The Devil`s in the Details

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Florida Government Finance Officers Association
Nature Coast Chapter
Citrus Hills Golf & Country Club
April 16, 2014
The Devil’s in the Details
(GASB 67 & 68)
Presented By:
James J. Rizzo
Piotr Krekora
Gabriel, Roeder, Smith & Company
[email protected]
[email protected]
Copyright © 2013 GRS – All rights reserved.
Who is this Guy?
 “The budget should be
balanced, the treasury
should be refilled, the
public debt should be
reduced and the arrogance
of public officials should be
controlled.”
 “If you see a snake, just kill
it - don't appoint a
committee on snakes.”
 “The devil is in the details.”
2
Get Ready for GASB 67 and 68 !!!
 No more
procrastinating !
 Think ahead !
 Get your tools in
place !
 He who hesitates is __________ !
3
Lions and tigers and bears! Oh my!
 Throw away
everything you
knew about Pension
Accounting!
 Nothing is the same.
4
Accountants in GASB-land!
 “It would seem so nice
if something would
make sense for a
change.”
 “Speak English! I don’t
know the meaning of
half those long words,
and I don’t believe you
do either!”
 “There is a place like no other place on earth. A land of
wonder, mystery and danger! Some say to survive it
you have to be as mad as a hatter, which luckily I am.”
5
Agenda
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6
Effective Dates
Scope
High-level View
Timing and Linkage Puzzles
Pension Expense
Deferred Outflows and Inflows of Resources
GASB Note Disclosures Nudges
Cost-sharing Employers
We will not be able to cover everything.
No surprise there! But we’ll leave some Q&A time.
Effective Dates
 GASB Statement No. 67 is effective for fiscal years
beginning after June 15, 2013 (mostly for 2014 yearends)
 GASB Statement No. 68 is effective for fiscal years
beginning after June 15, 2014 (mostly for 2015 yearends)
 Myth:
► Plans’ financial statements (FS) implement for their
2014 year-end
► Employers’ financial statements (FS) implement
for their 2015 year end
Effective Dates – This May Surprise You
 If plan issues a stand-alone GAAP-basis financial
statement (FS):
► GASB 67 will be implemented in the plan’s 2014 FS
► But if an employer’s GAAP-basis 2014 FS presents the plan as a
fiduciary fund, then include any GASB 67 disclosures “essential
to a fair presentation”, along with its GASB 27 compliance
 If plan does not issue a stand-alone GAAP-basis FS:
► And if an employer’s GAAP-basis 2014 FS presents the plan as a
fiduciary fund, then include all GASB 67 disclosures along with
its GASB 27 compliance

Paragraph 5, Footnote 9 and 11 of GASB 67, Q&A 2 of GASB 67 IG, and GASB 14
Scope
 Counties, Cities, School Districts, Tax Districts, etc.
► Employees in FRS, in one or more single employer plans, in both
► In Special Funding Situations (contributions for pension benefits
of non-employees)
 Component Units
► Some issue their own GAAP-basis FS.
► Some might not.
► If they do and if they have employees participating in pension
plans, their FS will need to include GASB 68 recognition and
disclosures.
 County Constitutional Offices
► Do not, generally, issue GAAP-basis FS; i.e., no long-term
liabilities, etc.
9
Scope
 Defined benefit pension plans
► Massive changes from GASB 27
 Defined contribution plans
► Very little change from GASB 27
 Cost-sharing plans
► FRS
► Other plans that cover a couple separate employers
 Single employer plans
► Local plans for police, fire and general employees
 OPEB
► Not yet - scheduled for FYE 2018
10
High-level View
 The Net Pension Liability (NPL) is the new, different,
much larger and volatile balance sheet liability – it is the
entire Unfunded Actuarial Accrued Liability
 NPL =
Total Pension Liability (TPL)
minus
Plan’s Fiduciary Net Position (PFNP)
(aka fair value of plan assets)
 TPL is calculated using only one actuarial cost method,
to achieve better comparability
11
High-level View
 Total Pension Liability (TPL)
=
Actuarial Accrued Liability (AAL) determined
under the traditional Entry Age normal (EA)
actuarial cost method
 Not the so-called Ultimate EA cost method
 Not the Frozen Entry Age or Frozen Initial Liability cost
method
 Not the Aggregate cost method
 Not the Projected Unit Credit cost method
12
High-level View
 Pension Expense (PE) is “based on” the change in the
NPL from one year to the next
 There are many reasons for the NPL changing from one
year to the next
 There are many different components of the change in
NPL from one year to the next; and different
components are treated differently
13
High-level View
 NPL = TPL minus PFNP
 The total change in NPL is separated into:
► Changes in the TPL from one year to the next and
► Changes in the PFNP from one year to the next
14
High-level View
 Liabilities:
► Net Pension Liability (NPL),
► Short-term payables for legally or contractually required
contributions, and
► Long-term liabilities for pension-related debt
 Deferred outflows of resources (appears below assets):
► Unrecognized portions of expense charges
 Deferred inflows of resources (appears below liabilities):
► Unrecognized portions of expense credits
15
Timing and Linkage Puzzles
• Dates to consider:
• Valuation Date
Measurement Date
Reporting Date
• Periods to consider:
• Valuation Year
Measurement Period
Reporting Period
• Reporting entities to consider:
• Plan’s FS reporting
Employer’s(s’) FS reporting
Timing and Linkage Puzzles
• Three Dates and three Periods for at least two
Reporting entities all need to be linked together in a
manner that:
• Cooperates with (or dictates) the needs and deadlines of the
plan’s FS preparers and auditors
• Cooperates with (or dictates) the needs and deadlines of the
employer’s FS preparers and auditors
• Coordinates with (or dictates) the needs and deadlines of the
actuaries
• If not yet worked out for each plan, it may need to be
one of the first things to get settled with actuaries,
preparers and auditors for efficient project
management.
Plan Reporting Timing and Linkage
RD1
Timing/Linkage A
(No Roll-forward)
MD1
PFNP1
VD1 (AAL1=TPL1)
9/30/13
9/30/14
Downside: Big timing
challenges for doing all
funding and accounting
calculations
Upside: More current
TPL calc’d, all at once
RD1
Timing/Linkage B
(With Roll-forward)
18
VD1
AAL1
Roll-forward
MD1
PFNP1
TPL1
Downside: Update AAL
for actual benefits and
significant changes
Upside: Obtain a
preliminary TPL early
Plan Reporting (1st Year Only)
To obtain a TPL for BOY
RD1
Timing/Linkage A
(No Roll-forward)
AAL0=TPL0
Roll-back
MD1
PFNP1
VD1 (AAL1=TPL1)
TPL0 (after rolling back)
is the TPL for BOY
in the RSI Schedule
(Q&A 99 GASB 67)
9/30/13
9/30/14
RD1
Timing/Linkage B
(With Roll-forward)
19
VD1
AAL1= TPL0
Roll-forward
MD1 TPL0 (before rolling forward)
PFNP1
is the TPL for BOY
TPL1
in the RSI Schedule
Plan Reporting (2nd Year)
RD1
RD2
Timing/Linkage A
(No Roll-forward)
MD1
PFNP1
VD1 (AAL1=TPL1)
9/30/13
MD2
TPL2
VD2 (AAL2=TPL2)
9/30/14
RD1
RD2
MD1
PFNP1
TPL1
VD2
AAL2
MD2
TPL2
Timing/Linkage B
(With Roll-forward)
20
VD1
AAL1= TPL0
Roll-forward
Roll-forward
Employer CAFR Timing and Linkage
 Now for the NPL on the Employer’s balance sheet
 Recall the timing and linkage for the Plan’s FS
No Roll-forward (same $)
9/30/14
10/1/13
TPL1-PFNP1=NPL1
Plan’s RD1
Timing/Linkage B
(With Roll-forward)
21
VD1
AAL1
Roll-forward
MD1
PFNP1
TPL1
9/30/15
Employer’s Balance Sheet
NPL1
Employer’s RD1
Employer CAFR Timing and Linkage
 Now what about the employer’s pension expense?
 Recall, it’s based on the change
between two NPLs
No Roll-forward (same $)
DETERMINES
Change in NPL
Employer’s Pension Expense
(During Measurement Period)
(During Reporting Periods)
10/1/13
9/30/14
NPL0
NPL1
9/30/15
Timing/Linkage
Employer’s RD1
 Change in NPL from 9/30/13’s NPL to the
22
9/30/14’s NPL (their MDs) forms the basis for the
employer’s CAFR pension expense for ye 9/30/15 RD
Pension Expense
 Recall the change in NPL drives the pension expense
► Under GASB 27, the pension expense (the ARC and APC) was
determined first and drove the balance sheet liability (the NPO)
► Under GASB 68, the balance sheet liability (NPL) comes first
and drives the pension expense (PE)
 There is much focus on the change in NPL from period
to period
► That change forms the basis for the employer’s pension expense
► That change in presented in a schedule in the Notes and RSI
23
Pension Expense
 Immediate recognition in PE of all types of changes in the
NPL except:
Type change in NPL recognized over
time
24
Straight line*
recognition period
Differences between expected and
actual experience (aka actuarial
liability gain/loss)
Average remaining
service life of active and
inactive members
Change of assumptions
Average remaining
service life of active and
inactive members
Difference between projected and
actual earnings on investments
5 years
* Other methods are permitted, but straight-line amortization of principal is expected to be the
rule rather than the exception; delayed recognition will result in layered amortization bases.
Deferred Outflows and Inflows
 The portion of NPL changes that are not yet recognized
in pension expense are set up and added to:
► A deferred outflows of resources account (DOR) or
► A deferred inflows of resources account (DIR)
 DOR/DIR accounts are established (or added to)
whenever any one or more of these three types of
changes in NPL occur
25
Deferred Outflows and Inflows
 Each year
► DOR amounts (if any) will be recycled out and charged to
pension expense
► DIR amounts (if any) will be recycled out and credited to
pension expense
 DOR/DIR-related pension expense charges and credits
come from either:
► The portion of a current year’s NPL change that is recognized in
the first year
► A portion of previous years’ NPL changes that had not yet been
fully recognized
26
GASB Note Disclosure Nudges
 There are disclosure requirements that some consider
nudges, but here are my four:
 Nudge 1: Dates of experience studies for significant
assumptions
 Nudge 2: Price inflation assumption
 Nudge 3: Long-term expected rate of return assumption
► And a description of how it was determined,
► Including significant methods and assumptions used
27
GASB Note Disclosure Nudges
 Nudge 4: For each major asset class:
► The asset allocation and the expected real rate of return (before
price inflation) net of investment expenses and whether they are
arithmetic or geometric expectations.
► Geometric version is more appropriate for pensions and is
approximately 50 bps to 150 bps less than arithmetic
28
GASB Note Disclosure Nudges
 Nudge 4 Table:
Asset
Allocation
Net Real Expected
Return (Arithmetic)
Domestic Stocks
31%
5.75%
Foreign Stocks
19%
6.15%
Private Equity
22%
5.85%
Real Estate
7%
4.35%
Foreign Bonds
9%
2.75%
Domestic Bonds
12%
1.55%
Asset Class
 Users will check out your LTeROR against your table
► They’ll multiply the two columns together and get 4.98%
► They’ll add your price inflation of 2.4% back in and get 7.38%
► Should be lower for geometric expected means
29
Cost-sharing Employers
 Employers with employees in FRS pension program
 Employers that contribute to a pension plan that covers
employees of more than one employer
 FRS’s total collective PE, NPL, DOR and DIR will need
to be allocated to each participating employer (and their
component units) based on the participating entity’s
proportionate share of either:
► Actual contributions, or
► Long-term contribution effort (e.g., actuarial present value of
future contributions)
30
Cost-sharing Employers
 Additional entries will need to be made by the
employer for contributions made after the measurement
date
 Hopefully, FRS will provide you with a package each
year
► Containing all you need to make all your required entries and
note disclosures
► In time for you to prepare your annual CAFR and audit
► But don’t hold your breath
31
Cost-sharing Employers
 Timing may be an issue for counties and any other
participating employers with a September 30 year end
 Here’s why: Consider the 9/30/15 implementation year
► Per GASB 68, measurement date (assets and liabilities) must be
anywhere from 9/30/14 through 9/30/15
► FRS currently values assets and liabilities each 6/30
► Using a measurement date of 6/30/14 will be too early
► Using a measurement date of 6/30/15,
• All their work and package to employers will not likely be completed by
9/30/15
• And may not be completed in time for employers to prepare their CAFR
and audit by the due date
► They might consider a second measurement date, but expensive
32
Cost-sharing Employers
 Audits may be an issue for all participating employers
► Local auditor education
► AICPA’s recent White Paper relating to Information for
Employer Reporting
• http://www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources
/gasbmatters/DownloadableDocuments/AICPASLGEP_CS_ER_Reporting_
Whitepaper.pdf
► AICPA’s recent White Paper relating to Plan Reporting and
Testing Census Data
• http://www.aicpa.org/interestareas/governmentalauditquality/resources/ga
sbmatters/downloadabledocuments/aicpaslgep_cs_census_data_whitepape
r.pdf
► AICPA will soon release four auditing interpretations
33
Cost-sharing Employers
 FRS’s auditor may need to express an opinion on a
schedule prepared by FRS as of the measurement date
showing employer proportionate share allocations of
the collective PE, NPL, DOR and DIR
 Testing the census data of participating employers will
be an issue
► For the FRS auditor
► And possibly for the participating employer’s auditor
34
Cost-sharing Employers
 For more information view KPMG archived webcast on
this subject: http://www.kpmginstitutes.com/governmentinstitute/events/critical-issues-in-implementing-gasb-pensionstandards.aspx
 A few weeks ago, the GASB considered and deliberated
whether to delay the effective date of GASB 68 due to
requests from major preparer and auditor organizations
and from others
 The GASB decided not to delay the effective date.
35
Single Employer Plans
 These audit issue may come into play on a smaller scale,
but problematic nonetheless, for single employer plans
for which:
► One auditor opines on the plan’s standalone financial statement
► Another auditor opines on the single employer’s financial
statement
36
Disclaimers
 Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent
this presentation concerns tax matters, it is not intended or written to be
used, and cannot be used, for the purpose of (i) avoiding tax-related
penalties under the Internal Revenue Code or (ii) marketing or
recommending to another party any tax-related matter addressed within.
Each taxpayer should seek advice based on the individual’s circumstances
from an independent tax advisor.
 This presentation shall not be construed to provide tax advice, legal advice
or investment advice.
 Readers are cautioned to examine original source materials and to consult
with subject matter experts before making decisions related to the subject
matter of this presentation.
 This presentation does not necessarily express the views of conference
sponsor, nor Gabriel, Roeder, Smith & Company, and may not even express
the views of the speaker.
37
Acknowledgement
Thank you to David Kausch and Paul Zorn who
checked and peer reviewed parts of this presentation.
38
Questions
and
Answers ?
39
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