The Governmental Accounting Standards Board’s (GASB) Statement No

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The Governmental Accounting Standards Board’s (GASB) Statement No. 68, Accounting andFinancial Reporting for Pensions, becomes effective for years ended June 30, 2015, and beyond.This standard transforms the way governments report their pension obligations in their financialstatements, which will present challenges for employer governments and their auditors duringimplementation. This feature discusses some of the key considerations for Pennsylvania localgovernments and their auditors to consider.Pension PlansTo pinpoint the appropriate accounting under Statement No. 68 and the related information thatwill need to be obtained, the type of defined benefit pension plan first must be determined.Defined benefit pension plans are classified according to the number of employers whoseemployees are provided with pensions through the pension plan and whether pension obligationsand pension plan assets are shared. For purposes of this classification, a primary government andits component units are considered to be one employer. Accordingly, plans are classified in oneof the following categories:* Single employer plans – Pension benefits are provided to the employees of only one employer.In Pennsylvania, these include the plans of counties, many cities, and other municipalities.* Cost-sharing multiple-employer (cost-sharing) plans – Pension obligations to the employees ofmore than one employer are pooled and plan assets can be used to pay the benefits of theemployees of any employer that provides pensions through the pension plan. The Public SchoolEmployees Retirement System (PSERS) is a cost-sharing plan in which local school districtsparticipate.* Agent multiple-employer (agent) plans – Plan assets are pooled for investment purposes, butseparate accounts are maintained for each individual employer so that each employer’s share ofthe pooled assets is legally available to pay the benefits of only its employees. The PennsylvaniaMunicipal Retirement System (PMRS) is an agent plan in which many local governmentsparticipate.Pension Amounts in Accrual Basis StatementsWhen Statement No. 68 is implemented, employers will be required to recognize a liability asemployees earn their pension benefits – that is, as they provide services to the government. Forthe first time, employers participating in single and agent plans will recognize their specificpension amounts, which include net pension liability, deferred outflows of resources, deferredinflows of resources, and pension expense (that is, specific pension amounts). Employersparticipating in cost-sharing plans will recognize their proportionate share of the collectivepension amounts for the plan.In many cases, the net pension liability will be material to the financial statements, resulting in asignificant increase in reported liabilities with a corresponding decrease in net position (equity).It is recommended that employer governments include appropriate discussion of the impact of these changes in the management’s discussion and analysis section of the comprehensive annualfinancial report. Employer governments may also consider developing a communications plan toeducate elected officials and those charged with governance about the new reportingrequirements.Selecting Measurement DateIn accrual basis financial statements, the net pension liability is required to be measured as of adate no earlier than the end of the employer’s prior fiscal year (the measurement date) andconsistently applied each year. As a practical matter, based on the need for information from theplan, the measurement date for the net pension liability will almost always coincide with theyear-end of the plan. In these circumstances, the employer will need to use the plan year-end thatfalls within the preceding 12 months of the employer’s year-end. When the employer and theplan have the same year-end, the employer may choose to use either the current or prior year-endof the plan as the measurement date. However, once selected, the employer must follow themeasurement date consistently. For example, assume an employer with a June 30 year-end isimplementing Statement No. 68 for the year ended June 30, 2015. Assume further that theemployer participates in a cost-sharing plan that also has a June 30 year-end. In this case, theemployer can select either June 30, 2014, or June 30, 2015, as the measurement date to report thenet 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 planin selecting the measurement date to avoid unnecessary delay in the issuance of the employer’sfinancial statements.Governmental Fund Financial StatementsIn governmental fund financial statements, a net pension liability should only be recognized tothe extent the liability is normally expected to be liquidated with expendable available financialresources. Pension expenditures are the total of amounts paid by the employer to the pensionplan and the change between the beginning and ending balances of the liability to be liquidatedwith expendable available financial resources. Statement No. 68 clarifies that pension liabilitiesare normally expected to be liquidated with expendable available financial resources to theextent that benefit payments have matured – that is, benefit payments are due and payable and thepension plan’s fiduciary net position is not sufficient for payment of those benefits. In mostcircumstances, this means pension expenditures will be recognized when paid, similar to the cashbasis of accounting. This may be a change for some governments that previously recognizedpension expenditures for contributions made to the plan shortly after year-end.Allocation of Pension AmountsStatement No. 68 does not establish specific requirements for allocation of the net pensionliability or other pension-related measures to individual funds. However, question 37 of theimplementation guide for Statement No. 68 states "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, asamended, 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 netposition, respectively." Most governments likely will allocate a portion of the net pensionliability, deferred outflows of resources, deferred inflows of resources, and pension expenseusing the allocation methodology for employers participating in cost-sharing plans. Thisallocation will likely result in the recognition of additional deferred outflows of resources ordeferred inflows of resource related to changes in proportion from year to year.Cost-Sharing EmployersFor the first time, employers participating in cost-sharing plans (such as those schoolsparticipating in PSERS) will recognize their proportionate share of the collective pensionamounts for the plan. A major challenge faced by each employer is how they will obtain all thenecessary information to support their proportionate share of these collective pension amounts.Similarly, employer auditors will be challenged in obtaining sufficient appropriate evidence toopine on the pension amounts included in employer financial statements.The AICPA State and Local Government Expert Panel issued a white paper in February 2014(Governmental Employer Participation in Cost-Sharing Multiple-Employer Plans: Issues Relatedto Information for Employer Reporting). This cost-sharing plan white paper addresses theseissues and recommends that cost-sharing plans calculate each employer’s allocation percentageand collective pension amounts. The following are the schedules the AICPA recommends thatcost-sharing plans prepare:* Schedule of employer allocations and allocation method to be used – This displays theproportionate relationship of each employer to all employers and each allocation percentage. Theplan will engage its auditor to opine on the schedule of employer allocations and related notes tothe schedule.* Schedule of pension amounts by employer – This will calculate amounts to be recorded in thefinancial statements of the employer, including net pension liability, deferred inflows andoutflows, pension expense, and changes in proportion share. The plan should engage its auditorto opine separately on the four following elements: total net pension liability, total deferredoutflows of resources, total deferred inflows of resources, and total pension expense for the sumof all participating entities included in this schedule.The white paper discusses a number of employer auditor responsibilities when relying on theinformation and related audit assurance provided by the plan. Specifically, the employer auditorshould review the plan auditor’s report and any related opinion modifications and assess othermatters discussed in the report. Additionally, the employer auditor should evaluate whether theplan auditor has the necessary competence and independence for the school auditor’s purposes.Further, the school and its auditor have a responsibility to verify and recalculate amounts specificto the applicable employer, including the employer amount used in the allocation percentage (thenumerator of the calculation), recalculate the allocation percentage for the employer, andrecalculate the pension amounts allocated to the employer based on the allocation percentage. The AICPA issued a census data white paper that addresses the plan auditor’s responsibility toobtain sufficient appropriate evidence regarding the completeness and accuracy of census dataunderlying certain financial statement elements of the cost-sharing plan financial statements. Thesuggested audit procedures performed by the plan auditor include selecting a risk-basedrepresentative group of participating employers each year on a rotating basis for testingunderlying payroll records of active employees for completeness and accuracy of the significantelements of census data reported to the plan. As a result, employer auditors may receive requeststo perform procedures to assist the plan auditor in obtaining sufficient appropriate evidence overthe completeness and accuracy of census data or the plan auditor may reach out to employers tocomplete these procedures themselves. If the participating employer’s auditor does theprocedures, an AT Section 101 attestation examination would be conducted.Agent EmployersFor the first time, employers participating in agent plans (such as local governments participatingin PMRS) will recognize their specific pension amounts, including net pension liability, deferredoutflows of resources, deferred inflows of resources, and pension expense. A challenge faced byeach employer (and its auditor) participating in an agent plan is how the employer will obtain allnecessary information to support the specific pension amounts, including net pension liability,deferred outflows of resources, deferred inflows of resources, and pension expense. This isbecause specific pension amounts are dependent on certain accounting records maintained by theplan, the controls and processes of the plan, and calculations by the plan’s actuary. The AICPAwhite paper on agent plans recommends addressing total pension liability, deferred outflows ofresources, deferred inflows of resources, and pension expense as a best practice solution. Anotherbest practice solution is to address the employer’s specific interest in the agent plan’s fiduciarynet position as follows:* ‘Total pension liability, deferred outflows of resources, deferred inflows of resources, andpension expense – The plan actuary issues a separate actuarial valuation report specific to eachemployer that includes a certification letter addressed to employer management. Also, the planengages its auditor to issue either a service organization controls (SOC 1) Type 2 report oncontrols over census data maintained by the plan, or an examination engagement over selectedmanagement’s assertions related to census data maintained by the plan.* Fiduciary net position – The plan prepares a schedule of changes in fiduciary net position bythe employer and related notes to the schedule. Also, the plan engages its auditor to opine on theschedule of fiduciary net position by employer either through an opinion on the schedule as awhole combined with a SOC 1 Type 2 report on the controls over the calculation and allocationof additions and deductions to employer accounts, or an opinion on each employer column in theschedule.The agent plan white paper discusses a number of employer auditor responsibilities when relyingon the information and related audit assurance provided by the plan. Specifically, the employerauditor retains the responsibility of evaluating whether the underlying census data is completeand accurate, and should consider the following: confirm 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 file for accuracy of census data, sample from payrollsystem to verify completeness of census file, and evaluate plan auditor and its reports.Additionally, the employer auditor will need to perform procedures related to the employerspecific amounts in the schedule of changes in fiduciary net position, including verifying thecompleteness and accuracy of the employer and employee contributions attributed to theindividual employer, and analytical procedures on investment income and administrativeexpenses and benefit payments by developing an expectation and validation of the expectations.Additionally, the employer auditor should evaluate whether the auditor’s report andaccompanying schedule are adequate and appropriate for the employer auditor’s purposes.CommunicationCommunication between pension plans, government employers, and their auditors is essential inimplementing Statement No. 68. This communication may be challenging because of thecomplexity of the standards and the potential lack of awareness about some of the more difficultprovisions. Nonetheless, timely communication is essential in the employer government’simplementation. Employers and their auditors need to understand what information andassociated audit assurance the plan will provide and the expected timing. Employers should nottake for granted that the plan will provide the necessary information and associated auditassurance as discussed in the applicable AICPA white papers.Key Planning ActionsAs a result of the complexity of the pension environment in governments and the newrequirements of the GASB standards and resulting AICPA white papers, the following are keysteps that governmental entities should be taking in conjunction with their actuary and auditor tobe ready for a successful implementation:All Employers* Review financial reporting timing and select measurement date.* Educate board/elected officials.Single Employers* Review investment policies to validate that they are in sync with rate of return assumptions inthe valuation.* Review or create policies for employer contributions.* Review policies for post-retirement benefit increases.Cost-Sharing Employers * Coordinate with auditor on incremental census testing.* Coordinate with PSERS on required testing of active employee census testing requirementsand AICPA schedules.Agent Employers* Coordinate with auditor on incremental census testing and review of PMRS data.* Coordinate with PMRS on timing of AICPA recommended reporting.AuthorAffiliationBy Joseph E. Seibert, CPAJoseph E. Seibert, CPA, is a partner with KPMG LLP in Harrisburg. He can be reached atjseibert@kpmg.com