Pensions making the number our own.

• Author: Scott, Bob

With the implementation of Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions, about a year away, it is time to focus on what preparers of employer financial statements will have to do in order to implement this complex standard. Many employers know very little about the huge number we are about to record in our financial statements. This article will discuss the challenge employers face in standing behind a complex pension expense number that they did not prepare. We will then discuss the best practice solutions published by the American Institute of CPAs' Government Audit Quality Center, which preparers can also use to gain understanding and assurance regarding what could be the largest number in our financial statements. And finally, we will discuss steps every employer should take to better understand both their pension plan and the public employee retirement system that administers it.

THE EMPLOYER DILEMMA

Under current standards, the focus of financial reporting is pension expense, defined by GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as the annual required contribution. Pension expense is typically relatively small, compared to other items in the financial statements. Also, under current generally accepted accounting principles, there exists a huge degree of flexibility in terms of how the annual required contribution is determined, including extensive use of smoothing techniques. These factors make the risk of material misstatement for pension expense relatively low for most employers. Under GASB Statement No. 68, however, employers will be required to report the net pension liability, which the GASB defines as the total pension liability less fiduciary net position (the net financial resources being held by the plan that is available to pay benefits). Pension expense will now be the change in the net pension liability from the beginning to the end of the year, adjusted for certain deferred inflows and outflows of resources.

The net pension liability will often be one of the largest numbers in an employer's financial statements. It could also be a very volatile number, given the requirements of GASB Statement No. 68 for reporting fiduciary net position at market value of assets and providing for relatively short amortization periods for the deferred inflows and outflows of resources. In addition, scrutiny of pensions and the affect they could have on an employer's financial health--by the media, investors, and the Security and Exchange Commission--are at an all-time high.

These factors create a significant dilemma for many employers that have independently governed and managed employee retirement systems. These systems typically have their own staff, accounting function, and internal control systems, and are the sole keeper of the census data used for the valuation. They hire the actuary, approve all assumptions, and often hire a different auditor than the employer hires. In other words, the GASB is now asking preparers to record and stand behind a very material and volatile number for which they may have no direct control or first-hand knowledge. This dilemma becomes even greater for employers that are members of agent plans. This is because unlike cost-sharing and single-employer retirement systems, the agent retirement system will be required to disclose little if any actuarial information, such as the net pension liability in the notes to their basic financial statements, under GASB Statement No. 67...