Certain Component Unit Criteria, and Accounting and Financial Reporting for Section 457 Plans
Project Description: A primary objective of this project is 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. Another objective of this project is to consider 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 develop requirements related to the issues addressed in that proposal.Status:
Final Statement, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, approved June 2020.
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 plan. 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.
An Exposure Draft of a proposed Statement proposing requirements related to Section 457 plans was issued in June 2019. The project subsequently was put on hold pending the results of the aforementioned outreach. The staff based the determination of whether a Section 457 plan meets the definition of a pension plan on the requirements proposed in the Exposure Draft. However, it should be noted that under existing authoritative guidance, Section 457 plans are not pension plans, regardless of whether the government is providing a benefit (for example, an employer contribution).
Accounting and Financial Reporting Issues. The key issues that this project will address are:
- 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.
- Whether paragraph 7 of Statement No. 84, Fiduciary Activities, (that establishes that a legally required employer contribution demonstrates a financial burden) should be limited to defined benefit pension and OPEB plans.
- 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 plan, should follow the applicable accounting and financial reporting for pension plans and for benefits provided through those pension plans.
- Pre-agenda research approved: April 2018
- Research results reported to the Board: December 2018
- Added to current technical agenda: December 2018
- Task force established? No
- Deliberations began: April 2019
- Exposure Draft approved: June 2019
- Comment period: June–September 2019
- Additional outreach conducted: November and December 2019
- Expanded project added to current technical agenda: January 2020
- Deliberations began: February 2020
- Exposure Draft approved: March 2020
- Comment period: March–April 2020
- Final Statement: June 2020
Certain Component Unit Criteria—Minutes
Minutes of Meetings, June 16–18, 2020
The Board reviewed a ballot draft of a final Statement and provided clarifying edits. The Board then voted unanimously to approve the issuance of Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans.