On July 31, 2015, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) 2015-12, which is designed to simplify several aspects of employee benefit plan financial reporting, including (1) fully benefit-responsive investment contracts, (2) certain plan investment disclosures, and (3) provide a measurement date practical expedient. ASU 2015-12 is effective for fiscal years beginning after December 31, 2015, however, early adoption is permitted, thus, employee benefit plans may elect to adopt any, or all, of the provisions in the ASU for plan financial statements that have not yet been issued.
Fully Benefit Responsive Investment Contracts (FBRICs)
The most significant change coming from ASU 2015-12 provides that plans within the scope of Accounting Standards Codification (ASC) 962 (defined contribution pension plans) and ASC 965 (health and welfare benefit plans) should measure FBRICs at contract value rather than fair value. Currently, FBRICs are required to be reported at fair value, with a reconciliation from fair value to contract value on the statement of net assets available for benefits. The FASB determined that contract value is the most relevant measure for such contracts as that is the amount a participant would receive in a transaction, thus, reporting at fair value and the related disclosures are no longer required. The amendments also remove many of the disclosure requirements for FBRICs in ASC 962 and ASC 965.
The definition of a FBRIC did not change, and the same five specific requirements must be met for an investment to be considered fully benefit responsive. Benefit responsiveness is a term used to describe investments that guarantee contract value regardless of whether the fair value of the contract's underlying assets is more or less than contract value. When plan participants receive benefits, they receive those benefits at the value specified in the contract. Depending on the type of investment contract, a FBRIC may have identifiable underlying assets, which are used to determine the return, or the contract may represent essentially a promise to pay at a specific amount and rate by the counterparty.
Benefit responsive investments are commonly found in employee benefit plans, particularly defined contribution plans and may be held as a direct investment or an indirect investment as part of another instrument, such as:
- Traditional guaranteed investment contracts (GICs)
- Fixed-interest contracts (those with a deposit administration or immediate participation guarantee), which are typically evergreen (that is, they have no maturity date) and benefit responsive
- Synthetic GICs, in which the plan owns the benefit responsive contracts and underlying assets
- Pooled separate accounts with underlying benefit responsive contracts
- Common collective trusts with underlying benefit responsive contracts
The measurement and presentation changes applicable to FBRICs are only applicable to direct investments in such contracts. Therefore, indirect investments are not within the scope of ASU 2015-12 and should remain measured and reported at fair value. In many instances, these investments qualify for measurement using the net asset value as a practical expedient to fair value.
Synthetic GICs generally represent direct investments by the benefit plan and therefore, should be reported at contract value upon adoption of ASU 2015-12. Additionally, the ASU clarifies that synthetic GICs should be reported as a single investment at contract value as opposed to reporting each underlying security within the GIC at its fair value. However, the Form 5500 reporting requirements remain unchanged, and therefore, the fair value of the underlying securities as well as the fair value of the wrapper contract should be presented separately in the Form 5500. The same presentation should be followed for the supplemental schedules to the plan's financial statements because they are a requirement of the Form 5500. This will also result in a potential difference between the plan's financial statements and Form 5500, which should be disclosed in the notes to the plan's financial statements. Fair value disclosure requirements will no longer apply to FBRICs reported at contract value. Current disclosure requirements such as the nature of each type of FBRIC, events that may limit the ability to transact at contract value and the probability of those events, and termination and settlement terms are also no longer required upon adoption. However, separate disclosure is required of each type of direct investment in FBRICs in the notes to the plan's financial statements.
Plan Investment Disclosures
Plans within the scope of ASC 960 (defined benefit pension plans), ASC 962 (defined contribution pension plans) and ASC 965 (health and welfare benefit plans), will now be allowed to disaggregate plan assets by general type only within the statement of net assets available for benefits, eliminating the current requirement to also disaggregate by class. Fair value disclosures will also only be required by general type.
Other disclosure simplifications include the following:
- Participant self-directed brokerage accounts would be presented in the aggregate as a single "general type" of plan asset.
- For a plan asset measured at the net asset value practical expedient permitted by ASC 820-10, if that investment is in a fund entity that directly files Form 5500 with the U.S. Department of Labor, the plan would not be required to disclose the investment strategies for that investment.
- Plan assets that account for 5 percent or more of net assets would no longer need to be listed individually.
- Disclosures of net appreciation or depreciation for each general type of plan asset would no longer be required; however, net asset appreciation or depreciation would still need to be disclosed in the aggregate.
On May 1, 2015, the FASB issued ASU 2015-07, which removes the requirement to include the fair value hierarchy disclosures for investments for which the practical expedient is used to measure fair value at net asset value. Instead, an entity would be required to include those investments as a reconciling line item so that the total fair value of investments in the disclosure is consistent with the amount reported on the face of the financial statements. ASU 2015-07 is effective for interim and annual periods beginning after December 15, 2015 (entities that are not public business entities are granted an additional year), and early adoption is permitted. ASU 2015-07 applies to employee benefit plan reporting entities.
Measurement Date Practical Expedient
ASU 2015-12 provides a practical expedient similar to the one in ASU 2015-04 for an employer's defined benefit plan assets and obligations for plans with a year end date that does not coincide with a calendar month end date. A plan may elect to measure its investments as of the most recent calendar month end date rather than the plan's fiscal year end date. Once elected, the plan must apply this practical expedient consistently on a prospective basis. Under ASU 2015-04, the plan sponsor's financial statements are required to include an adjustment for plan contributions, distributions, and other significant events between the fiscal year end and the alternative measurement date, an employee benefit plan reporting entity would need only to disclose these transactions and events.
ASU 2015-12 is effective for fiscal years beginning after December 15, 2015, however, it may be adopted early. Changes to the reporting for FBRICs and plan investment disclosures must be applied retrospectively. Changes resulting from the adoption of the measurement date practical expedient must be applied prospectively.
For More Information
If you have any specific comments, questions or concerns about the accounting standards update, please share them with Hal Hunt of MHM's Professional Standards Group. Hal can be reached at 816.945.5610 or email@example.com.
Published on September 04, 2015