Contract Value or Fair Value?

(How to Report Investments in Fully Benefit-Responsive Investment Contracts Held by Employee Benefit Plans)

September 2016

In July 2015, the Financial Accounting Standards Board (FASB) 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); (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient. While the ASU is effective for fiscal years beginning after December 15, 2015, early adoption is permitted, and many plans are choosing to early-adopt due to the simplification of disclosures and relevance to the financial statement users.

Part II and Part III of the ASU reduce investment related disclosures and simplify accounting for plans with a fiscal year end that does not coincide with a calendar month end. These changes are related to the overall simplification of financial statement disclosures and enhancement of relevance to financial statement users. (See our article Upcoming Changes to Employee Benefit Plans from August 2015 for more information on Parts II and III.)

While Parts II and III are fairly straightforward, there has been some confusion surrounding Part I. It was noted by FASB that there had been some diversity in practice regarding which investments should be considered fully benefit-responsive investment contracts (FBRICs) for financial reporting purposes. Specifically, disparity was seen in the treatment of indirect investments in FBRICs.

FASB’s master glossary includes a lengthy definition of fully benefit-responsive investment contracts. In simple terms, it is a contract between a plan and an issuer that credits principal and interest (that cannot be less than zero) to participants under the obligation of the issuer, and under which permitted participant transactions (such as withdrawals) occur at contract value (see FASB’s Master Glossary for a complete definition). It is the last piece of this definition that helped drive Part I of ASU 2015-12. Prior to the issuance of this ASU, FBRICs were reported at fair value in the financial statements, however, reporting these contracts at fair value is not considered relevant to financial statement users as permitted transactions occur at contract value.

FBRICs can include traditional guaranteed investment contracts and synthetic guaranteed investment contracts. A question comes into play, however, when plans hold indirect investments in FBRICs – for example, the plan may be invested in a stable value common or collective trust or pooled separate account which hold investment contracts. ASU 2015-12 clarifies that these types of indirect investments are not in the scope of FBRIC guidance.

Prior to ASU 2015-12, these indirect investments often were thought to be in the scope of FBRIC guidance and were presented at contract value with an adjustment to fair value on the face of the financial statements. However, under ASU 2015-12, FASB has clarified that these are to be reported at fair value. Net assets available for benefits will remain unchanged under the new guidance, but the presentation of the investments on the face of the financial statements and related notes will change. In adopting the new ASU, amounts indirectly invested in FBRICs previously reported at contract value should now be presented at fair value.

While Part I of ASU 2015-12 designates contract value as the only required measurement for fully benefit-responsive investment contracts, it is important to first determine whether the investments in the plan meet the definition of a fully benefit-responsive investment contract, as noted above. Plans should not rely on prior year financial statements in making this determination at the time of adoption. Instead, a review of FASB’s definition is highly encouraged. Whether a plan determines it should be reporting these investments at fair value or contract value, the updates should be applied retrospectively in the year of adoption.

More information regarding ASU No. 2015-12 may be found on the FASB website. If you have any questions regarding how these changes may apply to you, please call your BNN advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.