GASB Pension Disclosure Drafts Update, presented by David Bullock, CPA

1. New Pension
Proposed Rules:
Are You Ready?
Presented by David Bullock
August 25, 2011
© 2011 Macias Gini & O’Connell LLP. All rights reserved. This Macias Gini & O’Connell LLP session provides information and comments on current accounting issues and developments. It is not a
comprehensive analysis of the subject matter covered and is not intended to provide accounting or other conclusions with respect to the matters addressed in this issue. All relevant facts and circumstances,
including the pertinent authoritative literature, need to be considered to arrive at accounting that complies with matters addressed in this publication. For additional information on topics covered in this
publication, contact a Macias Gini & O’Connell LLP client service partner.

2. Speaker
David G. Bullock, Partner, MGO
David is a Partner with Macias Gini & O’Connell LLP
(MGO) with18 years of experience providing audit
services to state and local governments and
nonprofit entities. Since joining MGO, David has
been responsible for providing technical assistance
and training programs to clients, MGO staff and
other professionals in the areas of governmental
accounting, auditing and reporting.
He has been a frequent speaker for the Association of Government
Accountants (AGA), State Association of County Auditors and for the
California Association of Public Retirement Systems, and is currently
serving as President of the Silicon Valley Chapter of the AGA.
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3. Agenda
 GASB Due Process
 Pension and Pension Plan Exposure Drafts
• Highlights
• Note Disclosures and RSI
• Effective Date and Transition
 Questions
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4. GASB Exposure Drafts
• Issued 6/27/11
1. Accounting and Financial Reporting forsubstance
 Lack physical Pensions, an
amendment of GASB Statement No. 27 nature
 Nonfinancial in (Pension
Exposure Draft)  Initial useful life extending
beyond a single reporting
2. Financial Reporting for Pension Plans, an
amendment of GASB Statement No. 25 (Pension
period
Plan Exposure Draft)
• Comments accepted until 9/30
• Public Hearings – 10/3, 10/13 & 10/20
• User Discussion Forums – 10/4, 10/14 & 10/21
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5. Pension Exposure Draft
• Separates accounting from funding
• Eliminates the Annual Required Contribution
approach
• Introduces the Net Pension Liability
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6. Pension Exposure Draft
The net pension liability (NPL)
• Unfunded pension obligation a government
(employer) is responsible to pay
• Equals Total Pension Liability less Plan Net Position
(primarily investments reported at fair value)
• Replaces current cumulative difference between
annual pension cost and contributions made (the Net
Pension Obligation or NPO)
• Would be reported on the face of a government’s
financial statements and would substantially increase
the liabilities reported for most governments
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7. Pension Exposure Draft
Measuring the Total Pension Liability involves:
1. Projecting future benefit payments
2. Discounting projected future benefits to present
value
3. Allocating present value of projected future benefits
to past and future periods
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8. Pension Exposure Draft
Projecting Future Benefit Payments
• Continue current practice of incorporating
expectations of future employment related events
into projections
• Include valuation of ad hoc COLAs that occur
regularly and are substantively automatic (New)
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9. Pension Exposure Draft
Discounting Future Benefit Payments to
Present Value
• Current standard’s discount rate = Expected future rate of
return on pension plan’s investments over the long-term
• Proposed standard largely keeps status quo except when
assets are not expected to meet future plan benefits
• Difference would be discounted by a high-quality tax-exempt
municipal bond index rate (30-year AA/Aa or higher rated
bonds)
• Proposed standard will likely result in a lower blended
discount rate for plans that are significantly underfunded,
thus, increasing the total pension liability
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10. Pension Exposure Draft
Allocating Present Value of Projected Benefits
• Current standard allows for 6 actuarial cost
methods to select from and allows attribution of
payments to be done either in level dollar amounts
or as a level percentage of payroll
• Proposed standard only allows for the Entry Age
Normal (EAN) Method
• EAN is based on an individual calculation for each active
plan member
• Allocated at a level percentage of payroll
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11. Pension Exposure Draft
Annual Cost of Pensions
 Net pension liability changes annually due to:
• Employees work and earn more benefits
• Outstanding liability accrues interest
• Contributions to the plan increase/decrease
• Actual economic and demographic assumptions are
different from actuarial assumptions
• Changes made to economic and demographic
assumptions
• Changes to plan provisions
• Value of plan investments changes
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12. Pension Exposure Draft
Annual Cost of Pensions
 Immediate current year expenses include:
• Benefits that are earned each year by employees
• Interest on the total pension liability
• Changes in terms of the pension benefits to be provided
• Projected earnings on plan investments
• Changes in value of plan assets other than investments
(contributions and benefit payments)
• The effect of differences between what was assumed
regarding economic and demographic factors, as it relates to
retirees
• The effect of using new economic and demographic
assumptions, as it relates to retirees
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13. Pension Exposure Draft
Annual Cost of Pensions
 Deferral of expenses include:
• The effect of differences between economic and
demographic assumptions and actual experience, as it
relates to current employees
• The effect of using new economic and demographic
assumptions, as it relates to current employees
• The effect of difference between actual investment earnings
and what was projected
 Deferrals are amortized over estimated remaining
service lives or 5 years as noted on next slide
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14. Pension Exposure Draft
Annual Cost of Pensions
Period over which changes are recognized:
Amortization Periods for Pension Expense
Change Active Members Inactive Members
Investment gain or loss 5 years 5 years
Actuarial gain or loss Avg. expected remaining service lives Immediate
Actuarial assumption or method Avg. expected remaining service lives Immediate
Plan benefits Immediate Immediate
Results in faster recognition of changes
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15. Pension Exposure Draft
Cost-Sharing Multiple-Employer Pension Plans
Types of employer pension plans:
 Single-employer pension plans involve only 1 government
 Agent multiple-employer pension plans
• Separate accounts are maintained for each government
in the plan
• Akin to a collection of single employer pension plans
 Cost-sharing multiple-employer pension plans
• Governments share costs and risks
• Any assets in plan may be used to pay any employee’s
benefits, regardless of what participating government
they worked for
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16. Pension Exposure Draft
Cost-Sharing Multiple-Employer Pension Plans
 Current requirements:
• Reflect the sharing of risks and assets
• Do not require actuarial information to be presented for
individual employers
• Information found in the cost-sharing pension plan’s own
financial statements
 Proposed requirements:
• Report the government’s proportionate share of net pension
liability
• Report the government’s proportionate share of annual
pension expense
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17. Pension Exposure Draft
Note Disclosures
 Requirements for all governments:
• Descriptions of their pension plans
• Descriptions of persons covered by them
• Policies for determining government’s annual contributions
to the plan
• Significant assumptions used to measure net pension
liability
• Additional information related to discount rate
• Net pension liability, deferred outflows and inflows and
pension expense
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18. Pension Exposure Draft
Note Disclosures
 Requirements for single and agent plans:
• Change in the total pension liability, plan assets, and net
pension liability during current period
• Components of current period pension expense
• Reconciliation of beginning and ending balances of deferred
outflows and inflows during current period
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19. Pension Exposure Draft
Required Supplementary Information (RSI)
 10-year RSI schedules containing information about -
• Change in the total pension liability, plan net position, and
net pension liability
• Pension liability ratios
• Ratios of actuarially calculated contributions (if applicable)
• Notes to the schedules
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20. Pension Exposure Draft
Special Funding Situations
 Entity other than the employer government (usually
another government) is legally responsible for
contributing to the plan.
• Conditional
• Unconditional
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21. Pension Exposure Draft
Special Funding Situations
 Conditional Special Funding
• Conditional on a particular event or circumstance that is
unrelated to the pension plan
• Recipient government recognizes the contribution from
the nonemployer as revenue
• Nonemployer reports the contribution as an expense
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22. Pension Exposure Draft
Special Funding Situations
 Unconditional Special Funding
• The nonemployer legally responsible for contributing has
essentially taken a portion of the pension obligation of the
employer as its own
• The nonemployer would recognize its proportionate share of
the employer’s net pension liability, deferred outflows and
inflows and pension expense
• The employer would recognize revenue equal to its portion
of the noneomployer’s pension expense
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23. Pension Exposure Draft
Defined Contribution Pensions
 Defined contribution plan characteristics:
 Stipulates only the amounts to be contributed to an
employee’s account each year
 Does not specify the amount of benefits employees will
receive after the end of their employment
 Essentially no change to existing requirements
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24. Pension Exposure Draft
Effective Date and Transition
 Effective for fiscal years beginning after June 15,
2013 for most employers
 One year earlier for certain single employer plans
with plan net position of one billion dollars or more
 Employers would be required to restate prior
financial statements under the new rules if practical,
or to reflect the cumulative affects of the new rules in
financial statements
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25. Pension Plan Exposure Draft
Highlights
 Amends Statement No. 25, Financial Reporting for Defined
Benefit Pension Plans and Note Disclosures for Defined
Contribution Plans
 Amends Statement No. 50, Pension Disclosures
 Establish standards for financial reporting by defined
benefit pension plans (defined benefit and defined
contributions) administered through qualified trusts
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26. Pension Plan Exposure Draft
New Disclosures and RSI
 Time-weighted and money-weighted rates of return
on plan investments
 Employers’ net pension liability information (for
single-employer and cost-sharing pension plans)
 10-years of RSI Information
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27. Pension Plan Exposure Draft
Rates of Return on Plan Investments
 Time-weighted rate of return
• Expresses investment performance, net of investment expenses,
without consideration of timing and amounts invested
• Considers performance of a hypothetical dollar invested from the
beginning of an investment period to the period’s end
• Does not consider effect of varying amounts invested due to
contribution receipts, reinvestment of investment returns, or benefit
payments
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28. Pension Plan Exposure Draft
Rates of Return on Plan Investments
 Money-weighted rate of return
• Expresses investment performance, net of investment expenses,
after consideration of the impact of the changing amounts actually
invested
• Takes into account effects of transactions that increase and
decrease amount of plan investments (e.g., contributions and
benefit payments)
• Provides information that is comparable with long-term expected
rate of return of plan investments
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29. Pension Plan Exposure Draft
Information about the
Net Pension Liability of the Employer
 Replaces “funded status of employers” disclosure
 Only for single-employer and cost-sharing pension plans
 Disclosure includes:
• Components of the net pension liability of the employer(s) as of the
end of the plan’s reporting period
• Ratio of plan net position to total pension liability of employer(s) as of
that date
• Significant assumptions used to measure total pension liability
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30. Pension Plan Exposure Draft
Required Supplementary Information
 10 years of information
 For single-employer and cost-sharing pension plans
• Schedule of Changes in the Net Pension Liabilities of the Employer(s)
• Schedule of the Employer(s) Net Pension Liability
• Schedule of Employer Actuarially Calculated Contributions
 For all pension plans
• Schedule of Investment Returns
 Notes to schedules
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31. Pension Plan Exposure Draft
Implementation Date and Transition
 Effective for fiscal years beginning after June 15, 2012 for defined
benefit pension plans that meet ALL of the following criteria:
• Single-employer pension plan
• Plan net position of $1 billion or more in fiscal year ending after
June 15, 2010
• Participating employer does not have a special funding situation
 All other pension plans, this statement is effective for financial
statements for periods beginning after June 15, 2013
 Employers would be required to restate prior financial statements
under the new rules if practical, or to reflect the cumulative effects of
the new rules in the financial statements
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32. Now For
Questions.
www.mgocpa.com
info@mgocpa.com
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33. Thank you for
listening.
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