GASB 68 (Accounting and Financial Reporting for Pensions) has eaten GASB 27–RIP.
The magic date when the Great Pumpkin–the net pension liability–will rise out of the footnotes and land on the statement of net position is quickly approaching (year-ends of June 30, 2015). Instead of saying, “It’s the Great Pumpkin Charlie Brown!” we’ll be saying, “It’s the Great Debt Charlie Brown!” ARRG.
GASB 27 was a kind spook, allowing governments to bury pension liabilities in the notes. As long as public entities paid the “annually required contribution–ARC,” no liabilities were recognized on the statement of net position. But this is all changing. We have a new beast: the net pension liability–NPL, which will be recognized on the statement of net position. And, of course, as liabilities increase, equities (net positions) decrease. One saving grace: modified accrual accounting; governmental funds will not record the NPL, but the pension liability will appear on full accrual statements (i.e., government-wide statements and enterprise funds).
Under GASB 27, the ARC was treated as the funding amount. No longer. GASB 68 divorces funding from the pension expense.
It is the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service, less the amount of the pension plan’s fiduciary net position.
In simple terms, it’s the computed debt less assets set aside for future payments.
What journal entry will be made to record the NPL?
Account Dr. Cr.
Net Position (Equity) XXXX Net Pension Liability XXXX
Additionally, if the government previously recorded a net pension obligation (the result of the ARC not being paid), then this liability will also be removed (debited) as you record the NPL.
Governments will experience more volatility in their pension expenses since smoothing techniques are no longer used. Keep in mind that funding can (and I expect will be) fairly level. The pension expense is not intended to establish funding amounts. As a consequence, cash paid to fund the pension plan may remain fairly stable while the pension expense swings widely. Changes in the market value of pension plan investments will be felt more abruptly as they impact pension expense.
Statement 68 requires that most changes in the net pension liability be included in pension expense in the period of the change. For example, changes in the total pension liability resulting from current-period service cost, interest on the total pension liability, and changes of benefit terms are required to be included in pension expense immediately. Projected earnings on the pension plan’s investments also are required to be included in the determination of pension expense immediately.
The effects of certain other changes in the net pension liability are required to be included in pension expense over the current and future periods. Changes in the net pension liability not included in pension expense are required to be reported as deferred outflows of resources or deferred inflows of resources related to pensions.
The effects on the total pension liability of (1) changes of economic and demographic assumptions or of other inputs and (2) differences between expected and actual experience are required to be included in pension expense in a systematic and rational manner over a closed period equal to the average of the expected remaining service lives of all employees that are provided with benefits through the pension plan (active employees and inactive employees), beginning with the current period.
The effect on the net pension liability of differences between the projected earnings on pension plan investments and actual experience with regard to those earnings is required to be included in pension expense in a systematic and rational manner over a closed period of five years, beginning with the current period.
When Charlie Brown would go Trick or Treating, he’d say, “I got a rock.” Governments, after knocking on the GASB 68 door, may feel the same way. Those entities that have not properly funded their pension plans will see sizable hits to their net position. Worse yet, a poorly funded plan is required to use a lower discount rate which increases the net pension liability.
If your government has debt covenants, it would be wise to consider the potential effects of these changes now.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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