Project Pages

Certain Component Unit Criteria, and Accounting and Financial Reporting for Section 457 Plans

Project Description: A primary objective of this project would be to consider amending authoritative guidance for determining certain fiduciary component units to reflect benefit and cost considerations of reporting defined contribution pension and OPEB plans and other employee benefit plans (for example, an Internal Revenue Code Section 457 deferred compensation plan (Section 457 plan) that does not meet the definition of a pension plan) in a government’s fiduciary fund financial statements. In particular, this proposed project would reconsider the applicability of existing certain component unit guidance related to appointment of voting majority of a governing board and financial burden to certain arrangements. Further, this proposed project would consider if the component unit guidance related specifically to appointment of a voting majority of a governing board presented in Implementation Guide 2019-2, Fiduciary Activities, should be included in level A literature in the GAAP hierarchy and to which arrangements it should be applied.
 
In addition, due to their interrelated nature between (1) the fiduciary reporting of those arrangements, which include certain Section 457 plans, and (2) the project currently on the Board’s technical agenda regarding Section 457 plans, another objective of this project would be to consider the respondent feedback on the Exposure Draft, Internal Revenue Code Section 457 Deferred Compensation Plans That Meet the Definition of a Pension Plan and Supersession of GASB Statement 32, and propose requirements related to the issues addressed initially as part of that project.

Status:
Initial Deliberations  

Certain Component Unit Criteria—Project Plan


Background: Statement No. 14, The Financial Reporting Entity, as amended, provides guidance on the identification of component units and Statement No. 84, Fiduciary Activities, provides guidance regarding the identification of fiduciary component units and fiduciary activities. Paragraph 7 of Statement 84 amended the requirements in Statement 14 regarding financial benefit or burden by adding a criterion to indicate that a primary government is considered to have a financial burden if it is legally obligated or has otherwise assumed the obligation to make contributions to a pension plan or OPEB plan. Implementation Guide No. 2019-2, Fiduciary Activities, includes authoritative question and answers that address a specific situation in which some defined contribution pension plans, that (1) do not have a governing board and (2) to which the employer is legally required to make contributions, would be reported as fiduciary component units by the sponsoring government. Those questions and answers were intended to clarify (1) that the absence of a governing board is equivalent to the primary government appointing a majority of a governing board and (2) the application of paragraph 7 of Statement 84 regarding financial burden. Prior to the issuance of Statement 84 and related implementation guidance, many governments have not previously reported those plans.

Further, at the October 2019 Board meeting, the staff proposed additional questions and answers as part of the Implementation Guide Update project that would have addressed additional considerations associated with the absence of a governing board. Specifically, the two potential questions and answers provided that if there is no governing board and the government is essentially performing the duties of a governing board, the government would have the ability to impose its will. The potential guidance proposed by the staff at that time was framed in two potential questions and answers, one for pension and OPEB plans, regardless of whether the government is legally required to make contributions or has otherwise assumed an obligation to make contributions to the plan, and another for employee benefit plans that are not pension and OPEB plans, for example, a Section 457 plan that does not meet the definition of a pension plan1.  Therefore, in a circumstance in which there is no governing board and the government is performing the duties of the board, the activity (whether a pension or OPEB plan or an employee benefit plan that is not a pension or OPEB plan) would meet the criteria in paragraph 21a of Statement 14, as amended, to be a component unit.

Those potential questions and answers would have required many governments to report defined contribution pension and OPEB plans and other employee benefit plans that do not meet the definition of a pension or OPEB plan as component units in their fiduciary fund financial statements. As a result, prior to proposing that implementation guidance, the Board requested that the staff conduct additional outreach to more clearly understand the structure and characteristics of these types of arrangements and the implementation implications to sponsoring governments, including consideration of costs. The intention was that the outreach would be used to inform the Board’s consideration of the benefits and costs associated with presenting these types of arrangements as fiduciary component units.
 
1The potential questions and answers proposed by the staff at that time were based on the proposed requirements of the Exposure Draft related to Section 457 plans (see footnote 1).


Accounting and Financial Reporting Issues. The key issues that this proposed project would address are:
  1. Whether the absence of a governing board satisfies certain component unit criteria and if so, whether (a) it should be included in level A literature in the GAAP hierarchy, and (b) it is applicable to all arrangements.
  2. Whether paragraph 7 of Statement 84 (that establishes that a legally required employer contribution demonstrates a financial burden) should be limited to defined benefit pension and OPEB plans.
  3. Whether a Section 457 plan can meet the definition of a pension plan, and if so, whether such a plan, and the benefits provided through that plans, should follow the applicable accounting and financial reporting for pension plans and pensions.
Project History:
  • Added to current technical agenda: January 2020
Work Plan:
 
Board Meetings Topics to Be Considered
February 2020: Redeliberations of the applicable due process feedback from the original Exposure Draft related to Section 457 plans
March 2020:
 
Review and consideration for approval of a ballot draft of an Exposure Draft with a 30-day comment period
May 2020: Review of comments from due process and review of a preballot draft of a final Statement
June 2020: Review and consideration for approval of a ballot draft of a final Statement
 

Certain Component Unit Criteria—Recent Minutes


Minutes of Teleconference, January 27, 2020
 
To primarily address stakeholder concerns related to the expected costs associated with the reporting of defined contribution pension plans, defined contribution other postemployment benefit (OPEB) plans, and other employee benefit plans in the government’s fiduciary fund financial statements based on guidance provided in Statement No. 84, Fiduciary Activities, and Implementation Guide 2019-2, Fiduciary Activities, the Board added a project to its current technical agenda to determine whether:
  • The absence of a governing board satisfies certain component unit criteria and, if so, whether it should be included in level A literature in the GAAP hierarchy and applicable to all arrangements and
  • Paragraph 7 of Statement 84 should be limited to defined benefit pension and OPEB plans, within Statement No. 14, The Financial Reporting Entity, as amended. 
Furthermore, the Board determined that, because of its interrelated nature, the project related to the applicability of certain component unit criteria should be combined with the existing deferred compensation plans topic on the Board’s current technical agenda. The Board also determined that it would be appropriate for the project to result in the issuance of a Statement rather than a Technical Bulletin.
 
The Board began its initial deliberations of the project by discussing the feedback received from staff outreach related to defined contribution pension plans and other employee benefit plans. The Board then tentatively decided that (a) the following principle is generally appropriate: in the absence of a governing board, if a government is performing the duties that a governing board typically would perform, the absence of a governing board should be treated the same as the appointment of a voting majority of a governing board, and (b) certain arrangements should be exempt from that principle.
 
The Board then discussed the certain types of arrangements that should be exempt from considering the absence of a governing board, if the primary government performs the duties that a governing board typically performs, from being treated the same as the appointment of a voting majority of a governing board. The Board tentatively decided that the following arrangements should be exempt from that principle:
  • Defined contribution pension plans administered through trusts that meet the criteria in paragraph 3 of Statement No. 67, Financial Reporting for Pension Plans, and other employee benefit plans that otherwise would be defined contribution pension plans but to which only employees contribute 
  • All other employee benefit plans, which does not include defined benefit pension plans or defined benefit other postemployment benefit (OPEB) plans 
  • Defined contribution OPEB plans
  • Legally separate arrangements in which assets are accumulated for purposes of providing defined contribution pensions or defined contribution OPEB through plans that are not administered through trusts that meet the criteria in paragraph 3 of Statement 67 or paragraph 3 of Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, respectively. 
The Board then discussed the applicability of the criterion in paragraph 7 of Statement 84 that indicates that a primary government is considered to have a financial burden if it is legally obligated or has otherwise assumed the obligation to make contributions to a pension plan or OPEB plan. The Board tentatively decided that the financial burden criterion in that paragraph should be limited to defined benefit pension or defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of Statement 67 or paragraph 3 of Statement 74, respectively.
 
Finally, the Board discussed the effective date of the existing implementation guidance Questions 4.3, 4.5, and 4.6 in Implementation Guide No. 2019-2, Fiduciary Activities, that discuss the absence of a board or the financial burden criterion. The Board tentatively agreed that the effective date of Questions 4.3, 4.5, and 4.6 in Implementation Guide 2019-2 should be delayed until the completion of this project.
 

Certain Component Unit Criteria—Tentative Board Decisions to Date


The Board tentatively decided to propose the following:
  • A Statement rather than a Technical Bulletin should be issued for this project.
  • The following principle is generally appropriate: in the absence of a governing board, if a primary government is performing the duties that a governing board typically would perform, the absence of a governing board should be treated the same as the appointment of a voting majority of a governing board and certain arrangements should be exempt from that principle. 
  • Specifically, the following arrangements should be exempt from considering the absence of a governing board, if a primary government is performing the duties that a governing board typically would perform, from being be treated the same as the appointment of a voting majority of a governing board: 
    • Defined contribution pension plans administered through trusts that meet the criteria in paragraph 3 of Statement No. 67, Financial Reporting for Pension Plans, and other employee benefit plans that otherwise would be defined contribution pension plans but to which only employees contribute  
    • All other employee benefit plans, which does not include defined benefit pension plans or defined benefit other postemployment benefit (OPEB) plans   
    • Defined contribution OPEB plans 
    • Legally separate arrangements in which assets are accumulated for purposes of providing defined contribution pensions and defined contribution OPEB through plans that are not administered through trusts that meet the criteria in paragraph 3 of Statement 67 or paragraph 3 of Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, respectively. 
  • The component unit criteria in paragraph 7 of Statement No. 84, Fiduciary Activities, should be limited to defined benefit pension plans or defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of Statement 67 or paragraph 3 of Statement 74, respectively.
  • The effective date of the existing implementation guidance Questions 4.3, 4.5, and 4.6 in Implementation Guide No. 2019-2, Fiduciary Activities, that discuss the absence of a board or the financial burden criterion, should be delayed until the completion of this project.