new accounting standards implacting public power - baker … · baker tilly refers to baker tilly...

© 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

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New Accounting Standards Impacting

Public Power

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

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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:

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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

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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

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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.

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Standards for discussion

GASB Concepts Statement No. 4 created a

financial reporting model where:

Assets

+ Deferred outflows of resources

- Liabilities

- Deferred inflows of resources

= Net position

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GASB 65

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.

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GASB 65

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

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GASB 65

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

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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

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GASB 65 - Assets

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

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GASB 65 – Deferred Outflows

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

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GASB 65 - Liabilities

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

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

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GASB 65 – Current Period

Revenues

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

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GASB 65 – Current Period

Expenses

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.

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GASB 65 – Debt Issuance

Costs

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

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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

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GASB 65 – Financial

Statement Impact

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.

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GASB 65 – Use of Term

―Deferred‖

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

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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.

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Current GASB pension accounting guidance and

definitions

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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.

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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.

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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)

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•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



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•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



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•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



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•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.



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New sheriff in town – new rules

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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

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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.


for Pensions

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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.


for Pensions

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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


for Pensions

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• 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


Note Presentations

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• What will most of us do?

•Take information from pension plan report and

book it


Note Presentations

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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

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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

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• 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

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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

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.

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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

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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

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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


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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


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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!

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Questions and

comments

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Contact information

Russ Hissom, CPA, Partner

[email protected]

608 240 2361

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new accounting standards implacting public power - baker … · baker tilly refers to baker tilly...

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