Questions regarding ASU 2015-12
FINANCIAL REPORTING INSIGHTS |
Financial Accounting Standards Board (FASB) 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): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force), simplifies several aspects of plan accounting as discussed in our article, Accounting Standards Update issued for plan accounting matters. The ASU is effective for fiscal years beginning after December 15, 2015. Retrospective application is required for Parts I and II of the ASU for all periods presented.
Employee benefit plan administrators commonly have raised the following three questions related to the implementation of this standard:
- Because most plans investing with insurance companies are required to sign a group annuity contract, how should the plan discern whether it has a direct or indirect investment?
- Can the new guidance about direct investments in fully benefit-responsive investment contracts be applied to indirect investments in fully benefit-responsive investment contracts?
- Which differences between financial statement and Form 5500 reporting result in a reconciliation footnote?
The group annuity contract often represents the service agreement between the plan and the insurance company. Within this agreement, there is a list of which investments are held by the plan. Typically, the investments with an insurance company include a general account or guaranteed contract as well as various pooled separate accounts. In this case, the plan should look to the nature of the investments listed in the group annuity. If there is a guaranteed contract, that investment is likely a direct investment contract, and the next step is to evaluate whether or not it is fully benefit responsive. If there are pooled separate accounts, one or more may hold investment contracts, but those would be considered to be held indirectly by the plan.
It is important to understand whether the plan’s fully benefit-responsive contracts are held directly or indirectly by the plan. Part I of ASU 2015-12 designates contract value as the only required measure for direct investments in fully benefit-responsive investment contracts between the plan and the issuer, and as a result, eliminates the gross up to fair value, as well as the fair-value-to-contract-value adjustment, from the face of the financial statements and excludes such investments from the fair value disclosure requirements. The FASB did not change the scope of the definition of a fully benefit-responsive investment contract to include indirect investments in fully benefit-responsive investment contracts (e.g., fixed income or guaranteed contracts held within a common or collective trust, pooled separate account or stable value fund).
However, indirect investments in fully benefit-responsive investment contracts generally are held through common collective trust funds or pooled separate accounts that calculate net asset value (NAV) per share (or its equivalent) under Topic 946 of the FASB’s Accounting Standards Codification (ASC), “Financial Services – Investment Companies.” As such, these funds do not qualify for contract value reporting; however, they may qualify for use of the NAV either as readily determinable fair value or as a practical expedient under ASC 820, “Fair Value Measurement.” This may result in a change from current practice because these funds that invest in fully benefit-responsive contracts no longer will be reflected by the plan with a gross up to fair value and adjustment from fair value to contract value. Instead, the amounts would be netted together and shown in investments at fair value on the face of the financial statements. If the NAV is determined to be readily determinable, the fund would continue to be reported in the fair value hierarchy. Whereas, if the NAV is not readily determinable but is considered a practical expedient, the fund would be excluded from the fair value hierarchy upon adoption of 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 FASB Emerging Issues Task Force), but continue to be subject to the NAV tabular disclosures.
A reconciliation footnote between the Form 5500 and financial statements may be necessary for the current-year information, depending on how the Form 5500 reflects investment contracts and funds holding investment contracts. Due to the retrospective application of certain ASUs, the reconciliation footnote between the Form 5500 and financial statements for prior-year information may need to be "revised," depending on how the Form 5500 reflects investment contracts and funds holding investment contracts in the opening balance sheet. In addition, funds at NAV that indirectly hold investment contracts may be reflected in the Form 5500 at grossed up fair value, whereas they would be reflected at NAV in the audited financial statements. Because supplemental schedules attached to the audited financial statements should match the Form 5500 presentation, differences between the Form 5500 and financial statements may result in a reconciliation footnote.