PMRS data.
AICPA recommended reporting.
Joseph E. Seibert, CPA, is a partner with
KPMG LLP in Harrisburg. He can be
reached at jseibert@kpmg.com.
Joseph E. Seibert, CPA
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