Effective June 30, 2015, governmental employers are required to report their net pension liability (NPL) in the full accrual financial statements.
Cost-sharing employers will also report their share of the collective net pension liability. The footnotes will disclose basic information about the pension plan, the long-term expected rate of return, the discount rate, the deferred inflows of resources and deferred outflows of resources, and a sensitivity analysis.
There are several issues that must be addressed to ensure that auditors can give an unmodified opinion on the governmental employer financial statements. The American Institute of Certified Public Accountants (AICPA) AU-C Section 9500 states that audited plan financial statements do not provide sufficient evidence to support the relevant assertions in the employer’s financial statements with regard to the NPL. Without obtaining additional information, the employer auditor would likely not be able to accumulate sufficient appropriate audit evidence to support the pension amounts, and would likely have to modify the audit opinion.
It is important to note that the group audit standards (AICPA AU-C Section 600) do not apply to reporting the pension amounts. The AICPA issued AU-C Section 9600 to clarify this.
The Governmental Accounting Standards Board (GASB) Statement No. 68 (GASB 68) specifies that a primary government and its component units should be considered to be one employer for purposes of classifying a defined benefit plan as single-employer or multiple-employer. Therefore, the NPL must be allocated to component units that are part of the plan. Although GASB 68 does not establish specific requirements for allocation of the NPL to individual funds, question 36 of the GASB 68 Implementation Guide indicates that the National Council on Governmental Accounting (NCGA) Statement No. 1 would require allocation of the NPL to proprietary and fiduciary funds.
GASB 67 and 68 changed the definition of covered payroll, which is included in the Required Supplementary Information (RSI). GASB 25 and 27 defined covered payroll as “all elements included in the compensation paid to active employees on which contributions to a pension plan are based.” This was often referred to as “pensionable wages.” GASB 67 and 68 define covered payroll as “the payroll of employees that are provided with pensions through the pension plan.” Question 210 of the GASB 68 Implementation Guide indicates that the total payroll of covered employees on the accrual basis should be presented in the RSI schedules.
An employer will likely select a measurement date that coincides with the year-end of the plan. For example, an employer implementing GASB 68 for its June 30, 2015, financial statements would likely use a measurement date of June 30, 2014. The NPL to be reported at June 30, 2015, would have a measurement period of July 1, 2013, to June 30, 2014. The prior period adjustment to be recorded as of July 1, 2014, would include the effects of the deferred outflows of resources for employer contributions since the beginning of the measurement period (July 1, 2013 to June 30, 2014). The effect on the beginning net position (July 1, 2014) would be the beginning NPL less the deferred outflows of resources. Question 267 of the GASB 68 Implementation Guide discusses this. Also, the prior period adjustment should remove the net pension obligation (asset) if any, which was determined in accordance with GASB 27.
There are several issues related to multiple employer cost-sharing plans and agent plans. The AICPA issued two white papers to address these issues and provide best practices. The whitepapers are included in Appendix A and B of Chapter 13 of the AICPA Audit Guide for State and Local Governments as of March 1, 2015 (the Guide).
Each employer participating in a multiple employer cost-sharing or agent plan needs to obtain the necessary information to support its specific pension amounts, including net pension liability, deferred outflows of resources, deferred inflows of resources and pension expense.
COST-SHARING PLANS
Employers should obtain the audited schedule of employer allocations and the schedule of pension amounts by employer as described in the AICPA whitepaper, Governmental Employer Participation in Cost-Sharing Multiple-Employer Plans (Appendix B of the Guide) and determine whether the schedules are adequate and appropriate for the employer auditor’s purposes. The employer auditor will need to evaluate whether the plan auditor has the necessary competence and independence and also verify and recalculate certain amounts specific to the employer. Audited amounts should also be obtained for the beginning NPL and allocation percentages. Sample reports under AU-C Section 805 are included in Appendix B of the Guide.
Employer auditors will need to perform procedures to test the census data submitted by the employer to the plan. These procedures would ordinarily cover the census data reported to the plan during the year immediately preceding the actuarial valuation. Examples of procedures are included in Chapter 13 of the Guide.
AGENT PLANS
Employers’ pension amounts depend on certain accounting records that are maintained by the plan, the controls and processes of the plan, as well as the calculations by the plan’s actuary.
Appendix A of Chapter 13 of the Guide provides a two-part approach for employers to obtain sufficient appropriate audit evidence to support their pension amounts. The first part addresses the total pension liability, deferred inflows and outflows of resources, and pension expense. The plan should issue a separate actuarial valuation report specific to each employer and the plan engages its auditor to issue (1) a SOC 1 Type 2 report on controls over the census data maintained by the plan or (2) an examination engagement over selected management assertions related to census data maintained by the plan.
The second part addresses the employer’s specific interest in the plan’s fiduciary net position and calls for the plan to prepare a schedule of changes in fiduciary net position by employer and engage its auditor to opine on the schedule either through (1) an opinion on the schedule as a whole combined with a SOC 1 Type 2 report on the controls or (2) an opinion on each employer column in the schedule. Appendix A of the Guide includes sample reports under AU-C Section 805.
SUMMARY
Keep in mind that no matter what type of plan the employer participates in, it is not sufficient to simply obtain audited plan financial statements. Employers will need to obtain the audited schedules of pension amounts and the employer’s auditor will need to perform additional procedures on the pension amounts and census data. Chapter 13 of the Guide provides audit considerations and suggested audit procedures for all three types of plans.
For more information on accounting for governmental entities, please contact Aaron K. Waller, CPA, at (334) 887-7022 or please feel free to leave us a message below.
By Patricia Dupperon, CPA
This article originally appeared in BDO USA, LLP's "Nonprofit Standard" newsletter (Fall 2015). Copywrite 2015 BDO USA, LLP. All rights reserved. www.bdo.com
