GAQC Alert No. 253 


    GAQC Alert
     
    Important New Agent Plan Guidance for Plans, Participating Governmental Employers, and Their Auditors Issued by AICPA
       
      AICPA
    May 29, 2014
    GAQC Alert #253
     
    AICPA
    In This Alert
    Background and High-Level Summary of SLGEP Efforts
    Whitepaper Released Relevant to Agent Plans, Participating Employers, and Auditors
    Expected Issuance of Related Auditing Interpretations
    Accessing Resources on Pensions Currently Available
    Continued AICPA Efforts Addressing Pensions
    Reminder!
    Do not forget to register for the next GAQC Web event, The 2014 OMB Compliance Supplement and New Uniform Grant Guidance Key Points, to be held on Wednesday, June 18, 2014, from 1:00 PM - 3:00 PM (Eastern). See GAQC Alert #252 for registration information.
    Additional Resources
    GAQC Alerts

    Archived GAQC Web Events

    Audit Practice Aids and Tools

    HUD Information
    Dear Center Members
    As noted in GAQC Alert #244 and GAQC Alert #249, the AICPA State and Local Government Expert Panel (SLGEP) has been engaged in numerous and complex discussions regarding accounting and auditing implementation issues facing governmental pension plans, the governmental employers that participate in those plans (employers or participating employers), and their auditors. The purpose of this GAQC Alert is to make you aware of the following:
      Background and high-level summary of SLGEP efforts;
      The release of a whitepaper relevant to agent multiple-employer plans (agent plans), participating employers, and their auditors, that include critical information for a successful implementation of the new pension accounting standards issued by the Governmental Accounting Standards Board (GASB);
      Related auditing interpretations to be issued and expected timing;
      How to access audit and other resources on governmental pensions; and
      Continued AICPA efforts related to governmental pensions.
    Background and High-Level Summary of SLGEP Efforts
    In June 2012, the GASB issued two new standards that will substantially change the accounting and financial reporting of public employee pension plans and the state and local governments that participate in such plans. GASB Statement No. 67, Financial Reporting for Pension Plans, revises existing guidance for the financial reports of most governmental pension plans. GASB Statement No. 68, Accounting and Financial Reporting for Pensions, revises and establishes new financial reporting requirements for most governments that provide their employees with pension benefits. GASB Statement No. 67 is effective for financial statements for periods beginning after June 15, 2013. GASB Statement No. 68 is effective for financial statements for fiscal years beginning after June 15, 2014.

    There are numerous accounting and auditing issues facing governmental plans and participating employers that the SLGEP has been working very diligently to address. During this process, the SLGEP has had many discussions internally with representatives of the Auditing Standards Board, as well as with other key stakeholders including actuaries, plans, governmental employers, and the GASB. The remainder of this GAQC Alert discusses the most recent guidance issued by the SLGEP and other additional guidance expected.
    Whitepaper Released Relevant to Agent Plans, Participating Employers, and Auditors
    With the implementation of GASB Statement No. 68, employers will be required to recognize a liability as employees earn their pension benefits (that is, as they provide services to the government). The SLGEP has released a whitepaper titled, Governmental Employer Participation in Agent Multiple-Employer Plans: Issues Related to Information for Employer Reporting (agent whitepaper), which addresses numerous issues from the employer and employer auditor perspective that will arise from the implementation of GASB Statement No. 68. These issues need to be addressed by employers sooner rather than later and will involve close coordination between employers and agent plans.

    The agent whitepaper addresses issues related to how employers participating in agent plans obtain all necessary information to properly recognize and disclose pension amounts in their financial statements and how their auditors obtain sufficient appropriate evidence to support their opinions on employer financial statements. It should be of interest to agent plans, participating employers, and their auditors.

    Challenges Related to Employer Recognition of Specific Pension Amounts
    The main challenge for employers and their auditors is that under GASB Statement No. 67, participating employers will need information beyond what is provided in the audited financial statements of the plan to determine their specific pension amounts. For example, the financial statements of agent plans do not include the specific pension amounts required to be reported by participating employers and these employers do not have direct access to the underlying plan records and data supporting such amounts. Additionally, the plan financial statements do not disclose actuarial information for each individual employer or the plan as a whole. Actuarial information for each employer, including census data submitted to the actuary, underpins the calculation of the employer's net pension liability.

    Additionally, the financial statements of agent plans only report fiduciary net position for the plan as a whole. As fiduciary net position is a component necessary to calculate net pension liability, employers need their specific interest in the agent plan's fiduciary net position (that is, separate account information specific to the governmental entity) which the plan is not required to report in its financial statements.

    Finally, actuarially derived pension amounts (that is, total pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense) are dependent on demographic data of the plan participants, which is referred to as census data. The underlying records of the census data are typically maintained by different parties. Most commonly, the underlying records of active members are maintained by the employers. The underlying records of plan participants who are no longer employed by the government (that is, inactive or retired members) are maintained by the plan. Thus, another challenge facing employers is how to determine whether census data pertaining to their inactive and retired members is complete and accurate and whether the plan has properly accumulated the census data information for active members reported to it by participating employers in the census data file provided to the actuary.

    SLGEP Best Practice Solutions
    The differences in reporting requirements for the plan compared to the employer are significant. Given the nature of the elements the employer is required to report, the AICPA SLGEP is recommending one best practice solution to address total pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense and another best practice solution to address the employer's specific interest in the agent plan's fiduciary net position.

    With regard to the issues surrounding total pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense, the AICPA SLGEP recommends the following, which are further explained in the agent whitepaper:
      The plan actuary issues a separate actuarial valuation report specific to each employer which includes an actuarial certification letter addressed to each employer's management; and
      The plan engages its auditor to issue either:
    • Option 1: A service organization controls 1 (SOC 1) Type 2 report on controls over census data maintained by the plan, or
    • Option 2: An examination engagement over selected management's assertions related to census data maintained by the plan.
    With regard to the issues surrounding the fiduciary net position component of net pension liability, the AICPA SLGEP recommends the following, which are further explained in the whitepaper:
      The plan prepares a schedule of changes in fiduciary net position by employer and related notes to the schedule; and
      The plan engages its auditor to opine on the schedule of fiduciary net position by employer either through:
    • Option 1: An opinion on the schedule as a whole combined with a service of organizational controls 1 (SOC 1) Type 2 report on the controls over the calculation and allocation of additions and deductions to employer accounts, or
    • Option 2: An opinion on each employer column in the schedule.
    The employer auditor is solely responsible for the audit of the employer's financial statements and, therefore, is responsible for determining the sufficiency and appropriateness of audit evidence necessary to reduce audit risk to an appropriately low level. The best practice solutions presented in the whitepaper may need to be tailored to fit the particular risks identified at the employer level.

    The AICPA SLGEP developed two options for each of the best-practice solutions recognizing that plans may not be able to obtain a SOC 1 Type 2 report whether due to timing or due to lack of documentation of controls.

    Ramifications if Best Practices Not Adopted
    The whitepaper cautions that if an agent plan issues audited financial statements, but does not implement the best practice solutions recommended by the AICPA SLGEP, it is unlikely that employer auditors will be able to accumulate sufficient appropriate audit evidence necessary to provide unmodified opinions on the opinion units of the government financial reporting entity that have material pension amounts. It is important to emphasize that unaudited information provided by the plan to its employers to support specific pension amounts that have not been subjected to further audit procedures would not constitute sufficient appropriate audit evidence upon which employer auditors could base their opinions. While the AICPA SLGEP acknowledges that the best practice solutions proposed in the agent whitepaper are recommendations, it believes there are few other alternatives employers and their auditors could efficiently and effectively utilize to obtain sufficient appropriate evidence on which to base their specific pension amounts or the auditor's opinions, respectively.
    Expected Issuance of Related Auditing Interpretations
    In addition to the above described whitepaper, the SLGEP, working with the AICPA Audit and Attest Standards Team, is currently developing a series of auditing interpretations that will address specific questions pertaining to both the auditors of the agent plans and employers. These interpretations will support certain of the conclusions reached in the SLGEP whitepapers and include interpretations of AU-C 500, Audit Evidence, and AU-C 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement. The clearance process for these interpretations is currently underway and they are expected to be issued no later than late June. A future GAQC Alert will announce the issuance of these interpretations.

    It is important to note that Interpretation No. 1, "Auditor of Participating Employer in a Governmental Pension Plan," to AU-C section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors), issued in April clarifies that it would not be appropriate for the employer auditor to make reference to the audit report of the governmental pension plan auditor solely for purposes of GASB Statement No. 68, because, in this circumstance, a governmental pension plan is not a component of the employer. While this interpretation was issued with other interpretations specific to cost-sharing multiple-employer plans, Interpretation 1 of AU-C 600 applies to government pension plans broadly, including agent plans.
    Accessing Resources on Pensions Currently Available
    The Governmental Audit Quality Center (GAQC) continues to compile resources to assist with implementing the new GASB pension standards on the "GASB Pensions: Issues and Resources portion of the GASB Matters section of the GAQC Web site. The agent whitepaper is posted to this site and the forthcoming interpretations will be linked to this site upon their release. Other resources to highlight include:
      AICPA Guidance Relevant to Cost-Sharing Plans: The SLGEP issued two whitepapers and related auditing interpretations to address cost-sharing plans, participants, and their auditors. See also GAQC Alert #244 and GAQC Alert #249.
      GAQC Archived Web Events on Pensions (available now to GAQC members). The GAQC has offered numerous Web events on the GASB pension standards. GAQC members can access the following two hour archived events. Note that there is no continuing professional education (CPE) available for listening to these archives:
    • An Overview of the New GASB Pension Accounting Standards, addresses the new GASB pension accounting. While this event was originally done in February 2013, it is still relevant and up-to-date. Thus, for those that need assistance in understanding the accounting issues related, primarily to GASB Statement No. 68, this Web event is an excellent resourcet;
    • The GASB Pension Standards Part I: Considerations for Cost-Sharing Plans, Participating Employers, and Their Auditors, addresses the accounting and auditing challenges related to cost-sharing plans and their participants. Note that the GAQC will offer a CPE rebroadcast of this event on August 4, 2014, from 1:00 PM – 3:00 PM. Watch for a future GAQC Alert containing registration information;
    • The GASB Pensions Standards Part II: Considerations for Agent Plans, Participating Employers and Their Auditors, addresses the accounting and auditing challenges related to agent plans and their participants. Note that this event was conducted prior to finalizing this whitepaper and that there are some changes to the best practices that have occurred. The most significant relates to Option 1 above relating to fiduciary net position. So, if you listen to this event, be sure to focus on the additional recommendation in the final agent whitepaper to provide an in-relation-to opinion as discussed in AU-C section 725, Supplementary Information in Relation to the Financial Statements as a Whole, on each employer column in the schedule of changes in fiduciary net position by employer. This recommendation was added to make clear that the auditor is not opining on each employer column when using Option 1.
    Continued AICPA Efforts Addressing Pensions
    The AICPA SLGEP has focused almost exclusively on addressing issues related to multiple-employer plans and the issuance of the agent paper (and forthcoming interpretations) is the culminations of those efforts. The AICPA SLGEP will continue to discuss pensions, addressing other implementation issues as they arise and will consider issuing additional guidance as necessary. Additionally, a new governmental pension chapter for the AICPA Audit and Accounting Guide, State and Local Governments, is under development. The chapter will cover various plan and employer auditor considerations, including ramifications when an employer auditor is not able to obtain sufficient appropriate evidence in order to opine on the pension amounts included in employer financial statements. Future GAQC communications will be sent as the matters discussed in this section are finalized.
    *   *   *   *   *
    Sincerely,

    AICPA Governmental Audit Quality Center
     
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