Michele Weldon Michael Kraemer

Transcription

1 *connectedthinking Stable Value FSP Michele Weldon Michael Kraemer Background FASB Staff Position (FSP) AAG INV-1 and SOP provides guidance with respect to financial statement presentation and disclosure of fully benefit-responsive investment contracts Applies to investment companies (amends AICPA AAG Investment Companies) and Defined contribution health & welfare and pension plans (not defined benefit plans) (amends SOP 94-4 and AICPA AAG Employee Benefit Plans) Released December 29, 2005 Effective for financial statements with annual periods ending after December 15,

2 Investment Contracts As defined by the FSP, investment contracts include: - Traditional guaranteed investment contract (GIC), typically issued by an insurance company - Separate account GIC - Bank investment contract (BIC) - Synthetic GIC - A contract with similar characteristics Plans may hold stable value investments through direct contracts with issuers or through a specifically plan-managed account Plans may also hold stable value investments through ownership of bank collective trust funds or pooled separate accounts (which own investment contracts) 3 Fully Benefit-Responsive Investment Contracts Investment contracts must comply with all of the following criteria: Contract is between plan and issuer. The contract cannot be sold or assigned without consent of the issuer. Contract issuer must be obligated to (1) repay principal and interest or (2) provide prospective crediting rate adjustments that cannot be < 0. Contract requires all participant-initiated transactions to occur at contract value. An event that limits the ability of the plan to transact with the issuer and with the participants at contract value must be probable of not occurring. The plan must allow participants reasonable access to their funds. 4 2

3 Measurement of Investment Contracts What has changed? Change in focus from individual contracts at contract value to net assets at contract value. SOP 94-4 fully benefit-responsive investment contracts should be reported at contract value. SOP all investments should be reported at fair value. Contract value is the relevant measurement attribute for the portion of net assets available for benefits attributable to fully benefit-responsive investment contracts.. 5 Financial Statement Presentation of Investment Contracts Fully benefit-responsive investment contracts are reported at fair value under investments on the statement of net assets available for benefits. For synthetic GICS, the calculation of fair value is determined separately for the portfolio of underlying investments and the wrapper (sum of the two values equals for fair value of the synthetic GIC) The following amounts shall be presented: Net assets reflecting all investments at fair value shall be presented. The difference between the fair value and contract value shall be presented as a single line item Calculated as the sum of the amounts necessary to adjust the portion of net assets attributable to each fully benefit-responsive investment contract from fair value to contract value Net assets available for benefits 6 3

4 Financial Statement Presentation of Investment Contracts (continued) Example Statement of Net Assets Available for Benefits: Investments (at fair value) $8,900,000 Other assets 100,000 Total assets 9,000,000 Total liabilities (300,000) Net assets reflecting all investments at fair value 8,700,000 Adjustment from fair value to contract value for fully benefit-responsive investment contracts 1,100,000 Net assets available for benefits $9,800,000 7 Financial Statement Presentation of Investment Contracts Investments in CCTs or PSAs: Same presentation for statement of net assets. Investments in master trust: Same presentation for statement of net assets. Investment in master trust at fair value Difference between fair value and contract value of master trust single line item 8 4

5 Financial Statement Presentation of Investment Contracts (continued) Statement of changes in net assets available for benefits prepared on a basis that reflects income credited to participants in the plan and net appreciation/ depreciation in the fair value of only those investment contracts that are not fully benefit responsive. Effectively, no change In other words, the change in appreciation/depreciation by type disclosure does not include the fair value of GICs, nor the fair value of the underlying portfolios or wrappers for synthetic GICs) 9 Financial Statement Disclosures Disclose, in the aggregate **Nature of the contracts, how they operate, and methodology for calculating the interest crediting rate, - Key factors that could influence future average interest crediting rates, the basis for and frequency of determining interest crediting rate resets, and any minimum interest crediting rate - Relationship between future interest crediting rates and the adjustment to contract value reported on the statement of net assets. 10 5

6 Financial Statement Disclosures Disclose Average Yields 1) Average yield earned by the plan for all fully benefit-responsive investment contracts Divide annualized earnings of all fully benefit-responsive contracts by the fair value of all such contracts (i.e. portfolio income on last day of year annualized and divided by fair value of portfolio on last day of year) 2) Average yield with adjustment to reflect rate credited to participants for all fully benefit-responsive investment contracts Divide annualized earnings credited to participants by the fair value of all such contracts (i.e. income credited to participants on last day of year annualized and divided by fair value of portfolio on last day of year) **Present yields for each year a statement of net assets is presented. 11 Additional Disclosures Disclose in the aggregate: - Events that limit the ability of the plan to transact at contract value with the issuer Including a statement as to whether the occurrence of those events that would limit the ability of the plan to transact at contract value with the participants is probable or not probable. - A description of the events and circumstances that would allow issuers to terminate fully benefit-responsive investment contracts with the plan and settle at an amount different from contract value. 12 6

7 Additional Disclosures Disclosures apply to investments through a master trust! Disclosures not required for investments through bank collective trust funds (or pooled separate accounts) 13 Transition Considerations ERISA requires comparative statement of net assets: - FSP is applied retroactively to all prior periods presented. - Need fair value information on direct investments and investments through bank CTFs for 12/31/05 and 12/31/06. - If an investment contract is considered fully benefit-responsive under the revised definition on 12/31/06, considered fully benefit-responsive for all periods presented (provided it would have been fully benefit-responsive under SOP 94-4). Consider explanatory paragraph for opinion Prior year SAB 74 disclosures differences in values 14 7

8 Valuation - Per AU section , Plan sponsor is responsible for fair value measurements. Per DOL regs, plan sponsor is responsible for accurate Form 5500 reporting at current value. - Responsibility cannot be outsourced but Plan sponsor can look to investment manager for the mechanics of the valuation. - Many but not all service providers are in process of determining valuation methodology independent of Plan sponsor. Who will provide information???? - Plan sponsor must have sufficient information to evaluate and independently challenge the valuation. - Encourage clients to coordinate with service providers early. 15 Valuation Methodologies - Insurance contracts Present value of future cash flows Straightforward calculation 16 8

9 Possible Valuation Approaches to Valuing Synthetic GIC s Using the FASB 157 framework, three possible valuation techniques that can be considered: - Income approach - Market approach - Cost approach 17 Valuation Methodologies-Synthetic GICs Income Approach Treat wrap as put option Put the portfolio back to wrap providers at contract value (par) Only exercise when market value equals zero (deeply out of the money) Inputs to a down-and-in put model» Current price» Strike price» Hurdle price» Volatility» Time to expiration 18 9

10 Valuation Methodologies-Synthetic GICs Other possible approaches Market Approach Fully Participating Wrap with Contract Term tied to Duration of Portfolio - Use market prices on similar wrap contracts (level 1 or level 2) - Prices are available from counterparties (wrap fees, provided in basis points) - Similar contracts can rebid categories of contracts or individual contracts - Convert wrap fees (basis points) into dollar amounts - Apply discounted cash flow method - Discount using bank/finance yield curves (level 2) and fund s duration 19 Valuation Methodologies-Synthetic GICs Other possible approaches Cost Approach - Replacement cost of wraps would be determined by rebidding (level 1 or level 2) - Leads to similar methodology as market approach 20 10

11 Valuation Methodologies-Issues Income approach Can lead to the use of complex models All parameters used in models may not be observable/available Market approach Uses observable market prices May be difficult to get pricing on comparable instruments Cost approach There may be a wide range of results May be difficult to get data 21 Other Valuation Considerations Client may need to retain a valuation company Model needs to consider terms of the contracts; no one size fits all method Difficulty if not valued how can you assess materiality? Fair value of the wrapper contract is not necessarily equal to the difference between market and contract values

12 Auditing Considerations Full scope audits: Valuation testing Assessment of the propriety of the model Independent testing of inputs Calculation of value For CCTs, PSAs, review of audited financial statements (additional procedures as needed). Look out for investment fund year end different from Plan s year end Materiality considerations 23 Auditing Considerations Limited scope audits Will fair value be certified? Can Plan sponsor accept certification of fair value? Tests of disclosures Terms of contracts/descriptions Yields 24 12

13 Management Representation Appropriateness of the measurement methods and consistency in the application of the methods Completeness and adequacy of the disclosures related to estimated fair value Information regarding any subsequent events requiring adjustment to the estimated fair value measurements Reasonableness of significant assumptions Affirmation there are no events that limit the ability of the plan to transact at contract value with the issuer and that they none are probable of occurring 25 Form 5500 Considerations *Form 5500 historically required fully benefit responsive insurance contracts at contract value and synthetic contracts and CCTs at fair value *Requirements not always followed *New fair value information will allow correct reporting on Form 5500 *Schedule H and Schedule of Assets to show synthetic GICs and CCTs at fair value *Reconciling footnote to financial statements required *Insurance contracts remain at contract value 26 13

14 Resources - AICPA Alternative Investments Practice Aid AICPA EBP Audit Risk Alert - EBPAQC News Alert #77 (2006) -- Stable Value Investments Live Forum Audit Guide (May 2007) 27 Questions???? 28 14

15 *connectedthinking 2006 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. 15