November 23, 2015

By Shelly Archuleta, CPA

Changes to Financial Reporting for Benefit Plans
FASB Accounting Standards Update
ASU 2015-07 and ASU 2015-12

During this past summer, the Financial Accounting Standards Board (FASB) was busy issuing new guidance that changed financial reporting requirements for employee benefit plans. Accounting Standards Update (ASU) 2015-07 was issued in May 2015 and resulted in disclosure changes for investments in certain entities that calculate Net Asset Value (NAV) per share (or its equivalent).

Two months later, ASU 2015-12 was issued, which included changes to disclosures for fully benefit-responsive investment contracts and simplified investment disclosures in benefit plans. Both changes together could result in fairly substantial modifications to the financial statements of retirement plans. Let’s walk through the changes together.

Many retirement plans hold investments that do not have a quoted market price but do calculate NAV per share or its equivalent (e.g., stable value collective trust funds, insurance company separate accounts). Under FASB Topic 820, Fair Value Measurements, these investments’ NAV per share can be used as a practical expedient for measuring fair value and are categorized (Levels 1, 2, and 3) within the fair value hierarchy based on when they are redeemable at NAV.

Due to diversity in practice, ASU 2015-07 removes the requirement to categorize (“level”) these investments within the fair value hierarchy. However, ASU 2015-07 does require there to be sufficient detail to reconcile investments from the statement of net assets available for benefits to amounts reported in the fair value hierarchy footnote disclosures.

Now let’s talk about the new guidance provided by ASU 2015-12. There are three parts to ASU 2015-12, including 1) changes in reporting for fully benefit-responsive investment contracts, 2) simplification in investment disclosures, and 3) providing a practical expedient for entities that have a fiscal year-end that does not coincide with a month-end. We are going to focus our time on parts 1 and 2 of this guidance.

FASB Topic 962 required fully benefit-responsive investment contracts (FBRIC) to be measured at contract value with an adjustment to reconcile contract value to fair value on the statement of financial position of the plan. Part 1 of ASU 2015-12 designates contract value as the “only required measure for FBRICs.” What this means is that FBRICS will be measured, presented, and disclosed at contract value only. Investments are considered fully benefit-responsive if they meet five different criteria, which are outlined in more detail in the guidance.

It will be important for plan sponsors to determine whether an investment is fully benefit-responsive since disclosures for non-fully benefit-responsive investments will remain unchanged. Under ASU 2015-12, FBRIC’s will no longer be included in the fair value measurement disclosures. This means disclosure of quantitative information about significant unobservable inputs and reconciliation of opening balances to closing balances for FBRICS classified as level 3 in the fair value hierarchy are no longer required. Additionally, the requirement to disclose the average yield earned by the plan and the actual interest rate credited to the plan for FBRICs is no longer required.

Part 2 of ASU 2015-12 has some substantial changes to investment disclosures in plan financial statements. As discussed in the guidance, the changes were made to reduce the complexity of disclosures and to improve the usefulness of the information for financial statement users.

The first change relates to eliminating the requirement to break-out net appreciation or depreciation in fair value of investments by asset type. Prior to the change, plan financial statements were required to break-out net appreciation and/or depreciation in fair value of investments by general category (e.g., mutual fund, common stock, pooled separate accounts, etc.). It is now permissible to include all net appreciation or depreciation (realized or unrealized) on one line in the financial statements.

According to FASB Topic 962-325-45-7, plan financial statements were required to identify individual investments that represented more than 5% of net assets available for benefits at year-end. Part 2 of ASU 2015-12 eliminates this disclosure requirement in its entirety.

The next change highlighted in the new guidance related to the fair value measurement disclosures. Prior to ASU 2015-12, plan financial statements included a description of the valuation techniques and inputs used to measure fair value of investments. It also required investments held to be disaggregated by nature, characteristic, and risk (e.g., large cap, small cap, growth, value, etc.). ASU 2015-12 eliminates the disaggregation element. Plan financial statements still must disclose valuation techniques and inputs for investments held, but further break-out of investments by their nature and risk has been eliminated.

Another change highlighted in ASU 2015-12 relates to disclosures for investments measured at the net asset value or its equivalent (e.g. collective trust funds, pooled separate accounts). In the past, there was a requirement to disclose significant investment strategies for those funds; however, this requirement has been removed if the investment meets certain criteria as described in the guidance.

The last significant change described in ASU 2015-12 relates to disclosures for investments held in self-directed brokerage accounts. Self-directed brokerage accounts are offered by some plans whereby plan participants can invest directly in securities (e.g. common stock, bonds) outside of the core menu of investment options. FASB Topic 962 required all investments held by a plan, including self-directed brokerage accounts, to be presented by type (e.g. common stock, partnership, mutual fund, etc.); however, Part 2 of ASU 2015-12 removed this requirement and allows self-directed brokerage accounts to be reported in aggregate only.

In the guidance, the Financial Accounting Standards Board Emerging Issues Task Force concluded that the changes in the guidance was a change in accounting principle; however, the reporting entity is only required to disclose the nature and reason for the change in the principle. All changes from ASU 2015-07 as described above will be effective for fiscal years beginning after December 15, 2015 for public companies and after December 15, 2016 for nonpublic companies with early application permitted. All changes from ASU 2015-12 as described above will be effective for fiscal years beginning after December 15, 2015 with early application permitted.

© Clark Nuber PS, 2015.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.