The Financial Accounting Standards Board has issued a three-part accounting standards update for employee benefit plans accounting as part of its efforts to simplify the accounting rules.
Earlier standards for defined contribution benefit plans and health and welfare benefit plans required fully benefit-responsive investment contracts to be measured at contract value, along with an adjustment to reconcile contract value to fair value, when these measures differ, on the face of the plan financial statements.
Some stakeholders, however, suggested that requiring, for purposes of presentation and disclosure, fully benefit-responsive investment contracts to be measured at fair value does not provide decision-useful information when fair value differs from contract value. A statement of position from the American Institute of CPAs asserted that contract value is the relevant measure for those contracts because that is the amount participants normally would receive if they were to initiate permitted transactions, such as withdrawals, under the terms of the underlying plan. Those contracts also are reported at contract value for regulatory reporting.
Part I of the accounting standards update designates contract value as the only required measure for fully benefit-responsive investment contracts, which maintains the relevant information while reducing the cost and complexity of reporting for fully benefit-responsive investment contracts.
Part II of the update relates to the interaction between several areas of the accounting standards for employee benefit plans that sometimes requires aggregation, or organization of similar investment information, in multiple ways. Stakeholders told FASB that disclosing similar investment information in multiple ways is costly for preparers and makes the financial statements more cumbersome for users. The objective of Part II of the update is to simplify and make more effective the investment disclosure requirements under Topic 820 and under Topics 960, 962, and 965 for employee benefit plans.
GAAP requires plans to disclose (1) individual investments that represent 5 percent or more of net assets available for benefits, and (2) the net appreciation or 30 depreciation for investments by general type. Stakeholders told FASB that while less costly to prepare, those disclosures do not provide decision-useful information. The amendments in Part II of the update will eliminate those requirements for both participant-directed investments and nonparticipant-directed investments. The net appreciation or depreciation in investments for the period will still be required to be presented in the aggregate, but will no longer be required to be disaggregated and disclosed by general type.
Under Topic 820, classes of assets are grouped and disclosed on the basis of nature, characteristics, and risks, and under Topics 960, 962, and 965, classes of assets are grouped and disclosed on the basis of general type.
Examples of classes of assets grouped and disclosed by general type include registered investment companies, government securities, common collective trusts, pooled separate accounts, short-term securities, corporate bonds, common stocks, mortgages, and real estate. Classification by general type might be inconsistent with classification by nature, characteristics, and risks, which often results in plans grouping their investments in two different ways.
For example, an employee benefit plan may identify mutual funds as a general type of investment but then further break down the mutual fund into index funds, balanced funds, and fixed income funds to group those funds by nature, characteristics, and risks. The amendments in Part II of the update will require that investments (both participant-directed and nonparticipant-directed investments) of employee benefit plans be grouped only by general type, eliminating the need to disaggregate the investments in multiple ways. In addition, if an investment is measured using the net asset value per share (or its equivalent) practical expedient in Topic 820 and that investment is in a fund that files a U.S. Department of Labor Form 5500, Annual Return/Report of Employee Benefit Plan, as a direct filing entity, disclosure of that investment’s strategy will no longer be required.
Part III of the update relates to one area of several potential simplifications for employee benefit plans submitted by stakeholders. Accounting Standards Update No. 2015-04, Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, provides a practical expedient that allows employers to measure defined benefit plan assets on a month-end date that is nearest to the employer’s fiscal year-end, when the fiscal period does not coincide with a month-end.
If that practical expedient is elected, employers are required to apply it consistently from year to year, adjust the measurement of defined benefit plan assets and obligations to reflect contributions and significant events made between the alternative measurement date and the employer’s fiscal year-end, and disclose the use of the practical expedient and the alternative measurement date. The amendments in Part III of the update provide a similar measurement date practical expedient for employee benefit plans.
They permit plans to measure investments and investment-related accounts (for example, a liability for a pending trade with a broker) as of a month-end date that is closest to 90 the plan’s fiscal year-end, when the fiscal period does not coincide with a month-end. If a plan applies the practical expedient and a contribution, distribution, and/or significant event occurs between the alternative measurement date and the plan’s fiscal year-end, the plan should disclose the amount of the contribution, distribution, and/or significant event. The plan also should disclose the accounting policy election and the date used to measure investments and investment-related accounts.
The amendments are effective for fiscal years beginning after Dec. 15, 2015, but earlier application is permitted.
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