National State Auditors Association GASB—Separating Fact From Fiction The views expressed in this presentation are those of Chairman Vaudt and Mr. Bean. Official positions of the GASB on accounting matters are reached only after extensive due process and deliberation. 1

Pension Accounting and Reporting: Statement Now that the ship is out of the dock, what’s next?

What Are the Accounting Issues?  Separating accounting from funding -Inflation rate -Long-term expected rate of return -Discount rate (including crossover) -Mortality tables  Not updating assumptions  Proportionate share 3

What Are the Auditing Issues?  Documentation and controls  Management accepting responsibility for assumptions 4

 Establishing financial reporting processes and controls over measurement of pension amount -Reporting processes and controls will be different depending on type of plan (single- employer, agent, or cost-sharing)  Supporting assumptions with appropriate, reliable, and verifiable information -Not sufficient to rely solely on assumptions provided by plan or plan actuary -Significantly higher level of responsibility for single-employer and agent plans  Discount rate  Long-term expected rate of return on plan assets  Mortality  Underlying census data Employer Responsibilities—What is the AICPA Saying? 5

AICPA—Audit Considerations—Assumptions  Accounting valuation reports should include a discount rate calculation -Focus on appropriateness of projected contributions when evaluating the discount rate calculation -Perform retrospective analysis on prior discount rate calculations to determine whether assumptions are appropriate  Who is responsible? -For single-employer plans, both employer and plan management are responsible for the actuarial assumptions -For agent plans, the employer management is solely responsible for actuarial assumptions -For cost-sharing plans, the plan management is primarily responsible for actuarial assumptions 6

Practice Challenges Related to Accounting Valuations  Accounting valuations not including necessary information, such as discount rate calculation  Lack of employer involvement in establishment of assumptions  Lack of documentation supporting actuarial assumptions  Not updating review of assumptions each year  Misunderstanding of relationship of assumptions used for “best estimate” measurement of net pension liability under pension accounting standards versus assumptions used for funding valuations that affect current measurement period  Assumptions being changed for subsequent funding valuation but not for measurement of net pension liability as of current measurement date 7

AICPA—Support for Long-term Rate of Return  Should be forward-looking  Usually based on analysis of expected returns correlated to target asset allocation as of measurement date  Consider inputs to assumption (for example, inflation factor) to determine if reasonable based on plan investments, investing strategy, and market conditions  Validate individual rates for each asset class Investment advisor often helps develop the long-term rate of return, based on building block approach, Monte Carlo simulation or proprietary method 8

AICPA—Audit Considerations—Changes in LTRR  Understand why the long-term rate of return assumption is or is not changing: -Did asset allocation change? -Did market conditions change?  Determine if change is appropriate and supportable 9

AICPA Audit Considerations—Cross-over Calculation  Evaluation required every year -Understand changes to plan provisions that would affect projection of fiduciary net position -Need appropriate documentation over discount rate  Retrospective review -Compare actuals from last year to corresponding projections used  Employer contributions -Consider short-falls in employer funding -Change to average of last five years contributions if necessary -Be skeptical of declining normal costs or rapid benefits from adding a tier for new employees  Benefits from prospective changes usually accrue slowly 10

 Unique to each plan -May be based on standard tables modified for employer characteristics -Large employers may use own experience -One-size does not fit all  Understand why a certain table and improvement scale is being used -Most current improvement scale may or may not be appropriate AICPA—Audit Considerations—Mortality Tables Mortality assumption needs to be reviewed each year and must include allowance for future improvement! 11

 Pension Plan uses a valuation date as of July 1, 2014 and rolls forward the total pension liability to the Plan’s year end of June 30,  Employer measures its total pension liability as of June 30, 2015 for their fiscal year ended June 30,  The Plan uses (1) a long-term rate of return of 7.5%, and (2) the RP-2000 mortality table, as adjusted, for the July 1, 2014 valuation.  In August 2015, the Plan completes its July 1, 2016 funding valuation using certain assumptions that have been changed. Specifically, the valuation uses (1) a long- term rate of return of 7.25%, and (2) the MP-2015 mortality tables. Change in Assumption—Plan and Employer 12

Change in Assumption—Plan and Employer  When the auditor asked management why the rate changed, they stated it was due to the pension board voting to change the rate. Question: What should the Employer and Plan do? 13

 What is the reason for the Plan changing the assumptions?  Is the change in assumption based on a future change in asset allocation?  Is it appropriate to have different long-term rates of return for funding and accounting purposes?  What is impact if the current financial statements were issued without considering the change for subsequent funding valuation? Management Considerations for Changes in Assumptions Assumptions should be reviewed each year. Consider all relevant information available when Plan financial statements are issued. 14

AICPA—Audit Considerations—Assumptions  Actuarial assumptions for single-employer and cost-sharing plans should consider all relevant information through the date the plan financial statements are issued  Actuarial assumptions for agent plans should consider all relevant information through the date the individual employer financial statements are issued  Consider whether changes made in the subsequent funding valuation should be incorporated into current measurement of total pension liability for financial reporting purposes  Employer management should “look-through” to the plan to determine what information was available at the time the plan financial statements were issued 15

AICPA—Audit Considerations—Assumptions  Actuarial assumptions need to be reviewed each year -Actuarial experience study may serve as the starting point, but all other relevant factors must be considered -Long-term rate of return is forward looking and is usually based on analysis of expected returns correlated to target asset allocation as of measurement date  Historical investment returns are only a secondary consideration -Mortality assumptions should consider future mortality improvement  Management’s evaluation and consideration of actuarial assumptions needs to be documented each year 16

AICPA—Audit Considerations—Cost-sharing Employers  Allocation basis -Large change in proportion is indicator that allocation methodology may be flawed  Schedule of Pension Amounts by Employer -Reports cumulative deferred outflows and inflows of resources -Correct application of layering -Changes to average of expected remaining service lives of all members -Consider prior year balances when performing proof 17

Tax Abatement Disclosures: Statement 77 18

What Are the Implementation Issues?  Does a tax abatement actually exist?  Who is responsible for documenting and reporting these abatements?  What audit evidence is needed for tax abatement disclosures? 19

 Statement 77 applies only to transactions meeting this definition: -A reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which:  One or more governments promise to forgo tax revenues to which they are otherwise entitled and  Individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments. Definition of a Tax Abatement 20

 The Statement does not include or exclude transactions based on their form or name – governments should apply the criteria contained in the definition  Key points: -A principal distinction between tax abatements and other tax expenditures is the existence of an agreement with an individual or entity -The agreement generally is in writing but not necessarily -The agreement may or may not be legally enforceable -The agreement must precede the reduction of taxes and the recipient’s fulfillment of the promise to act -The tax reduction may occur before, during, or after fulfilment of the promise – as long as it occurs after the agreement has been entered into Substance over Form 21

 Is tax-increment financing a tax abatement?  If an abatement for one taxpayer is off-set by increases to other taxpayers, is a disclosure required? Some Common Questions 22

 A government would disclose separately (a) its own tax abatements and (b) tax abatements that are entered into by other governments that reduce the reporting government’s taxes  Disclose own tax abatements by major program  Disclose those of other governments by the government and specific tax abated  May disclose individual tax abatements above quantitative threshold established by the government  Disclosure would commence in the period in which a tax abatement agreement is entered into and continue until the tax abatement agreement expires, unless otherwise specified General Disclosure Principles 23

 If a government chooses to disclose individual abatement agreements, it should select a quantitative threshold and disclose all agreements that meet or exceed the threshold -Any quantitative threshold used by the government to determine which agreements to disclose individually should be described in the note disclosure -A government may use one threshold for its own abatements and a different threshold for other governments’ abatements -A government may disclose some of its own abatements individually but disclose those of other governments in the aggregate, or vice versa -Tax abatements below the threshold (if any) should be presented in the aggregate, as described in the Statement Disclosing Individual Abatements 24

 Blended component units’ tax abatement agreements that reduce the primary government’s tax revenues – disclose the information required for the government’s own tax abatement agreements  Discretely presented component units’ tax abatement agreements that reduce the primary government’s tax revenues should be evaluated to determine whether they are essential to fair presentation of the primary government (as required by Statement No. 14, The Financial Reporting Entity, as amended): -If they are essential to fair presentation, disclose the information required for the government’s own tax abatements -If they are not essential, disclose the information required for other governments’ tax abatements Tax Abatements of Component Units 25

Brief Descriptive Information Government’s Own Abatements Other Government’s Abatements Name of program Purpose of program Name of government Tax being abated Authority to abate taxes Eligibility criteria Abatement mechanism Recapture provisions Types of recipient commitments Summary of Required Disclosures 26

Other Disclosures Government’s Own Abatements Other Government’s Abatements Dollar amount of taxes abated Amounts received or receivable from other governments associated with abated taxes Other commitments by the government Quantitative threshold for individual disclosure Information omitted due to legal prohibitions Summary of Required Disclosures 27

 The disclosure requirements should be applied to the current period and all prior periods presented  If application for all prior period presented is not practical, the reason for not applying the standards to prior periods presented should be explained  Effective for periods beginning after December 15, Early adoption is encouraged Effective Date and Transition 28

Quick Update 29

Current Proposals 30

Exposure Drafts  Leases  Fiduciary activities  Asset retirement obligations 31

Leases Project Timeline Pre-Agenda Research StartsApril 2011 Added to Current Technical AgendaApril 2013 Preliminary Views ApprovedNovember 2014 Exposure DraftJanuary 2016 Final Statement ExpectedDecember

Fiduciary Project Timeline Pre-Agenda Research StartsApril 2010 Added to Current Technical AgendaAugust 2013 Preliminary Views ApprovedNovember 2014 Exposure DraftDecember 2015 Final Statement ExpectedDecember

ARO Project Timeline Pre-Agenda Research StartedDecember 2013 Added to Current Technical AgendaAugust 2014 Exposure DraftDecember 2015 Final Statement ExpectedOctober

Other Current Technical Agenda Projects 35

Major Projects Financial reporting model Revenue and expense recognition 36

FRM Project Timeline Pre-Agenda Research StartsAugust 2013 Added to Current Technical AgendaSeptember 2015 Invitation to Comment ExpectedDecember 2016 Preliminary Views ExpectedMay 2018 Exposure Draft ExpectedDecember 2019 Final Statement ExpectedMay

Revenue and Expense Project Timeline Pre-Agenda Research StartsSeptember 2015 Added to Current Technical AgendaApril 2016 Invitation to Comment ExpectedJanuary 2018 Preliminary Views ExpectedOctober 2019 Exposure Draft ExpectedApril 2021 Final Statement ExpectedJune

 Debt Disclosures—research to be completed in July 2016  Equity Interest Ownership Issues—research to be completed in November 2016  Going Concern—research to be completed in 2017  Note Disclosures—research to be completed in 2017 Research in Process 39

Questions? 40