Pershing Yoakley & Associates, P.C., is pleased to present the following Audit and Accounting Update. This update is designed to provide direct access to current audit and accounting information that is relevant to you.
FASB Activities
Recently Completed Projects
The Financial Accounting Standards Board (“FASB”) has released two Accounting Standards Updates (“ASU”). A summary of these items is provided below.
ASU No. 2012-01, Health Care Entities (Topic 954), Continuing Care Retirement Communities-Refundable Advance Fees
The guidance in this Update is intended to clarify the accounting for how, and when, deferred revenue should be recognized when a continuing care retirement community has resident contracts that provide for a payment of a refundable advance fee to a former resident of a unit upon reoccupancy of that unit by a subsequent resident.
The Update clarifies that an entity should classify an advance fee as deferred revenue when a continuing care retirement community has a resident contract that provides for payment of the refundable advance fee, which is limited to the proceeds of reoccupancy, upon a unit’s reoccupancy by a subsequent resident. The resulting deferred revenue is to be amortized over the remaining useful life of the entity’s facility. The amortization basis and method should be consistent with the method used to calculate depreciation for the facility. Many continuing care retirement communities interpreted the previous guidance to mean that refundable entry fees could be accounted for as deferred revenue in all situations. The Update clarifies that the deferred revenue should only be recognized in situations in which the refund to the initial resident is limited to the proceeds received from the subsequent resident. Refundable entry fees that are not limited to the proceeds from the subsequent resident should be reported as a liability, not deferred revenue.
The Update is effective for public entities with fiscal periods beginning after December 15, 2012. For non-public entities, the Update is not effective until the first fiscal year beginning after December 15, 2013. Early adoption is permitted, and the Update should be applied retrospectively with a cumulative-effect adjustment applied to opening retained earnings as of the beginning of the earliest period presented.
ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment
The FASB issued this Update in response to concerns regarding the cost and complexity of testing indefinite-lived intangible assets (other than goodwill) for impairment. The objective of this Update is to simplify that process.
This Update introduces a qualitative approach for testing these assets for impairment whereby an entity is allowed to first determine whether it is more likely than not (or a likelihood of greater than 50%) that the asset’s fair value exceeds its carrying amount. If this determination can be made, additional testing is not required. However, if the qualitative analysis suggests that it is more likely than not that the carrying amount of the asset exceeds its fair value, the entity is required to calculate the fair value of the intangible asset and recognize an impairment loss to the extent the fair value exceeds the carrying value. This Update references examples of events and circumstances that an entity should consider when performing the qualitative analysis. This Update also allows an entity to skip the qualitative assessment in any reporting period and go directly to the quantitative impairment test while also allowing an entity to go back to the qualitative analysis in any subsequent period.
The Update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted.
GASB Activities
Recently Completed Projects
The Governmental Accounting Standards Board (“GASB”) has released GASB Statement No. 67, Financial Reporting for Pension Plans and GASB Statement No. 68, Financial Reporting for Pensions. GASB No. 67 amends previous accounting and financial reporting practices required for pension plans sponsored by governmental entities, while GASB No. 68 addresses the accounting and financial reporting for pension plans in the financial reports of most governmental entities that provide pension benefits to their employees. GASB No. 67 and GASB No. 68 (collectively the Statements) are interrelated and much of the guidance offered in each Statement is similar to, or complements, the other. The Statements affect pension plans that are administered through irrevocable trusts where contributions from employers and nonemployer contributing entities and their related earnings are irrevocable; pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms; pension plan assets are legally protected from the creditors of employers, nonemployer contributing entities, and the pension plan administrator; and, if the pension plan is a defined benefit pension plan, plan assets are also legally protected from creditors of plan members. Defined benefit pension plans are most affected by the Statements, while the accounting and financial reporting for defined contribution plans remains, for the most part, unchanged from existing standards.
The following are some of the more critical changes documented in the Statements:
Recognition and Presentation of the Net Pension Liability
The Statements require the net pension liability for defined benefit pensions to be measured by taking the portion of the present value of projected payments to be provided through the pension plan to current active and inactive employees that is attributable to those employees’ past service (the total pension liability of the employer), less the amount of the pension plan’s net position (assets less liabilities). The Statements require that actuarial valuations of the total pension liability be calculated at least every two years in conformity with Actuarial Standards of Practice issued by the Actuarial Standards Board with more frequent valuations encouraged, but not required. The GASB is also requiring that the entry-age normal actuarial cost method be the only method used to attribute the present value of projected benefit payments. Previously, several cost allocation methods were deemed acceptable. The net pension liability is required to be reported as a liability in a governmental entity’s financial statements. Previously, governmental entities were only required to report as a liability the difference between the contributions they were required to make to a plan in a given year versus what was actually funded during that year.
Changes to the Discount Rate
Prior to the issuance of the Statements, the discount rate used to determine the net present value of future benefit payments was based on a plan’s long-term annual investment return assumption. The Statements require projected benefit payments to be discounted to their actuarial present value using a rate that reflects a long-term expected rate of return on pension investments to the extent that the pension plan’s fiduciary net position is projected to be sufficient to pay benefits (with the expectation that pension plan assets are invested using a strategy to achieve that return) and a tax-exempt, high-quality municipal bond rate to the extent that the conditions for use of the long-term expected rate of return are not met. Basically, if the projected plan assets and future contributions are not expected to cover projected future benefit payments, the municipal bond rate is to be used at the point the plan’s assets are projected to be exhausted. A lower discount rate equates to a higher liability and, generally speaking, the rate of return on a tax-exempt, high-quality municipal bond is relatively low in comparison to other types of investments. This change has the potential to dramatically increase the net pension liability for plans with projected benefit payments after the projected plan asset exhaustion date.
Plan Modifications and Annual Plan Expense
The Statements require that most changes in the net pension liability be included in pension expense in the period the change occurs. As a result, changes in the total pension liability resulting from current-period service cost, interest on the total pension liability, and changes of benefit terms are required to be recognized immediately. In addition, projected earnings on a pension plan’s investments are also required to be included in the determination of pension expense immediately.
Other changes in the net pension liability are required to be included in pension expense over the current and future periods. The effects on the total pension liability of changes related to economic and demographic assumptions, or of other inputs and differences between expected and actual experience, are required to be included in pension expense in a systematic and rational manner over a period equal to the average of the expected remaining service lives of all active and inactive employees that are provided with benefits through the pension plan. Amounts that are deferred to future periods are to be recognized as deferred inflows or deferred outflows of resources.
The effect on the net pension liability of differences between the projected earnings on pension plan investments and actual experience with regard to those earnings is required to be included in pension expense in a systematic and rational manner over a closed period of five years. Amounts that are deferred to future periods are to be recognized as deferred inflows or deferred outflows of resources.
Required Supplemental Information and Expanded Note Disclosures
The Statements require the presentation of required supplementary information (“RSI”) schedules covering the past ten years with respect to sources of changes in the components of the net pension liability, ratios that help in evaluating the magnitude of the net pension liability, and comparisons of actual contributions to the plan with actuarially determined contribution requirements.
The Statements also require enhanced disclosures such as providing information about the types of benefits provided, how contributions to the plan are determined, assumptions and methods used to calculate the net pension liability, the composition of employees covered by the terms of the plan, and the sources of changes in the components of the net pension liability for the current year.
Changes for Cost-Sharing Plans
Prior to the issuance of the Statements, employers that participated in cost-sharing plans were only required to recognize an expense related to contractually required contributions. If all required payments were made during the year the contributions were required to be funded, no liability was recognized. The Statements now require that the net pension liability of the cost-sharing plan be allocated to each participating employer, based on the employer’s estimated long-term proportionate share of the collective net pension liability.
The provisions of GASB No. 67, which relate to the accounting and financial reporting for pension plans, are effective for fiscal years beginning after June 15, 2013. The provisions of GASB No. 68, which relate to the accounting and financial reporting for pension plans in the financial reports of most governmental entities that provide pension benefits to their employees, are effective for fiscal years beginning after June 15, 2014. Early adoption is permitted for both Statements.
For more information, please contact the experts listed below at PYA, (800) 270-9629.
Learn more about the FASB Accounting Standards Updates
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