Accounting Standards Update issued for plan accounting matters
FINANCIAL REPORTING INSIGHTS |
In an effort to simplify plan accounting, the Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965) – (I) Fully Benefit-Responsive Investment Contracts, (II) Plan Investment Disclosures, and (III) Measurement Date Practical Expedient (a consensus of the FASB Emerging Issues Task Force), which is briefly summarized as follows:
- Fully Benefit-Responsive Investment Contracts – Part I of ASU 2015-12 designates contract value as the only required measure for fully benefit-responsive investments contracts, and as a result, excludes such investments from the fair value disclosure requirements, which maintains the relevant information while reducing the cost and complexity of reporting for fully benefit-responsive investment contracts. In addition, certain disclosures (such as those related to average yield) were superseded. Disclosure of total contract value of each type of investment contract will be required. Under the amendments, fully benefit responsive investment contracts also will be presented at contract value; accordingly there no longer will be an adjustment from fair value to contract value on the face of the financial statements.
The above amendments are limited to direct investments between the plan and the issuer of the investment contract. Investment contracts that qualify for and use net asset value per share (NAV) or its equivalent as a practical expedient would be subject to the disclosure requirements of Accounting Standards Codification Topic 820, Fair Value Measurement, as amended recently by ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the Emerging issues Task Force). Such contracts would be excluded from the fair value hierarchy but continue to be subject to the NAV tabular disclosures. Typically this will be the case with certain stable value funds that are structured as common or collective trust funds, even though the NAV is contract-value NAV.
- Plan Investment Disclosures – Part II of ASU 2015-12 eliminates current requirements to disclose (a) individual investments that represent five percent or more of net assets available for benefits and (b) the net appreciation or depreciation for investments by general type. The net appreciation or depreciation in investments still is required to be presented in the aggregate.
ASU 2015-12 requires that investments (both participant and non-participant directed investments) of employee benefit plans be grouped only by general type, eliminating the need to further disaggregate the investments on the basis of nature, characteristics and risk. Also, self-directed brokerage accounts now should be reported as a single line item, instead of the underlying investments in the brokerage accounts being disaggregated by general type or further disaggregated by nature and risk.
In addition, the ASU states that if an investment is measured using the NAV (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 is no longer required.
- Measurement Date Practical Expedient – Part III of ASU 2015-12 provides a practical expedient to 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 the plan’s fiscal year-end, when the fiscal period does not coincide with 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 is required to disclose the amount of the contribution, distribution, and/or significant event. The plan also is required to disclose the accounting policy election and the date used to measure investments and investment-related accounts.
ASU 2015-12 is effective for fiscal years beginning after December 15, 2015. Earlier application is permitted.