A pension is defined as a gratuity paid regularly as a benefit to a person in consideration of past service

`Pensions in GovernmentAccounting and auditing:gasb 67 & 68 changesDupins, Latrina DAccounting 4311IntroductionA pension is defined as a gratuity paid regularly as a benefit to a person in considerationof past services; notably to one retired from service, on account of retirement age, disability, orsimilar cause. It is a regular stipend paid by a government to retired public officers, or disabledsoldiers; and is sometimes passed on to the heirs, or even specifically for them, as to the familiesof soldiers killed in war. In 1961, U.S. President John F. Kennedy created the President’sCommittee on Corporate Pension Plans. The movement for pension reform gained somemomentum when the Studebaker, an automobile manufacturer, closed its plant in 1963.Studebaker’s pension plan was so poorly funded that only 3,600 workers who were of retirementage received full pension benefits, 4,000 workers aged 40–59 who had ten years with Studebakerreceived lump sum payments valued at roughly 15% of the actuarial value of their pensionbenefits, and the remaining 2,900 workers received no pension at all.Government Accounting Standards Board, established in 1984, issued GASB 4 & 5; thefirst accounting standards for pensions in 1996. In November 1994 GASB adopted public –sector pension plans: GASB 25 and GASB 27. These plans were established to symbolize astrong link between funding and accounting. GASB 25 defines the accounting for the plan bythe plan and GASB 27 describe accounting for the plan by the sponsor. GASB 25 and 27 wereconsidered a significant improvement over GASB 5 and for years there was no pressure tochange the standards. Refinements of GASB’s accounting theory and the development by otherstandards-setting organizations of accounting standards led to a decision to revisit the accountingstandards. Therefore, in 2006 the Government Accounting Standards Board added the project toits agenda. To ensure that GASB pronouncements continue to be of high quality and are in sync2with the continuously evolving government environment, the GASB periodically reexamines its1standards. Reexamination typically takes place after a Statement has been in place and fullyimplemented for at least five years. Research on the GASB’s pension standards indicatedopportunities for significant improvement.  The old GASB standards focused on how plans were funded each year. State and localgovernments were required to report whether or not they made their full actuarially requiredcontribution, better known as the ARC. In modest terms, the ARC is what a state or localgovernments needs to pay into the pension fund each year to keep it on sound financial footing.The new GASB standard takes an accounting-based approach rather than a funding-basedapproach. Instead of reporting the ARC, state and local governments will be required to report anew figure called the net pension liability on their balance sheets. Before, these liabilities wereonly reported as supplementary information. This new net pension liability figure has beencompared to the unfunded liability numbers that are already familiar, but it is not the same. Dueto the use of different methods and assumptions, the new net pension liability is not an apples-toapples comparison to the unfunded liabilities from the prior year. If employers recognize anunfunded pension obligation as a balance sheet liability and pension expense that may have littlerelation to the actuarially determined contribution, there will be significant changes. However,the GASB standards do not change the methods and assumptions used to determine thecontributions needed to fund the plan.In the subsequent sections will be discoursed the manner pensions in government aresignificant to the accounting profession. This will be followed by the reason alterations to theGASB Statements will enhance pension accounting and financial reporting requirements. The1Boundless. “Employee Retirement Income Security Act.” Boundless Business. Boundless, 10 Jun. 2015.Retrieved 16 Jun. 2015 from https://www.boundless.com/business/textbooks/boundless-businesstextbook/human-resource-management-12/human-resources-and-relevant-laws-78/employee-retirementincome-security-act-378-/3GASB Statement No. 68 will be defined, and the accounting and reporting demands of GASB 68identified. Subsequent to this will be an evaluation of the GASB Statement 67, and ultimatelythis paper will terminate with a conclusion of all of the above-mentioned. Pensions inGovernment are significant to the accounting profession; hence, albeit it will take time andeffort, modifications to the GASB (Government Accounting Standards Board) statements willenhance pension accounting and financial reporting standards.Why are Pensions in Government Important to the Accounting Profession?The guidance contained in these Statements will change how governments calculate andreport the costs and obligations associated with pensions in important ways. It is designed toimprove the decision-usefulness of reported pension information and to increase thetransparency, consistency, and comparability of pension information across governments. TheStatements apply specifically to governments and pension plans in which a government’scontributions to the trust used to administer a pension plan are (a) irrevocable, (b) restricted topaying pension benefits, and (c) are beyond the reach of creditors. Pension benefits providedthrough trusts that do not meet those three criteria are not addressed in these new Statements andthose pension benefits would continue to be accounted for and reported following Statements 25,27, and 50.It is important to note that the new Statements relate to accounting and financial reportingissues only—how pension costs and obligations are measured and reported in audited externalfinancial reports. The Statements do not address how governments approach pension planfunding—a government’s policy regarding how much money it will contribute to its pensionplan each year. There has been a close relationship between how governments fund pensions andhow they account for and report information about them until now. The Board crafted its new4Statements with the fundamental belief that funding is squarely a policy decision for electedofficials to make as part of the government budget approval process.2Why Changes to the GASB Statements Will Improve Pension Accounting and FinancialReporting Standards?Defined contribution plans stipulate the amount to be contributed to an employee’saccount each year, and not the amount of benefits employees will receive after the end of theiremployment. The new standards generally carry forward the existing requirements regardingdefined contribution pensions. Governments will report an expense equal to the amount they arerequired to contribute for employee service each year and a liability equal to the differencebetween that required contribution and what the government actually contributes. Governmentswill also make descriptive disclosures about the plan and its terms, and the method by whichcontributions to the plan are determined.Defined Benefit Pension PlansGovernments provide pension benefits through various types of defined benefit pensionplans, which specify the amount of benefits to be provided to the employees after the end of theiremployment. The Statement requires governments that participate in defined benefit pensionplans to report in their statement of net position and net pension liability. The net pensionliability is the difference between the total pension liability (the present value of projectedbenefit payments to employees based on their past service) and the assets (mostly investmentsreported at fair value) set aside in a trust and restricted to paying benefits to current employees,retirees, and their beneficiaries.2http://www.gasb.org/cs/ContentServer?c=Document_C&pagename=GASB%2FDocument_C%2FGASBDocumentPage&cid=11761601405675The Statement calls for immediate recognition of more pension expense than is currentlyrequired. This includes immediate recognition of annual service cost and interest on the pensionliability and immediate recognition of the effect on the net pension liability of changes in benefitterms. Other components of pension expense will be recognized over a closed period that isdetermined by the average remaining service period of the plan members (both current andformer employees, including retirees). These other components include the effects on the netpension liability of (a) changes in economic and demographic assumptions used to projectbenefits and (b) differences between those assumptions and actual experience. Lastly, the effectson the net pension liability of differences between expected and actual investment returns will berecognized in pension expense over a closed five-year period.The standards continue the general existing practice of incorporating expectations offuture employment-related events into projections of pension benefit payments—like projectedsalary increases and projected years of service if they affect the amount of pension paymentsemployees will receive. Provisions for automatic cost- of-living adjustments (COLAs) and otherautomatic benefit changes (which generally are written into the pension benefit terms) will alsocontinue to be included in projections. On the other hand, ad hoc COLAs and other ad hocbenefit changes—which are made at the discretion of the government will only be included inprojections if they occur with such regularity that they are effectively automatic.To discount projected pension benefit payments to a present value, governments assumea discount rate. Standards now in effect require governments to apply a discount rate equal to thelong-term expected rate of return on the investments of the pension plan. The long-term expectedrate of return will continue to be the starting point for the discount rate. However, the new6standard makes it clear that this rate should be applied only to available pension plan assets thatare expected to be invested using a strategy to achieve that return.Under the Attribution Method, governments will use a single actuarial cost allocationmethod “entry age,” with each period’s service cost determined as a level percentage of pay.Analysis of Defined Contribution PensionThe existing standards for governments that provide defined contribution pensions arelargely carried forward in the new Statement. These governments will recognize pensionexpenses equal to the amount of contributions or credits to employees’ accounts, absent forfeitedamounts. A pension liability will be recognized for the difference between amounts recognizedas expense and actual contributions made to a defined contribution pension plan.GASB Statement No, 68 DefinedStatement 68 replaces the requirements of Statement No. 27, Accounting for Pensions byState and Local Governmental Employers and Statement No. 50, Pension Disclosures, as theyrelate to governments that provide pensions through pension plans administered as trusts orsimilar arrangements that meet certain criteria.Statement 68 requires governments providing defined benefit pensions to recognize their longterm obligation for pension benefits as a liability for the first time, and to more comprehensivelyand comparably measure the annual costs of pension benefits.The Statement also enhances accountability and transparency through revised and new notedisclosures and required supplementary information (RSI).Single-employer pension plans provide pension benefits to the employees of oneemployer (a single employer). Multiple-employer pension plans provide pension benefits to theemployees of more than one employer. Under an agent multiple-employer pension plan, the7assets of a multiple-employer pension plan are pooled for investment purposes but separate“accounts” are maintained for each individual agent employer, so that each agent employer’sshare of the pooled assets is legally available to pay the pensions of only its employees. In a costsharing multiple-employer pension plan, cost-sharing employers share their assets and theirobligations to provide pension benefits to their employees—plan assets can be used to pay thepensions of the employees of any employer that provides pensions through the plan.Accounting and Reporting Requirement of GASB 68A government’s net pension liability varies from year to year for a variety of reasons,including actual earnings on plan investments, employee compensation changes, interest on theoutstanding pension liability, contributions from employers and employees, and actual economicor demographic changes not matching up with assumptions made in the actuarial calculations.When these period-to-period changes should be included in the calculation of the cost of agovernment’s operations—as expenses in the accrual-based financial statements—is a key issue.The new standards will better align the recognition of pension expense with the period in whichthe related benefits are earned. Considered in total, the changes set forth by the GASB will havethe overall effect of expense recognition being accelerated. Under the new standards, severalcauses of change in the net pension liability will be factored into the calculation of pensionexpense immediately in the period in which the change occurs:1.Benefits earned each year2.Interest on the total pension liability3.Changes in benefit terms4.Projected earnings on plan investments5.Changes in plan net position from other than investments8The effects on the total pension liability of (a) changes in assumptions and (b) differencesbetween assumptions and actual experience are to be recognized initially as deferred outflows ofresources or deferred inflows of resources and then introduced into the expense calculationsystematically and rationally over the average remaining years of employment of employees(active employees and inactive employees, including retirees). This period is likely to besignificantly shorter than the period of up to 30 years over which governments may nowrecognize portions of their pension expense.The difference between the expected earnings on plan investments and actual investmentearnings is to be recognized as deferred outflows of resources or deferred inflows of resourcesand included in expense in a systematic and rational manner over a five-year closed period ratherthan longer periods that are allowed under the current standards.Under the pension standards now in effect, cost-sharing employers have not beenrequired to present actuarial information about pensions. Instead, information has been requiredto be presented in the pension plan’s own financial statements for all of the participatinggovernments combined. Through its research, the GASB concluded that the needs of users ofinformation regarding cost-sharing employers do not differ significantly from those interested insingle and agent employers. Therefore, the GASB believes it is important to give users of thefinancial statements of cost-sharing employer’s access to better, more transparent financialinformation. Consequently, under the new standards the GASB is requiring that cost-sharinggovernments report a net pension liability, pension expense, and pension-related deferred inflowsand outflows of resources based on their proportionate share of the collective amounts for all thegovernments in the plan.9The new standards contain requirements for disclosing information in the notes to thefinancial statements and presenting required supplementary information (RSI) following thenotes. Due to the complexity of the array of pension plan features, the Board concluded it wascritical that financial statement users have access to certain basic plan information throughgovernments’ own financial statements. The Board believes that including this information willenhance the usefulness of financial reports for both decision making and assessingaccountability.All governments participating in a defined benefit pension plan will now include the followinginformation in their note disclosures:.1. Descriptions of the plan and benefits provided.2. Significant assumptions employed in the measurement of the net pension liability.3. Descriptions of benefit changes and changes in assumptions.4. Assumptions related to the discount rate and the impact on the total pension liability ofa percentage point increase and decrease in the discount rate.5. Net pension liability and deferred outflows of resources and deferred inflows ofresources.Analysis of GASB Statement No. 67Statement No. 67, Financial Reporting for Pension Plans, addresses financial reportingfor state and local government pension plans. Statement No. 68, Accounting and FinancialReporting for Pensions, establishes new accounting and financial reporting requirements forgovernments that provide their employees with pensions.The guidance contained in these Statements will change how governments calculate and reportthe costs and obligations associated with pensions in important ways. It is designed to improve10the decision-usefulness of reported pension information and to increase the transparency,consistency, and comparability of pension information across governments. Statement 67replaces the requirements of Statement No. 25, Financial Reporting for Defined Benefit PensionPlans and Note Disclosures for Defined Contribution Plans, for most public employee pensionplans. GASB Statement 67 requires defined benefit pension plans to prepare two financialstatements – a statement of fiduciary net position and a statement of changes in fiduciary netposition.ConclusionThe GASB’s changes to pension accounting standards are extensive and will take time tofully implement. State and local governments should work to understand the standards andestablish a process for implementing them. Efforts should be made to understand the differencesbetween the accounting and funding measures in order to avoid confusion about the long-termsustainability of plans.11BibliographyGovernment Accounting Standards Board. “Pension Standards for State and LocalGovernments, http://www.gasb.org/jsp/GASB/Page/GASBSectionPage&cid=1176163528472,August 2, 2012Moss-Adams LLP. “Government Accounting Standards Board Update,”http://mossadams.com, October 10, 2012Sorenson Senta, Jennifer. “GASB 67/68: Beginning Implementation and Overview,” Milliman,http://www.milliman.com, January 2014, SeattleHall, Steven D. “Transparency of GASB 67 & 68, The Demise of Defined Benefit PensionPlans,” American Society of Business and Behavioral Sciences, http://asbbs.org, February 2014,Corpus ChristiBaker Tilly Vivchow Krause, LLP. “GASB 67 and 68; Accounting and Reporting for Pensions,”BakerTilly, http://www.bakertilly.comGovernment Accounting Standards Board. “GASB Improves Pension Accounting and FinancialReporting Standards,” http://www.gasb.orgAmerican Institute of Certified Public Accountants. “GASB Pensions: Issues and Resources,”AICPA,http://www.aicpa.org/interestareas/governmentalauditquality/resources/gasbmatters/pages/gasbpensionsissues.aspxNational Association of State Retirement Administrators. “Accounting (GASB),” NASRA,http://www.nasra.org, 2015Government Accounting Standards Board. “Financial Reporting for Pension Plans,” GASB,http://www.gasb.orgWikipedia. “Public Employee Pension Plans in the United States,” Wikipedia,http://wikipedia.org, May 20, 2015 (last update)Richwine, Jason, Ph.D. “Nine Fallacies Used to Defend Public-Sector Pensions,” The HeritageFoundation, http://www.heritage.org, February 5, 2013Source: Boundless. “Employee Retirement Income Security Act.” Boundless Business.Boundless, 10 Jun. 2015. Retrieved 16 Jun. 2015 fromhttps://www.boundless.com/business/textbooks/boundless-business-textbook/human-resourcemanagement-12/human-resources-and-relevant-laws-78/employee-retirement-income-securityact-378-5943/12