The Government Accounting Standards Board (GASB) recently approved two new standards which will have a significant impact on state and local government financial statements. GASB 67 relates to the accounting and reporting of pension plans and will be effective for the December 31, 2014, pension plan financial statements. GASB 68 relates to the accounting and reporting of pension information of member governments (employers) financial statements and will be effective beginning with the June 30, 2015, employer financial statements.
These new standards will require that pension plan actuarial valuations be calculated using a single liability measurement method instead of various methods currently permitted, and that the pension liability be “measured” at least annually as of the pension plan year-end. It will also require (for the first time) that the auditor of the pension plan provide an opinion on the accuracy of the actuarially determined annual pension expense and unfunded liability. This will require extensive planning, coordination, and communication among the auditor, actuary, and pension plan management.
The most dramatic impact of these standards will be reflected in the financial statements of member government employers (cities, towns, districts). For the first time, member government employers will report their proportionate share of the retirement system’s overall unfunded net pension liability in their entity-wide financial statements. This liability is expected to be substantial, and in most cases, will cause the “unrestricted net position” to report a large deficit balance. If the government has enterprise operations, the net pension liability will also need to be allocated to those funds.
In addition, the member government financial statements will require extensive new footnote disclosures and supplementary information disclosures.
The purpose of these new standards is to report employer pension expenses in the same periods that employees earn those benefits (accrual basis accounting). Although employer financial statements will look much weaker after implementing GASB 68 by reporting these previously unrecorded net pension liabilities, bond rating agencies have indicated that these changes will not likely affect actual bond ratings of member employers.
Pension plans are encouraged to begin communicating with their auditors and actuaries to ensure the 2014 pension plan financial statements and annual audit will be coordinated and completed in a timely manner. Employer governments are also encouraged to begin communicating with their member pension plan to ensure required financial information will be available to them so their 2015 financial statements and audit can be completed in a timely manner.
Melanson Heath anticipates working closely with the actuaries of its pension plan clients to clarify and coordinate the transfer of new documentation requirements to support the pension expense and net pension liability calculations under the new standards.
If you have questions please contact Frank Biron, CPA, President of Melanson Heath
Email Frank Biron or Phone: 800-282-2440.