ERISA Accounting and Other Emerging Issues

Caron & Bletzer spends considerable time each year ensuring that our managers and staff are not only familiar with, but knowledgeable about recent accounting pronouncements and emerging auditing issues. We will work with you to make sure you are fully informed about all employee benefit plan audit related emerging accounting and auditing issues, as well as other issues that may affect reporting compliance for your plan.

Simplification of Disclosure Requirements

During 2015, two Accounting Standards Updates ("ASUs") were issued in response to industry calls to simplify disclosure requirements as they apply to employee benefit plans, after years of increasingly complex requirements.

ASU 2015-07 updated Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) by removing the leveling requirement for investments that utilize the net asset value practical expedient.

Investments valued using net asset value as a practical expedient are no longer required to be included in the leveling table and are listed only as a reconciling item at the bottom of the table, so the total agrees to total investments at fair value on the statement of net assets available for plan benefits.

Disclosure of unfunded commitments, investment strategies, withdrawal restrictions and notification requirements are still required for all investments valued using net asset value as a practical expedient. However, ASU 2015-12 further modifies the disclosure requirements eliminating the requirement to disclosure investment strategy if an investment is a direct filing entity ("DFE").

The standard is effective for 11-K filers for fiscal years beginning after December 15, 2015 and fiscal years beginning after December 15, 2016 for all other plans. Early adoption is permitted.

ASU 2015-12 - Plan Accounting (Topics 960, 962, 965) is one of the first written with benefit plans specifically in mind and contains three parts that can be adopted together or separately. All three parts must be adopted for years beginning after December 15, 2016, and early adoption is allowed. Parts I & II should be adopted retrospectively (giving effect for all years presented), and Part III is to be adopted prospectively. The main thrust of this ASU is towards simplification, with the elimination of several disclosures.

Part I deals with Fully Benefit Responsive Investment Contracts ("FBRICs"), and it eliminates the requirement to present these contracts at fair value. Establishing fair value for insurance contracts was often challenging, as confirmations usually give only contract value and management was required to come up with a reasonable methodology to measure fair value. Under the new rules, investments in contracts determined to be fully benefit responsive (FBRICs) are to be presented at contract value. They will be presented separately from investments at fair value on the statement of net assets available for plan benefits. Several disclosures were eliminated for these contracts, including inclusion in the leveling table (typically at level 3), and the resulting level 3 roll-forward, the nature of unobservable inputs and average yields during the plan year.

Certain disclosures were maintained or added, including the total contract value of each type of contract, the nature of each type of contract, how contracts operate, events that could limit ability to transact at contract value, termination provisions and settlement value if applicable, and a statement that events which limit the Plan's ability to transact at contract value with the issuer are not probable of occurring.

There are no changes to the requirement to establish fair value for non-fully benefit responsive contracts, or to the disclosures required for these investments. Clarification was provided for Stable Value Common Collective Trusts and similar investments that indicated net asset value can be used under the practical expedient as fair value and no adjustment is needed.

Part II simplifies plan investment disclosures. It eliminated the requirement for investments in the leveling table to be disaggregated by class (defined as nature, characteristics and risk) in addition to type, and now allows them to be presented by general type of investment alone (for example, mutual funds may be presented as one line item, instead of breaking into large cap, small cap, etc.). Additionally self-directed investments may be listed as one general type, and disclosure of net appreciation or depreciation by investment type, disclosure of individual investments greater than 5% of net assets available for benefits, and disclosure of strategies for investments measured using net asset value as a practical expedient that are DFEs are all eliminated.

Finally, Part III, the Measurement Date Practical Expedient, allows plans with year ends that do not coincide with a month end to measure investments and investment related accounts as of a month end date that is closest to the plan year end.

We are pleased, in general, with the new ASUs as we believe that they eliminate disclosures that were not particularly useful to the users of financials statements, and will result in the saving of time and effort for both plan sponsors and auditors.

Fair Value Accounting and Presentation Requirements

ASC 820-10 Fair Value Measurement and Disclosures (formerly SFAS No. 157) defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This pronouncement, now effective for all audits, does not require any new fair value measurements of a plan's investments, it merely increases audited financial statement disclosure requirements.

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value as described below.

Level 1: Investments:
Valued using quoted prices in active markets for identical assets that the plan has the ability to access at the measurement date.
Example: Prices derived from a stock exchange.

Level 2: Investments:
Valued using inputs other than quoted prices included with level 1 that are observable for the asset, either directly or indirectly.
Example: Yield curves, indices, matrix pricing.

Level 3: Investments:
Valued using significant unobservable inputs that reflect the plan's own assumptions about the assumptions that market participants would use in pricing the asset, based on the best information available.
Example: Investment manager pricing, hedge funds, private equities.

Plans were required to implement this standard in their 2008 financial statements, so it should now be applied in your plan's financials statements. In 2009, further guidance again became applicable when FASB issued an amendment to ASC 820-10. The amendment provides additional guidance on how to determine the fair value of an investment when the volume and level of activity for the asset or liability have significantly decreased and in identifying transactions that are not orderly. It also expands disclosure requirements for investments by requiring detail by major security type.

In 2010 FASB yet again issued guidance on ASC 820-10, with ASU No. 2010-06. ASU 2010-06 requires increased disclosures for transfer of level 3 investments in and out of level 1 and 2 investments, effective for plan years beginning after December 15, 2009. For plan years beginning after December 15, 2010 additional disclosure is required for activity related to level 3 investments.

C&B is well aware of the confusion the ASC 820-10 hierarchy can cause plan sponsors. In some instances, leveling guidance published by asset custodians may not appear appropriate for your situation. The decision between level two and level three for more complex assets is not always clear. We encourage thorough discussion of the nature of assets and how valuations are arrived at between plan sponsors and their advisors, and we are happy to discuss any questions you may have. The positive result of this new guidance has been the closer look taken at asset characteristics and valuations.

ERISA AUDIT SERVICES WE OFFER

Employee benefit plan audits of:

  • 11-K Audits
  • 401(k) plans
  • 403(b) plans
  • Other 401(a) plans
  • Money purchase pension plans
  • Defined benefit pension plans
  • Cash balance pension plans
  • ESOPs
  • Other hybrid plans
  • Funded welfare benefit plans

ERISA consulting and other employee benefit plan services:

Form 5500 preparation and review

Employee benefit plan tax services, including preparation of Forms 8955-SSA, 5330, 990, 990-T

Representation in DOL and IRS examinations

Consulting in ESOP formation and transactions

Assistance in correcting problems involving late filings, plan administration and design, including self-corrections and submissions to the DOL and IRS under established correction programs (DFVCP, VFCP and EPCRS)

Assistance with the RFP process to find plan service providers