What’s New in the World of Employee Benefit Plan Accounting?
Matt Prunier, Audit Principal
2015 saw several changes that impact the financial reporting of employee benefit plans. The purpose of this article is to provide a roundup of some of them that should be of use to plan administrators and others involved with plan accounting.
During 2015, the Financial Accounting Standards Board (FASB) issued a three part accounting standards update (ASU 2015-12). The disclosure changes are practical and should provide meaningful relief for many plans going forward. That being said, the changes might be frustrating to many plan administrators (and auditors), as some of the disclosures no longer required were only recently added and in some cases required significant time commitments to implement!
The first part of the update pertains to guaranteed investment contracts, including stable value funds. This type of investment is very popular and allows plans to offer participants an investment option which will return a guaranteed rate (albeit a small one in recent years). This option works well for participants nearing retirement age or for those who do not wish to accept much risk in their retirement portfolio.
Historically, plans have had to determine whether their particular investment was “fully benefit responsive,” and that determination would direct the presentation in the plan’s financial statements. Essentially an investment would be “fully benefit responsive” if participants were always transacting in that fund based on the agreed upon rate of return (contract value). The previous guidance required benefit responsive investments to be reported at fair value with a reconciliation to contract value on the face of the financial statements.
The new guidance confirms what we all knew: that contract value is the only relevant measurement for fully benefit responsive investment contracts. This eliminates the need for the adjustment on the face of the financial statements. This change is beneficial because many investment companies provide only contract value in their annual reporting package. Gathering fair value information for each of these investments can at times be complicated, time-consuming and expensive. Additionally, given the complications in valuing these contracts, many resided as level 3 investments in the fair value hierarchy, which required even more disclosure. As the investments are now measured at contract value, rather than fair value, inclusion in the fair value hierarchy is no longer required.
Historically, plan financial statements have been very heavy on disclosures surrounding the investments held by the plan. Disclosures grouped and sorted the portfolio in almost every way imaginable. This makes sense as the investments are important to participants; these are their retirement accounts after all! However, at the back of every set of plan financial statements is a mandatory schedule which includes detailed information on the investment portfolio, listing each investment separately. This schedule makes many of the other disclosures redundant.
Part two of the new guidance eliminates the requirement to a) disclose individual investments in excess of five percent of total net assets available for benefits, b) disclose the net appreciation or depreciation of investments by type of investment, and c) disclose investments by similar characteristics, type or investment strategy (for example small cap and large cap funds). Disclosure will be limited to presenting investments on the basis of general type (for example mutual funds, common stocks).
Part three of the accounting standard update is extremely narrow and impacts a limited number of plans. That being said, if you have a plan whose year-end does not line up with a month-end (for example the Saturday closest to December 31) you are now allowed to value your investments as of the month-end closest to your plan year end date as a practical expedient.
Net Asset Value
Many plans hold investments where fair value is not readily available, but for which net asset value is calculated on a regular basis. Net asset value (NAV) is simply the fair value of the underlying assets and liabilities divided by the number of investor units available. An example of an investment that uses NAV would be a pooled separate account held with an insurance company. Current accounting guidance allows, in many circumstances, the net asset value of qualifying investments to be used to measure fair value as a practical expedient.
One of the complications with the use of NAV is the ambiguity in classifying the investments within the fair value hierarchy. Frequent discussions occurred with clients and within the profession to determine where these assets should be classified. In May, the FASB issued ASU 2015-07. This standard removed the requirement to include investments measured at NAV as a practical expedient within the fair value tables. This removes any confusion and diversity in the classification of these investments.
Mortality rates are a key assumption in determining liabilities related to defined benefit pension plans. Plans rely on industry data rather than developing their own mortality rates specific to their plan participants. The most common source of information for mortality information is the Society of Actuaries. Until very recently, the most current and widely used information was mortality table RP-2000 produced by the Society. Over the years this information has become dated and in 2014 the Society issued an updated mortality table RP-2014 and an associated improvement scale MP-2014.
This new information took into account additional years’ worth of available data and bore out what was evident to most of us: that people generally are living longer now. Plan sponsors have adopted these tables and the end result, not surprisingly, was a higher pension liability.
The Society has indicated that updates to the mortality tables will occur more frequently in the future and in fact, has already issued an updated mortality improvement table MP-2015 which includes two additional years of Social Security mortality data, not previously available. The 2015 updates include smaller improvements in mortality rates than were originally expected, so perhaps plans and plan sponsors will be able to reverse some of the increases in plan liabilities seen last year.
If you would like more details regarding the changes described above, please call Matt Prunier or 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.