Rahn, Don

Yahr, Robert

English

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Marquette Universitye-Publications@MarquetteAccounting Faculty Research and Publications Accounting, Department of5-1-2004Local Government Reporting Under GASB 34Robert YahrMarquette University, robert.yahr@marquette.eduDon RahnPublished version. Wisconsin CPA, Vol. 8, no. 5 (May 2004): 30-31. Publisher Link. © 2004Wisconsin Institute of Certified Public Accountants. Reprinted with permission from On Balance,the magazine of the Wisconsin Institute of Certified Public Accountants.Local government reporting under GASB 34 G enerally accepted accounting principles (GAAP) for local govern-mental units have changed significant-ly in the past several years. Governmental Accounting Standards Board (GASB) Statement No. 34 cre-ated many of these changes. Some guidelines in the new standard leave little room for judgment, such as the need to depreciate buildings, machin-ery, and equipment. Other require-ments are not handled quite so easily or have given rise to different inter-pretations. An example of those latter issues is the proper reporting of the liability many governments have to the State ofWisconsin Department of Employee Trust Funds (ETF). The liability, commonly called the unfund-ed prior service cost, is owed by about 40% of the 1,400 local units participating in tl1e ETF plan. Before GASB Statement No. 34 was issued, governments prepared a multi-column fi.md-based balance sheet which included two account groups: one for general long-term debt and one for general fixed assets. Common practice in Wisconsin was to report tl1e prior service cost liability in the general long-term debt column, although that method was not univer-sally accepted. Foomote disclosure of tl1is liability was also used in most cases. As GASB No. 34 is currently being implemented over a three-year period, most governments now prepare two additional financial statements along witl1 the usual fund-based statements. These new statements present a high-ly summarized overview of the fin an-By Don BRim, CPA, and Robert Taln; CPA cial position and results of operations of the governmental unit as a whole. The intent for one of those new statements, the Statement of Net Assets, is to present the true financial position of the entire entity, using the fi.111 accrual basis of accounting. Of particular interest here are tl1e liabili-ties formerly reported in tl1e general long-term debt account group. While liabilities previously reported in that account group generally are required to be reported in the Statement of Net Assets, differing views arose among Wisconsin governments and CPAs about whether or not that requirement applies to tl1e prior serv-ice liability. Some concluded that a govern-ment's prior service liability to ETF (which they interpreted to be the government's unfi.mded actuarial lia-bility) should not be reported as a lia-bility on the face of the financial state-ments. Looking at the hierarchy of GAAP for governmental units, they found no specific guidance regarding the treatment of unfi.mded actuarial liabilities in connection with the gov-ernment-wide Statement of Net Assets in levels A (most authoritative, such as GASB statements and inter-pretations) through C (certain AICPA pronouncements cleared by GASB). However, they noted what appeared to be relevant guidance in level D (other guidance), in a GASB staff Implementation Guide. In the newly reorganized Comprehensive Implementation Guide-2003, Question 7.31 asks whether an unfunded actuarial liability (UAL) should be reported as a liabili-30 THE WISCONSIN CPA MAY 2004 WWW . W I CPA.O RG ty. GASB staff's answer, in part, is "no," because Statement No. 27 requires employers to recognize the net pension obligation rather than the fi.1ll UAL as a financial-statement lia-bility. Some accountants and govern-mental officials have used that portion of staff's answer to the question, without considering the rest of the answer, to conclude that the Wisconsin prior service liability should be excluded from the Statement of Net Assets. In 1997, after reviewing the han-dling of prior service costs in the Wisconsin plan, the GASB staff con-cluded, in response to a specific inquiry, that the prior service cost lia-bility has the essential characteristics of pension-related debt. Pension-related debt, as used in Statement 27, refers to a portion of the UAL (actu-arial liability) that has been converted to an ordinary liability (analogous to a note payable) of an employer, or employers, to the plan. In this case, what has been referred to as the UAL for prior service costs should be viewed as a series of pension-related debts (ordinary liabilities) of individ-ual employer governments to the ETF, rather than as the UAL or part of the UAL, for recognition purposes in the financial statements. This distinction is important because, under GASB Statement No. 27 (level A guidance in the GAAP hierarchy), pension-related debt is required to be reported as a liability in the general long-term debt account group. (As noted above, prior to GASB No. 34, this presentation had widespread support.) -When asked whether this liability should now be presented in the new government-wide Statement of Net Assets, GASB staff referred to nvo directly applicable but previously overlooked portions of the answer to question 7.31 of the Comprehensive Implementation Guide. First, "Statement 34 does not change the measurement and recognition stan-dards in Statement No. 27 .. . " Sec9nd, and even more specific, "Liabilities also should be reported in the statement of net assets for short-•· term differences and pension-related debt as defined in paragraphs ll and 39, respectively, of Statement 27, as amended." Therefore, GASB staffs conclusion is that, since the prior service liability ofWisconsin governments constitutes pension-related debt, the liability should continue to be reported, now "Consistency in financial reporting among and benveen local units of government is important from a cred-ibility standpoint for governing bod-ies and citizens, " says Robert Scott, CPA, director of finance for the City of Brookfield and vice president of the Wisconsin Government Finance Officers Association. "The WRS prior service liability is a significant obliga-tion for many units of government in Wisconsin. Guidance from the GASB indicates it should be recognized in the financial statements ofWisconsin governments." Promoting understanding and con-sistency on the accounting for pen-sion-related liabilities is the goal of this article. Individual governments and audit firms must still exercise professional judgment and document their own analysis regarding the application of GAAP. "The WRS prior service liability is a significant obligation for many units of government in Wisconsin." on the Statement of Net Assets. Many governments have paid off their prior service liability by issuing general obligation debt. For tl1ose governments, tl1e new debt obviously needs to be included. From a consis-tency standpoint for those govern-ments , it follows that, prior to issuing the new debt, tl1eir pension-related debt should have been reported, so mat this refinancing simply replaced one type of long-term debt with anotl1er. If this were not the case, refunding the pension liability would produce a significant increase in lia-bilities and a comparable reduction in net assets (a term now used to replace what was previously known as equity). Robert Scott, CPA By applying the guidance described in this article, Wisconsin communities can achieve greater comparability amongst tl1emselves on this issue. Don Rahn, CPA is a partner in Virchow Krause & Company, LLP, Madison. He can be reached at drahn@virchowkrause.com or (608) 240-2328. Robert Yahr, CPA is technical director of the GRATE Program and associate professor of accounting at Marquette University. He can be reached at grate4wisc@aol.com or (414) 288-1459. AFTER CPA, WHAT NEXT? Are you interested in increasing your mar-ketability? Do you want to expand upon your areas of professional expertise? Consider adding a new professional creden-tial to your repertoire. The following is a list of professional designations, along with the administering organization. CVA Certified Valuation Analyst National Association of Certified Valuation Analysts www.nacva.com CBA Certified Business Appraiser Institute of Business Appraisers, Inc. www.instbnsapp.org ASA Accredited Senior Appraiser American Society of Appraisers www.appraisers.org ABV Accredited in Business Valuation AI CPA www.aicpa.org PFS Personal Financial Specialist AI CPA www.aicpa.org CITP Certified Information Technology Professional AI CPA www.aicpa.org CFP Certified Financial Planner Institute of Certified Financial Planners www.icfp.org CFE Certified Fraud Examiner Association of Certified Fraud Examiners www.cfenet.com, then click on CFE membership, then Uniform CFE exam. TH E WISCONSIN CPA MAY 2004 WWW . WICPA .O RG 31 

Local Government Reporting Under GASB 34

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Local Government Reporting Under GASB 34

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