What's Happening?
The Governmental Accounting Standards Board (GASB) issued Statement No. 97 in June 2020, which aims to decrease the reporting burden for defined contribution plans and other employee benefit plans when classified as fiduciary component units. This new
statement modifies previous guidelines, specifically GASB 84, by altering the criteria for what constitutes a fiduciary activity. According to Moss Adams, a CPA firm, the component unit changes introduced by GASB 97 took effect immediately upon its issuance. The remaining provisions of GASB 97, including those related to Section 457 plans, are applicable to fiscal periods beginning after June 15, 2021. A key change is that the 'no-governing-board' rule now exclusively applies to defined benefit pension and Other Post-Employment Benefits (OPEB) plans, and the financial burden criterion outlined in paragraph 7 of GASB 84 no longer applies to defined contribution plans. This adjustment means that most 401(a) and 457 plans are generally not classified as pension trust funds under the revised rules, primarily because separate trustees typically hold the assets and employees direct their investments, indicating a lack of governmental control over these assets.
Why It's Important?
This change in GASB standards is significant for state and local governments, including school districts, as it directly impacts their financial reporting requirements and potentially reduces administrative costs. By narrowing the scope of what qualifies as a fiduciary component unit for defined contribution plans, GASB 97 alleviates some of the complexities and expenses associated with compliance. Governments previously had to navigate intricate rules to determine if certain employee benefit plans needed to be reported as fiduciary activities, which often involved detailed control and beneficiary tests. The updated guidance clarifies these distinctions, making it easier for entities to assess their reporting obligations. This reduction in reporting complexity can free up resources that would otherwise be spent on compliance, allowing governments to allocate funds and personnel to other critical areas. For financial professionals and auditors, understanding these changes is crucial to ensure accurate and compliant financial statements, avoiding potential issues during audits.
What's Next?
Governmental entities, particularly those managing defined contribution plans and other employee benefit plans, will need to continue to review their accounting practices to ensure full compliance with GASB 97. While the component unit changes were effective immediately, the remaining provisions, including those for Section 457 plans, became effective for fiscal periods beginning after June 15, 2021. This means that ongoing adjustments to financial reporting systems and internal controls may be necessary. Auditors will also need to incorporate these updated standards into their review processes, focusing on how entities have reclassified or adjusted their reporting for defined contribution plans. Furthermore, accounting firms like Moss Adams will likely continue to provide guidance and support to their governmental clients to help them navigate these regulatory changes and ensure accurate financial disclosures. The long-term impact will be a more streamlined and potentially less costly reporting environment for these specific types of employee benefit plans.
Beyond the Headlines
The issuance of GASB 97 reflects a broader trend in financial reporting to balance transparency with practicality. While the primary goal of GASB standards is to ensure accountability and provide clear financial information to the public, the cost of compliance can sometimes be substantial for governmental entities. This particular amendment demonstrates an effort to reduce unnecessary burdens without compromising the integrity of financial reporting. By specifically targeting defined contribution plans, which often involve individual employee control over investments, GASB acknowledges that the level of governmental oversight and financial risk may not warrant the same rigorous fiduciary reporting as other types of plans. This move could set a precedent for future standard-setting, where the GASB might increasingly consider the administrative and financial impact of its rules on state and local governments, aiming for more efficient and cost-effective compliance while maintaining high standards of financial transparency.
