On March 5, 2020, the Governmental Accounting Standards Board (GASB) issued exposure draft, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans.
The exposure draft is intended to improve the consistency of the reporting of fiduciary component units and enhance the comparability in the application of accounting and financial reporting requirements for deferred compensation plans.
The amended guidance applies to all governmental organizations subject to generally accepted accounting principles (GAAP) for state and local governments. Comments are due by April 10, 2020.
Key Provisions
The proposed statement is intended to increase consistency and comparability related to the reporting of fiduciary component units in circumstances where a potential component unit doesn’t have a governing board.
The proposed statement is also intended to mitigate financial reporting costs associated with certain defined contribution pension plans, defined contribution other postemployment benefit (OPEB) plans, and other employee benefit plans, by clarifying that the financial burden criteria in GASB Statement No. 84 is applicable only to defined benefit pension plans and defined benefit OPEB plans that are administered through trusts.
Lastly, the proposed statement extends the accounting and financial reporting requirements related to pension plans to Section 457 plans that meet the definition of a pension plan.
Component Unit Criteria
Component units are legally separate organizations for which the elected officials of the primary government are financially accountable. Furthermore, paragraph 21 of GASB Statement No. 14, The Financial Reporting Entity, as amended, provides that a primary government is financially accountable for a legally separate organization if:
- The primary government appoints a voting majority of the organization’s governing body and is able to impose its will on that organization.
- The primary government appoints a voting majority of the organization’s governing body, and there’s the potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government.
- The organization is fiscally dependent on the primary government and there’s the potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government.
The proposed statement clarifies a government that performs the duties of a governing board in the absence of one should be treated the same as a government that appoints a voting majority of a governing board for purposes of determining financial accountability, except for a potential component unit that is a:
- Defined contribution pension plan
- Defined contribution OPEB plan
- Other employee benefit plan
Additionally, the proposed statement changes the applicability of the financial burden criterion by revising the criterion in paragraph 7 of GASB Statement No. 84 to apply only to defined benefit pension plans and defined benefit OPEB plans administered through trusts that meet the criteria within GASB Statement No. 67 and 74, respectively.
These proposed changes would be effective immediately upon issuance of a final statement.
Deferred Compensation Plans
Historically, Section 457 plans were viewed as more similar to tax-deferred employee savings plans than pension plans. Changes to the characteristics of certain Section 457 plans resulted in the GASB reassessing the treatment of Section 457 plans.
The proposed statement clarifies a Section 457 plan that meets the definition of a pension plan in accordance with GASB Statement No. 67 or 73 is to be treated as a pension plan for accounting and financial reporting purposes, including for purposes of determining whether the plan should be reported as a fiduciary activity in accordance with GASB Statement No. 84.
The proposed statement would supersede the remaining provisions regarding investment valuation requirements for Section 457 plans in GASB Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, as amended. As a result, the proposed standard would require investments of all Section 457 plans to be measured as of the end of the plan’s reporting period.
These proposed changes would be effective for fiscal years beginning after June 15, 2021 with earlier application encouraged.
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For more information on how the proposed changes may affect your organization, contact your Moss Adams professional.