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Plan sponsors (and plan advisors) often struggle with the appropriate application of new accounting pronouncements due to limited and/or complex technical guidance on implementation. The Financial Accounting Standards Board (FASB) has provided relief for financial reporting for employee benefit plans (EBPs) with the issuance of 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 (ASU). This ASU is part of the FASB’s Simplification Initiative, which is an ongoing effort to improve the usefulness of the information provided to users of the financial statements while reducing costs and complexity related to financial reporting by EBPs. The ASU is divided in three parts and applies to plan accounting of certain benefit plans.

PART I – Fully benefit-responsive investment contracts

The guidance in Part I of the ASU applies to reporting entities within the scope of Topics 962 (Plan Accounting – Defined Contribution Pension Plans) and 965 (Plan Accounting – Health and Welfare Benefit Plans) that classify investments as fully benefit responsive investment contracts (FBRICs) (e.g. guaranteed investment contracts or GICS).

To better comprehend the impact of this new guidance, it is important to first understand what was required under the old guidance. Prior to ASU 2015-12, generally accepted accounting principles in the United States of America (U.S. GAAP) required an entity to measure FBRICs at both contract value (for purposes of determining the net assets available for benefits) and fair value (for purposes of presentation and disclosure). In addition, U.S. GAAP required an adjustment on the face of the statements of net assets available for benefits to reconcile fair value to contract value (if the measured values differed).

Part I of the new ASU clarifies that contract value is the only required measurement for FBRICs. Contract value is considered to be the most relevant measurement since that is the amount at which plan participants would transact. The ASU requires plans to disclose the contract value of each type of FBRIC (e.g., traditional or synthetic) and eliminates the following reporting requirements:

  • Measurement and presentation at fair value within the statements of net assets available for benefits
  • Related disclosures required by Topics 820 (Fair Value Measurement) and 825 (Financial Instruments)
  • Certain disclosures under Topics 962 and 965 requiring a fair value calculation (e.g., interest crediting rate and average yield disclosures)

The ASU also clarifies that indirect investments in FBRICs (e.g., stable value common or collective trusts) should no longer be reflected as FBRICs and, therefore, should be reported at fair value. Generally, those funds calculate net asset value per share (NAV) or its equivalent in a manner consistent with the measurement principles of Topic 946 (Financial Services – Investment Companies). As such, those funds may qualify for the NAV practical expedient, which would then permit the funds to be omitted from the fair value hierarchy under ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).

PART II – Plan investment disclosures

The guidance in Part II of the ASU applies to reporting entities that follow the requirements of Topics 960 (Plan Accounting – Defined Benefit Pension Plans), 962 and 965.

Prior to Part II of ASU 2015-12, U.S. GAAP required an entity to disclose the following:

(i.) Individual investments that represent 5 percent or more of the net assets available for benefits

(ii.) Net appreciation or depreciation for investments by general type of investment

(iii.) Investment information disaggregated based on the nature, characteristics and risks

The following reflect the changes adopted under Part II of the ASU:

  • Disclosure requirements (i) and (ii) above are eliminated. However, net appreciation or depreciation in fair value of investments for the period is now required to be presented only in the aggregate. In addition, investments (both participant directed and nonparticipant-directed) are now required to disaggregate only by general type of investment (e.g., common stocks, corporate bonds, pooled separate accounts, mutual funds, government securities, mortgages, real estate, etc.) either on the face of the financial statements or in the notes.
  • The ASU removes the requirement to disaggregate the investments within self-directed brokerage accounts. These investments should now be presented as a single type of investment.
  • For investments measured using NAV as the practical expedient and that also file as a Direct Filing Entity (DFE), the disclosure of the investment’s strategy is no longer required.

PART III – Measurement date practical expedient

The guidance in Part III of the ASU applies to reporting entities that follow the requirements of Topics 960, 962 and 965 and have a fiscal year-end that does not coincide with a month-end.

Part III permits 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 (the “alternative measurement date”), when the fiscal period does not coincide with a month-end.

Plans that apply the practical expedient should disclose the accounting policy election, the alternative measurement date and the amount of any contribution, distribution, and/or significant events that occurs between the alternative measurement date and the plan’s fiscal year-end. A similar measurement date practical expedient is available through ASU 2015-04, Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation, for employers with fiscal periods that do not coincide with a month-end.

Effective dates

The guidance in each part of the new ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted for all three parts individually or in the aggregate.

Parts I and II of the ASU should be applied retrospectively, while Part III should be applied prospectively. Only the nature and reason for the change in accounting principle is required to be disclosed in the annual period of adoption.

Practical considerations for implementation

While this new guidance is certainly welcomed for the potential time savings gained through eliminated and/or simplified disclosures, there are certain practical considerations to address when implementing. Some of these considerations include:

  • Continue to understand the nature of the plan’s investment contracts (e.g., are the contracts fully benefit-responsive and if so, are the contracts held directly or indirectly by the plan?).
  • Watch for potentially counter-intuitive guidance (for instance, indirect investments in FBRICs may potentially be excluded from the fair value hierarchy, but the path to arrive at that conclusion is circuitous).
  • Consider how the fair value of the investments in the hierarchy will be reconciled to the corresponding line items in the statements of net assets available for benefits (e.g., how will investments no longer required to be included in the fair value hierarchy be addressed?).
  • Be aware of unintentional consequences of adopting this ASU and ensure minimum required disclosures are met. Elimination of disclosures discussed above may result in additional disclosures under other applicable reporting guidance. For example, disaggregation of investments by general type may result in additional disclosures needed regarding investment strategies, which may have been considered adequately disclosed when disaggregated by investment class. Also, if two or more disclosures were previously combined, portions of the original disclosure may still be required.

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