GASB 97: Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans
(an amendment of GASB Statements No. 14 and No. 84, and a supersession of GASB Statement No. 32)
Effective Dates
Effective for fiscal years beginning after June 15, 2021
Overview
Governmental Accounting Standards Board Statement No. 97 clarifies component unit criteria for a potential component unit in the absence of a governing board in determining financial accountability; limits the applicability of financial burden criteria in paragraph 7 of GASB Statement No. 84; and classifies Section 457 Deferred Compensation plans as either a pension plan or other employee benefit plan.
Component Unit Criteria
Component units are legally separate organizations for which the primary government is financially accountable (GASB 61 as amended by GASB statements No. 14 and 34).
If a government appoints a voting majority of the organization’s governing body and can impose its will on the organization, the primary government would then appoint a majority of the organization’s governing body. The potential for the organization then would be to provide specific financial benefits to or impose specific financial burdens on the primary government.
GASB 97 clarifies the case where a legally separate organization does not have a governing board, the primary government must determine whether it is financially accountable for the potential component unit.
In making this determination, if the primary government performs the duties that a governing board would typically perform, then it should be treated as though the primary government appoints a voting majority of a governing board.
This criterion excludes defined contribution pension plans, defined contribution other post-employment benefits plans or other employee benefit plans (Section 457 plan).
Financial Burden Criteria
In general, pension plans and OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of GASB Statement No. 67, Financial Reporting for Pension Plans, or paragraph 3 of GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, respectively, are legally separate entities.
GASB 97 clarifies, when determining whether a legally separate entity is a component unit, that the financial burden criteria in paragraph 7 of GASB Statement No. 84 only applies to defined benefit pension and defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of GASB Statement No. 67, or paragraph 3 of GASB Statement No. 74, respectively.
Changes adopted to conform with these standards should be applied retroactively, if feasible, by restating financial statements for all prior fiscal years or reporting periods. If not feasible, the cumulative effect, if any, of applying the standards should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable) for the earliest fiscal year or reporting period restated.
Section 457 Deferred Compensation Plans
Determination of Type of Plan
Plans of deferred compensation described in Internal Revenue Code section 457 are available for certain state and local governments and non-governmental entities tax exempt under IRC Section 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).
Under GASB 97, a Section 457 plan is classified as either a pension plan or as an “other” employee benefit plan.
If a Section 457 plan that meets the definition of a pension plan in paragraph 51 of GASB Statement No. 67, Financial Reporting for Pension Plans or paragraph 128 of GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provision of GASB Statements 67 and 68, it is considered a pension plan for accounting and financial reporting purposes.
If a Section 457 plan does not meet the definition of a pension plan it is considered an “other” employee benefit plan for accounting and financial reporting purposes.
Accounting and Reporting
GASBStatement No. 84, Fiduciary Activities, as amended, should be applied to determine whether a Section 457 plan should be reported as a fiduciary activity in a government’s fiduciary fund financial statements.
If a Section 457 plan that meets the definition of a pension plan is either included in the financial statements of another government, or issues stand-alone financial statements, all accounting and financial reporting requirements relevant to pension plans should be applied.
An employer or nonemployer contributing entity should apply the requirements of GASB Statement No. 68, Accounting and Financial Reporting for Pensions, as amended, or GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, as amended, to such benefits. The requirements that are applied should be based on the specific type of benefits that are provided through the Section 457 plan.
Summary
In summary, GASB 97 states that when there is no governing board, the primary government must determine whether it is financially accountable for the potential component unit.
In making this determination, if the primary government performs the duties that a governing board would typically perform, then it should be treated as though the primary government appoints a voting majority of a governing board.
This criterion excludes defined contribution pension plans, defined contribution OPEB plans, or other employee benefit plans (Section 457 plan).
GASB 97 clarifies, when determining whether a legally separate entity is a component unit, the financial burden criteria in paragraph 7 of GASB Statement No. 84 only applies to defined benefit pension and defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of GASB Statement No. 67, or paragraph 3 of GASB Statement No. 74, respectively.
Under GASB 97, a Section 457 plan is classified as either a pension plan or as an “other” employee benefit plan.
If a Section 457 plan that meets the definition of a pension plan in paragraph 51 of GASB Statement No. 67, Financial Reporting for Pension Plans or paragraph 128 of GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provision of GASB Statements 67 and 68, it is considered a pension plan for accounting and financial reporting purposes.
If a Section 457 plan does not meet the definition of a pension plan it is considered an “other” employee benefit plan for accounting and financial reporting purposes.
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