About Face; Forward March!(IN PRACTICE: ACCOUNTING)

• Author: Levine, Michele Mark

The Governmental Accounting Standards Board (GASB) recently proposed a new standard that would result in the exclusion of certain defined contribution pension and deferred compensation plans from the fiduciary fund financial statements of sponsoring governments. (1) Few, if any, of the plans to be excluded are currently reported by governments, so the proposal represents an unusual reversal of course by the Board, which is backing away from a series of decisions made in GASB Statement No. 84, Fiduciary Activities, and GASB Implementation Guide No. 2019-2 of the same name, both of which became effective for reporting periods beginning after December 15, 2018, but which had unintended consequences.

GASB 84 identified two routes leading to inclusion in a government's fiduciary funds financial statements, the conduct of fiduciary activities either (1) by a component unit of the reporting government, or (2) using assets that are controlled by the reporting government. GASB 84 and IG 2019-2 both provided additional guidance to be used in applying GASB's preexisting rules for the determination as to whether postemployment benefit (PEB) plans --including both pension and other postemployment benefit (OPEB) plans--and other kinds of employee benefit plans are component units. A quick review of those rules--the requirements that a component unit be a legally separate entity for which the elected officials of the primary government are financially accountable (2)--is in order here.

Legal separation

GASB 84 states that "Generally, pension plans that are administered through trusts that meet the criteria in paragraph 3 of Statement 67 and OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of Statement 74 are legally separate entities." (3) While the referenced pension and OPEB statements include both legal trusts and equivalent arrangements,

IG 2019-2 clarifies that only legal trusts can be presumed to be legally separate, while equivalent arrangements would require a legal analysis. (4) However, research conducted by GASB staff concluded that most, if not all, pension and deferred compensation plans would be considered to be legally separate from their sponsoring governments. (5)

Financial accountability

Generally accepted accounting principles (GAAP) dictate that a primary government is financially accountable for a legally separate entity, making it a component unit of that primary government, if either:

1. The...