September 17, 2012

GASB Adopts New Pension Accounting and Financial Reporting Standards

On June 25, 2012, the Governmental Accounting Standards Board (GASB) issued two new standards that improve the accounting and financial reporting for state and local governments' pension plans. GASB Statement No. 67, Financial Reporting for Pension Plans, amends existing standards for the financial reports for pension plans. GASB Statement No. 68, Accounting and Financial Reporting for Pensions, amends existing and establishes new standards for financial reporting requirements for governments that provide pension benefits to their employees. GASB's objective in developing these standards were to improve financial reporting by state and local governments by providing decision-useful information, supporting assessments of accountability and inter-period equity and creating additional transparency.

As most local governments in the State of New Jersey are a part of one or more of the State of New Jersey's Multiple-Employer Plans, we will dedicate this quarter's update to the key aspects of the changes incorporated in GASB Statement No. 68 that affect cost-sharing employers. The standard drastically changes the manner in which governments account for and report its pension expenditures and unfunded liabilities.

GASB Statement No. 68 establishes standards for measuring and recognizing liabilities, deferred outflows and inflows of resources and expenditures. It also addresses additional requirements affecting footnote disclosures and required supplementary information.

For financial statements prepared utilizing the economic resources measurement focus and full accrual basis of accounting (entity-wide and enterprise funds), a cost-sharing governmental entity is required to recognize a liability, expense and deferred outflow or inflow of resources for its proportionate share of the collective net pension liability and expense, unless a special funding situation is present. For financial statement prepared utilizing the current financial resources measurement focus and modified accrual basis of accounting (governmental funds), a cost-sharing governmental entity is required to recognize its proportionate share of the collective net pension liability that would normally be expected to be paid with expendable available resources.

Notes to financial statements for cost-sharing governmental entities will be required to include information regarding discount rates utilized, assumptions made in determining the proportionate share of the entity's net pension liability and disclose how contributions to the pension plans were determined. Required supplementary information will provide a ten year schedule reflecting 1) the net pension liability as well as certain ratios and 2) information regarding statutorily or contractually required contributions to the pension plan and certain ratios.

The statement also introduces the concept of special funding situations which is defined as circumstances in which a non-employer governmental entity is legally responsible for making contributions directly to a pension plan that is used to provide pensions to the employees of another governmental entity or entities and either (1) the amount of the contributions for which the non-employer governmental entity is responsible is not dependent upon one or more events unrelated to pensions or (2) the non-employer governmental entity is the only entity with a legal obligation to make contributions directly to a pension plan. The employer that has a special funding situation for its defined benefit plans are required to recognize a pension liability and deferred outflow or inflow of resources related to pensions with adjustments to recognize revenue for the contributions made by the non-employer contributing governmental entity. Notes to the financial statements and required supplementary information will include information about the support provided by a non-employer contributing governmental entity.

Who Will Be Affected?

This Statement will be effective for all governmental units that provide pensions to either active or inactive employees. However, for those governments that do not follow GAAP, such as New Jersey municipalities and counties, the only provisions of the proposed standard that would apply would be dependent on changes promulgated by the New Jersey Division of Local Government Services through the issuance of a local finance notice.


The provisions in GASB Statement No. 67 and GASB Statement No. 68 are effective for financial statements for periods beginning after June 15, 2013 and June 15, 2014, respectively.