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Practical Expedient Created for Defined Benefit Plans

April 20, 2015

Entities with year-ends that do not fall at the end of a month have a new practical expedient that may be elected when measuring the fair value of defined benefit plan assets. Accounting Standards Update 2015-04, Compensation- Retirement Benefits (Topic 715), allows these entities to use fair value measurement dates from the calendar month end nearest to the entity's year-end. For example, if an entity's year-end were June 10, the entity would be able to use the fair value measurements of its defined benefit plan assets from May 31.

The expedient does not apply to employee benefit plans. The FASB's Emerging Issues Task Force (EITF) is examining ways to simplify employee benefit plan reporting. The EITF has proposed a similar expedient which has been approved by the FASB and is expected to be issued during the second quarter as discussed in this MHM Messenger.

Using the Expedient

Fair value measurement dates can be difficult for entities with year-ends that fall at other times in the month. Third party service providers that measure fair value tend to do so at the end of a month. Entities have had to adjust their fair values for their defined benefit plan assets to meet their year-end reporting requirements, often at great cost to their organization.

With the practical expedient, entities can streamline their approach to measuring defined benefit plan assets. The accounting standards update also permits the expedient to be used when a significant event occurs that requires plan assets to be remeasured. An entity can remeasure the plan assets using the month-end that is closest to the date of the significant event. The standard does require that adjustments be made if the month-end measurement does not fully capture the effect of the event that triggered the remeasurement. The measurement could, for example, include assets that are no longer part of the plan and for which the measurement must be adjusted to properly reflect the event.

Changes in market price or interest rates between the fair value measurement and the year-end reporting do not require entities to redo its fair value assessment. Contributions made between the fair value measurement date and the year-end reporting date also do not necessitate the fair value measurement of the assets to be revalued. An entity would have to include the amount of the contributions not reflected in the fair value measurement in a disclosure in order to permit reconciliation between the table of fair values of plan assets by class and the ending balance of plan assets.

The practical expedient can be used by public companies for annual and interim periods beginning on or after December 15, 2015. Nonpublic entities can adopt for annual periods beginning December 15, 2016, and interim periods beginning after December 15, 2017. Entities may adopt early. The expedient, once elected, should be applied consistently across all eligible plans. Entities electing the expedient will have to make a related disclosure that includes the fair value measurement date selected.

For More Information

For specific questions, concerns or comments, please contact your MHM professional.

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