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New Standards Simplify Benefit Plan Reporting and Disclosure Requirements
New accounting standards simplify the reporting and disclosure requirements for investments held in defined contribution, defined benefit, and health and welfare employee benefit plans. The Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2015-12 in July 2015. Although the update is effective for fiscal years beginning after December 15, 2015, plans may adopt any of the three parts early without adopting the others.
Part I – Reporting for fully benefit-responsive investment contracts
Part I of the update simplifies reporting for fully benefit-responsive investment contracts. These contracts guarantee that plan participants receive benefits at the value specified in the contract, even if the fair market value of the plan’s investments has dropped.
Prior to ASU 2015-12, fully benefit-responsive investment contracts held in a plan were required to be reported at fair value with a reconciliation to contract value on the face of the financial statement. However, fair value is not considered a meaningful measurement basis for fully benefit-responsive investment contracts, as participants’ transactions are typically at contract value and the investments are reported at contract value for regulatory purposes.
Under Part I, fully benefit-responsive investment contracts are measured, presented, and disclosed only at contract value. The footnotes will continue to describe the nature of the contract and how it operates; however, certain disclosures were eliminated, including the crediting rate and average yield. Also, because benefit-responsive investment contracts are reported at contract value, Topic 820 fair value disclosures no longer apply. Once adopted, the amendments should be retrospectively applied.
Part II – Plan investment disclosures
The second part of ASU 2015-12 eliminates substantial disclosures in a plan’s financial statements, including:
- Investment holdings that represent 5 percent or more of net assets available for benefits.
- Net appreciation (or depreciation) by investment type.
- Major class of investments by nature, characteristics, and risk within the Topic 820 hierarchy table. Disclosures are required by general type of investment. Investments held in self-directed brokerage accounts are also not required to be disaggregated by the underlying investment type and are instead reported as one line item.
- Investment objective for investments measured using net asset value (NAV) as a practical expedient if the investment files a Form 5500 as a direct filing entity.
In addition, ASU 2015-12 no longer requires separate presentation or disclosure requirements for nonparticipant-directed investments.
Once adopted, the amendments should be retrospectively applied.
Part III – Measurement date practical expedient
Part III provides a practical expedient for plans that do not report on a month-end date. Plans are permitted to measure investments and investment-related accounts at the month-end that is closest to the plan’s fiscal year-end when the two do not coincide. Plans also must disclose contributions, distributions, and other significant events that occur between the measurement date and the plan’s fiscal year end. Any amendments should be prospectively applied.
Also consider adopting ASU 2015-07
Plans that adopt ASU 2015-12 may also consider adopting ASU 2015-07, Disclosure for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). This standard addresses the variety of ways that certain investments are measured and categorized with the fair value hierarchy. It removes the requirement to level investments measured using the NAV or its equivalent as a practical expedient. The amendments are effective for nonpublic entities for years beginning after December 15, 2016, but it can be adopted early. Once adopted, it should be retroactively applied.
How we can help
The amendments to the accounting standards will have a significant impact on financial statement reporting for employee benefit plans. CliftonLarsonAllen professionals can help you understand the impact of these amendments.