Page 1
© Baker Tilly Virchow Krause, LLP
Baker Tilly refers to Baker Tilly Virchow Krause, LLP,
an independently owned and managed member of Baker Tilly International.
Presented by:
Russ Hissom CPA, Partner
Baker Tilly Energy and Utilities Group
1
New Accounting Standards Impacting
Public Power
Page 2
Goals for this session
>Discuss the new accounting standards you should know
>Understand the definitions of the new elements of the
financial statements
>Identify classification of assets, deferred outflows,
liabilities, and deferred inflows
>Highlight changes in accounting treatment for certain
items
>Identify planning for pension accounting changes and
impacts on reporting and rates
2
Page 3
Discussion leader
Russell Hissom, CPA, Partner, in the Energy and Utilities Group since 1983. Russ has
extensive experience with contract compliance audits under jointly owned electric generation
contracts, overhead cost allocation studies, enterprise risk management implementation
projects, benchmarking studies, work order asset management implementation projects,
management audits, financial and compliance audits of electric utilities, and specialized risk
management and operational and financial training for utilities. He has spoken nationally on a
variety of utility topics for organizations such as APPA, the Society of Corporate Compliance
and Ethics and NERC Regional Audit Organizations.
Contact [email protected] or call 608 240 2361
– Check out our Energy and Utilities Finance, Accounting and Consulting Issues
Forum on LinkedIn at:
http://www.linkedin.com/groups?mostPopular=&gid=2546046
3
Page 4
About Baker Tilly
Company Overview
Firm established in 1931—an 80 year
history of focusing on client needs and
providing outstanding service
16th largest Public Accounting and
Consulting Firm in USA (Public
Accounting Report’s ―Top 100 2008‖)
Over 170 partners and more than 1,300
professionals = Depth of Resources
Seamless global services through
Baker Tilly International (BTI)
Industry Awards for Outstanding
Service and Employee Satisfaction
Nationwide energy practice
Nationwide energy practice with
more than 100 electric utility clients
across North America – our Energy
and Utilities Group is focused just on
utilities
Proud supporter of Industry
Associations
4
Page 5
Standards for discussion
GASB’s been busy…….here are the standards for
discussion today:
•GASB 65: Items Previously Recognized as Assets and Liabilities
Effective for period beginning after December 15, 2012 (fiscal years ending on
or after 12/31/13)
•GASB 67: Financial Reporting for Pension Plans – an amendment of
GASB Statement No. 25 - effective for periods beginning after June 15, 2013
•GASB 68: Financial Reporting for Pensions – an amendment of GASB
Statement No. 27 - effective for periods beginning after June 15, 2014
5
Page 6
GASB 65: Items Previously Recognized as Assets and Liabilities
Effective for period beginning after December 15, 2012 (fiscal
years ending on or after 12/31/13)
Restatement may be necessary, if material.
6
Standards for discussion
Page 7
GASB Concepts Statement No. 4 created a
financial reporting model where:
Assets
+ Deferred outflows of resources
- Liabilities
- Deferred inflows of resources
= Net position
7
GASB 65
Page 8
Definitions of these elements are as follows:
Assets are resources with present service capacity that the government
presently controls.
Liabilities are present obligations to sacrifice resources that the government
has little or no discretion to avoid.
A deferred outflow of resources is a consumption of net assets by the
government that is applicable to a future reporting period.
A deferred inflow of resources is an acquisition of net assets by the
government that is applicable to a future reporting period.
Net position is the residual of all other elements presented in a statement of
financial position.
8
GASB 65
Page 9
Purpose of GASB 65 project was to review all
existing financial statement items to determine:
• If they met definition of asset or liability
• If not, if they met definition of deferred outflow or
deferred inflow
• If not, if they needed reclassification as an
outflow or inflow in current period
9
GASB 65
Page 10
Polling question #1
The term Net Position replaces the term(s)
a) Net Assets and Fund Balance
b) Net Assets and Retained Earnings
c) Net Assets only
10
Page 11
Items that retain the classification as an asset
include:
• Prepaid items
• Grants paid to another government in advance of meeting
eligibility requirements (other than time).
• Purchase of future revenues from another government
(GASB 48)
• Regulatory assets resulting from regulatory operations
under GASB 62
• Pension assets
11
GASB 65 - Assets
Page 12
Items previously classified as assets (or contra
liabilities) that will be reclassified as deferred
outflows include:
• Deferred amounts on debt refundings
• Grants paid to other governments in advance of meeting
time requirements.
• Payments to acquire rights to future intra-entity revenues
(GASB 48)
• Loss from a sale of property that is subsequently leased
back
12
GASB 65 – Deferred Outflows
Page 13
Items that retain the classification as a liability
include:
• Regulatory credits which result in refunds in future
periods (GASB 62)
• Grants received before eligibility requirements (excluding
time) are met
• Resources received in advance of an exchange
transaction
13
GASB 65 - Liabilities
Page 14
Items previously classified as liabilities that will be
reclassified as deferred inflows include:
• Grants received in advance of meeting time requirements
• Property taxes received or reported as receivable prior to
the period for which they are levied
• Regulatory credits providing recovery in current period for
costs to be incurred in future periods (GASB 62)
• ―Unavailable‖ revenue in governmental funds
• Sales of future revenues (GASB 48)
• Gain from a sale of property that is subsequently leased
back 14
GASB 65 – Deferred Inflows
Page 15
Transactions which should be recognized as
revenues that were previously classified as
liabilities:
• Various lending activities related to loan origination fees
and commitment fees
• Refer to standard if you do significant government lending
activities
15
GASB 65 – Current Period
Revenues
Page 16
Transactions which should be recognized as
expenses that were previously classified as
assets:
• Debt issuance costs !!!
One potential exception to be discussed
• Initial indirect costs incurred by lessor in an operating
lease
• Acquisition costs of insurance contracts should be
expensed in the period incurred
• Any fees paid in the purchase of a loan(s) should be
expensed in the period the loan(s) was purchased
16
GASB 65 – Current Period
Expenses
Page 17
If a business-type activity qualifies as a regulated operation
under GASB 62, and
If the business-type activity elects to follow accounting for
regulated operations, and
If debt issuance costs are recovered through rates over the
life of the debt issue ….
The business-type activity could record the debt issuance
costs as a regulatory asset and recognize the expense
over the rate recovery period.
17
GASB 65 – Debt Issuance
Costs
Page 18
Polling question #2
One of the most common reclassifications from
liability to deferred inflow will be:
a) Accrued payroll
b) Deposits
c) Property taxes reported as receivable prior to
the period for which they are levied
18
Page 19
Summary of most significant changes:
• Debt issuance costs expensed in current period
• Losses on refunding of debt now a deferred outflow
• Regulatory credits
• Refunds in future periods = liability
• Current recovery of future costs = deferred inflow
• Gains and other revenues received in current period to be applied
to recoverable future costs = deferred inflow
•Grants received in advance of meeting time requirements are now
deferred inflows
19
GASB 65 – Financial
Statement Impact
Page 20
GASB No. 65 restricts the use of the term
"deferred" to only those items designated as
deferred outflows or deferred inflows of resources
by the standards. As such, other items may need
to be relabeled on the financial statements.
20
GASB 65 – Use of Term
―Deferred‖
Page 21
Polling question #3
Based on what we have discussed, will your
financial statements be impacted by GASB 65?
a) Yes
b) No
c) I’m still not sure
21
Page 22
GASB 67 / GASB 68
•GASB 67 Financial Reporting for Pension Plans –
an amendment of GASB Statement No. 25 is related
to accounting for the pension plans and is effective for
periods beginning after June 15, 2013.
•GASB 68 Financial Reporting for Pensions – an
amendment of GASB Statement No. 27 applies to
employers and is effective for periods beginning after
June 15, 2014.
22
Page 23
Current GASB pension accounting guidance and
definitions
23
Page 24
Types of pension plans
•Defined benefit plan
Specifies the amount of benefits to be provided to
employees after the end of employment
•Defined contribution plan
Determines only the amount to be contributed by the
utility to a plan member’s account each year of
active employment.
24
Page 25
Types of pension plans
Plans can also be classified by how many employers participate in
the plan
•Single-employer plan involves only the utility
•Multiple-employer plan includes more than one government
In a cost-sharing multiple-employer plan, governments pool or share the
costs of financing the benefits and administering the plan and assets
accumulated to pay benefits
Generally, only one actuarial valuation is conducted for all in the participating
governments
•Agent multiple-employer plan
No pooling of the benefit costs and each employer has its own account
Separate actuarial valuations are conducted for each participant.
25
Page 26
Current rules – measurement
of pension liability
•Utilities that provide defined benefit pension plans are required to
measure and disclose an amount for annual pension cost on the
accrual basis of accounting
•Annual pension cost should be equal to the utility’s annual required
contributions (ARC) to the plan, unless the employer has a prior net
pension obligation (NPO)
26
Page 27
•ARC is the utility’s required contribution for the year calculated by
an actuarial valuation
•Actuarial valuation should occur biennially
•NPO is the cumulative difference between annual pension cost
and the utility’s actual contributions to the plan, including the
pension liability or asset
•Adjustment is typically calculated by the actuary
Current rules – measurement
of pension liability
27
Page 28
•If the utility does have an NPO, the annual pension cost should
be equal to the ARC, one year’s interest on the NPO, and an
adjustment to ARC
•Interest is calculated using the balance of the NPO at the
beginning of the year and the investment rate of return that is in
the actuarial valuation that is used to determine the ARC
Current rules – measurement
of pension liability
28
Page 29
•Adjustment should be calculated using the same amortization
method, actuarial assumptions, and amortization period that were
used in the actuarial valuation that determined ARC
•If the NPO is positive the adjustment will be deducted from ARC
•If NPO is negative the adjustment will be added to the ARC
Current rules – measurement
of pension liability
29
Page 30
•Amount recognized as pension expense is equal to the annual
pension cost as calculated on previous slide
•NPO should be adjusted for the difference between actual
contributions made to the plan and the pension expense
•If there is a yearend balance in the NPO and it is positive it will be
reported as a liability on the financial statements. If the balance is
negative it will be reported as an asset.
Current rules – measurement
of pension liability
30
Page 31
New sheriff in town – new rules
31
Page 32
The scope of this Statement addresses accounting and financial
reporting for pensions that are provided to the employees of state
and local governmental employers through pension plans that
are administered through trusts that have the following
characteristics:
1. Contributions from employers and nonemployer contributing
entities to the pension plan and earnings on those contributions
are irrevocable
2. Pension plan assets are dedicated to providing pensions to
plan members in accordance with the benefit terms
GASB 68 – Financial Reporting
for Pensions
32
Page 33
3. Pension plan assets are legally protected from the creditors of
employers, nonemployer contributing entities, and the pension
plan administrator. If the plan is a defined benefit pension plan,
plan assets also are legally protected from creditors of the plan
members.
GASB 68 – Financial Reporting
for Pensions
33
Page 34
This Statement establishes standards for measuring and
recognizing liabilities, deferred outflows of resources, deferred
inflows of resources, and expense/expenditures.
For defined benefit pensions, this Statement identifies the
methods and assumptions that should be used to project benefit
payments, discount projected benefit payments to their actuarial
present value, and attribute that present value to periods of
employee service.
GASB 68 – Financial Reporting
for Pensions
34
Page 35
Employers are classified in one of the following categories for purposes of this
Statement:
•Single employers are those whose employees are provided with defined benefit
pensions through single-employer pension plans
•Agent employers are those whose employees are provided with defined benefit
pensions through agent multiple-employer pension plans—plan assets are pooled
for investment purposes but separate accounts are maintained for each individual
employer
•Cost-sharing employers are those whose employees are provided with defined
benefit pensions through cost-sharing multiple-employer pension plans—pension
plans in which the pension obligations to the employees of more than one
employer are pooled and plan assets can be used to pay the benefits of the
employees of any employer that provides pensions through the pension plan
GASB 68 – Financial Reporting
for Pensions
35
Page 36
• As implementation time draws near the checklists will
appear
•In the meantime, these are some key disclosures, aka
you can always early implement the standards
GASB 68 – Financial Reporting
Note Presentations
36
Page 37
• What will most of us do?
•Take information from pension plan report and
book it
GASB 68 – Financial Reporting
Note Presentations
37
Page 38
GASB 68 – measurement of
pension liability
• Current rules focus on funding and result in a pension liability
only when actual contributions are less that required
contributions
• GASB 68 focuses on accrual and thus the liability is based on
the difference between the benefits earned and the value of
the assets established to provide those benefits
• The annual expense also shifts from being focused on the
amount of funding required to a combination of the annual
benefits earned and the amortization of certain changes over
the various periods outlined
38
Page 39
GASB 68 - illustration
Total Pension Liability (a)
Plan Net Position (b)
Net Pension Liability (a) -
(b)
Deferred Pension
Outflows of Resources
Deferred Pension Inflows
of ResourcesPension Expense
Balance 12/31/15Changes for the year: $ 3,045,893 $ 2,283,333 $ 762,560 $ 310,538 $ 50,766 Service cost 101,695 101,695 $ 101,695 Interest 231,141 231,141 231,141 Benefit changes - - -
Experience losses (gains) (69,638) (69,638) - 59,690 (9,948)Changes of assumptions - -
Contributions - Utility 109,544 (109,544)
Contributions - Employees 51,119 (51,119) (51,119)
Net investment income 199,273 (199,273)
Expected return on plan (178,268)Expensed portion of difference between expected returns on plan (4,201)Non-expensed portion of plan investments above 16,804
Refunds of contributions (2,780) (2,780) -
Benefits paid (124,083) (124,083) -
Plan administrative (3,427) 3,427 3,427
Other changes 8 (8) (8)
Amortization of beginning - - - (80,979) (24,250) 56,729
Net changes 136,335 229,654 (93,319) (80,979) 52,244 149,448 Balance 12/31/16 $ 3,182,228 $ 2,512,987 $ 669,241 $ 229,559 $ 103,010 $ 149,448
39
Page 40
• Assumptions and methods used in measuring the net pension
liability and in determining the discount rate
• Any changes in assumptions or benefits from prior years
• Impact on the total pension liability of a change in the discount
rate of one percentage point in either direction
• Details of the net pension liability and related deferred inflows
or deferred outflows of resources for the year
GASB 68 - disclosures
40
Page 41
GASB 68 – required
supplemental information
• Information on key assumptions and changes that impact the
trends presented
• Sole or Agent Plans
Additional details for the total liability, plan position, and net
liability
Accumulate 10 years of information
• Defined Benefit Plans – Include 10 years of information on
funding including….
Actuarially or statutorily determined required contribution
Actual contribution
Covered payroll
Ratio of the actual contributions to the covered payroll41
Page 42
GASB 68 - Financial Reporting
for Pensions – Single and
Agent Employers
Required Supplementary Information
This Statement requires single and agent employers to present in
required supplementary information the following information,
determined as of the measurement date, for each of the 10 most
recent fiscal years:
•Sources of changes in the net pension liability
•The components of the net pension liability and related ratios,
including the pension plan's fiduciary net position as a
percentage of the total pension liability, and the net pension
liability as a percentage of covered-employee payroll.
42
Page 43
GASB 68 - Financial Reporting for
Pensions – Cost Sharing
Employers
•A cost-sharing employer that does not have a special funding
situation is required to recognize a liability for its proportionate
share of the net pension liability (of all employers for benefits
provided through the pension plan)—the collective net pension
liability
•Recognize pension expense and report deferred outflows of
resources and deferred inflows of resources related to pensions
for the proportionate shares of collective pension expense and
collective deferred outflows of resources and deferred inflows of
resources related to pensions
43
Page 44
GASB 68 Guidance Prior Guidance
Record Net Pension Liability on the
Statement of Net Position = difference
between the actuarial total pension liability
and the fair value of the legally restricted
plan assets
Liability was only recorded if the actual
contributions were less than the actuarial
calculated contributions for the year
Entry age actuarial cost method to be
used to calculate the pension liability
Allowed one of six actuarial methods
Ad hoc COLAs or other benefit changes
approved with such consistency they are
considered automatic will not be
considered in the projection of future
benefits
Benefit changes were only included in the
plans if they were incorporated into the
plan
GASB 68 – New vs. prior guidance
44
Page 45
GASB 68 Guidance Prior Guidance
If the projected plan assets and future
contributions are not sufficient to meet the
projected future benefits, a blended
discount rate will be used incorporating the
long-term expected rate of return on
investments until such time as resources
are exhausted and then based on the
municipal tax-exempt, high quality 20-year
bond rating
Used the long-term expected rate of return
Differences between the expected
earnings on plan investments and actual
investment earnings is to be recognized as
a deferred outflow or inflow of resources
and included in expense over a 5-year
closed period
Differences were amortized over 30 years
GASB 68 – New vs. prior guidance
45
Page 46
GASB 68 Guidance Prior Guidance
The effects of changes in assumptions and
differences between assumptions and
actual experience to the net pension
liability will be recorded as a deferred
inflow or outflow of resources and
amortized over the average remaining
years of employment of employees (active
and inactive)
Differences were amortized over 30 years
Utilities participating in cost-sharing multi-
employer plans are required to report a
liability for their proportionate share of the
net pension liability of the plan as well as
the related pension expense and any
deferred inflows or deferred outflows of
resources
Utilities participating in cost-sharing multi-
employer plans historically only included
their required contribution as expense
GASB 68 – New vs. prior guidance
46
Page 47
GASB has a project on its agenda to discuss OPEB accounting
and reporting in light of changes to pension accounting.
An exposure draft is anticipated to be released in late 2013.
More GASB’s are coming!
47
Page 48
Questions and
comments
48
Page 49
Contact information
Russ Hissom, CPA, Partner
[email protected]
608 240 2361
49