Accounting Standards Update (ASU)

Transcription

1 Accounting Standards Update (ASU) Plan Accounting: Defined Benefit Pension Plans (Topic 960) Defined Contribution Pension Plans (Topic 962) Health and Welfare Benefit Plans (Topic 965) Presenters Judy Goldberg Ernst & Young Lisa A. Muehlbauer Financial Accounting Standards Board (FASB) Beth Thompson KPMG LLP Michele Weldon PricewaterhouseCoopers 2 1

2 Financial Reporting Simplifications FASB issued a three-part ASU to simplify financial reporting for benefit plans Part I: Fully Benefit-Responsive Investment Contracts Part II: Plan Investment Disclosures Part III: Measurement Date Practical Expedient Developed by the Emerging Issues Task Force (EITF) Responded to advocacy efforts by the AICPA s Employee Benefit Plans Expert Panel Identified the issues affecting a large number of plans with the goal of completing a project within a short period of time Effective for fiscal years beginning after December 15, 2015 Early application is permitted Plans can early adopt any of the ASU s three parts without early adopting the other parts 3 Part I: Fully Benefit-Responsive Investment Contracts 2

3 Part I: Fully Benefit-Responsive Investment Contracts Affects defined contribution pension and health and welfare plans Definition of a fully benefit-responsive investment contract (FBRIC) in master glossary did not change Clarifies that contract value is the relevant measure for FBRICs because that is the amount participants would receive in a transaction Eliminates requirements to measure fair value and present related fair value measurement disclosures Responds to concerns about the cost and effort required to measure the fair value of FBRICs when fair value is not the relevant measure 5 Part I: Fully Benefit-Responsive Investment Contracts (continued) Instead, plans will present FBRICs at contract value in the statement of net assets available for benefits, either as Investments at contract value Fully benefit-responsive investment contracts at contract value Investment contracts that do not meet the definition of a FBRIC continue to be presented at fair value 6 3

4 Illustrative Statements of Net Assets Available for Benefits: FBRICs Prior to Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X2 and 20X1 (in thousands) Assets: 20X2 20X1 Investments at fair value $ 740, ,020 Notes receivable from participants 9,810 7,230 Net assets reflecting investments at fair value 750, ,250 Adjustment from fair value to contract value for fully benefitresponsive investment contracts (2,861) (5,210) Net assets available for benefits $ 747, ,040 7 Illustrative Statements of Net Assets Available for Benefits: FBRICs Marked-up for Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X2 and 20X1 (in thousands) Assets: 20X2 20X1 Investments at fair value $ 721,098740, ,208612,020 Fully benefit-responsive investment contracts at contract value 16,491 17,602 Notes receivable from participants 9,810 7,230 Net assets reflecting investments at fair value 750, ,250 Adjustment from fair value to contract value for fully benefitresponsive investment contracts (2,861) (5,210) Net assets available for benefits $ 747, ,

5 Illustrative Statements of Net Assets Available for Benefits: FBRICs Final for Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X2 and 20X1 (in thousands) 20X2 20X1 Assets: Investment at fair value $ 721, ,208 Fully benefit-responsive investment contracts at contract value 16,491 17,602 Notes receivable from participants 9,810 7,230 Net assets available for benefits $ 747, ,040 9 Stable Value Common or Collective Trusts (CCTs) or Similar Investment Funds Guidance clarifies that indirect investments in FBRICs through investment companies (e.g., stable value CCTs) are not in the scope of the FBRIC guidance Plans should report these investments at fair value These funds typically qualify for measuring fair value using the net asset value (NAV) practical expedient These funds calculate NAV per share (or its equivalent) in a manner consistent with the measurement principles of ASC 946 As required by ASC 946, the NAV calculated by the fund is based on net assets which includes FBRICs at contract value - This NAV represents the plan s fair value since this is the NAV at which the plan transacts with the fund The amount previously presented as contract value is now presented as fair value - This does not change total net assets available for benefits - The investments are now accounted for consistent with other CCTs or similar investment funds and are presented with investments at fair value 10 5

6 Illustrative Information Provided by Issuer: Stable Value Fund Financial Highlights Class I Selected Per-Unit Data ABC Stable Value Fund December 31, 20X2 Net asset value Beginning of period $ Income from investment operations: Net investment income.009 Less distributions from: Net investment income (.009) Net asset value End of period $ Illustrative Information Provided by Issuer: Stable Value Fund (continued) ABC Stable Value Fund Period ending 12/31/20X1 Period ending 12/31/20X2 Investments (at fair value) $8,422,929,099 Investments (at fair value) $7,282,502,333 Wrapper contracts (at fair value) 1,000,000 Wrapper contracts (at fair value) 900,000 Net assets at fair value [A] $8,423,929,099 Net assets at fair value [A] 7,283,402,333 Adjustment from fair value to contract value for fully benefit responsive investment contracts Adjustment from fair value to contract value for fully benefit responsive investment contracts (1,922,929,099) (1,077,502,333) Total investments (at contract value) [B] $6,501,000,000 Total investments (at contract value) [B] $6,205,900,000 Contract value spot yield (credited to participants) 1.01% Contract value spot yield (credited to participants) 1.06% Market value spot yield (underlying return) 1.50% Market value spot yield (underlying return) 1.70% Compute plan s book value % Compute plan s book value % Interest in CCT [C] $17,602,000 Interest in CCT [C] $16,491,000 Total Investments at contract value [D] $6,501,000,000 Total Investments at contract value [D] $6,205,900,000 The plan s book value % [C/D=E].2708% The plan s book value % [C/D=E].2657% Compute plan s fair value Compute plan s fair value Plan Investments at fair value [E*A] $22,812,000 Plan Investments at fair value [E*A] $19,352,000 Plan s Contract/Fair Adjustment $5,210,000 Plan s Contract/Fair Adjustment $2,861,

7 Illustrative Information Provided by Issuer: Stable Value Fund (continued) *********************************************************************************** ABC Trust Company Trustee Certification Statement Plan Name: DFE 401(k) Plan The information provided in the attached report is a summary of the financial activity for the trust trusteed by ABC Trust Company (Trustee) for the Plan for the plan year ending December 31, 20X2 and 20X1 includes all applicable contributions received by the trust though this date. This summary is subject to the terms and conditions of the Plan Document and Trust Agreement. Trustee hereby certifies to the existence of the plan assets which are under our control and reflected in the enclosed reports. Trustee further certifies that the information in the enclosed reports is complete and accurate. This statement is being furnished pursuant to 29 CFR (d). By: Mr. B. Good Senior Vice President of Trust Department, Authorized Signatory for the Trustee 13 Illustrative Statements of Net Assets Available for Benefits: Stable Value Fund Prior to Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X2 and 20X1 (in thousands) 20X2 20X1 Assets: Investments at fair value $ 740, ,020 Notes receivable from participants 9,810 7,230 Net assets reflecting investments at fair value 750, ,250 Adjustment from fair value to contract value for fully benefitresponsive investment contracts (2,861) (5,210) Net assets available for benefits $ 747, ,

8 Illustrative Statements of Net Assets Available for Benefits: Stable Value Fund Mark-up for Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X2 and 20X1 (in thousands) Assets: 20X2 20X1 Investments at fair value $ 737,589740, ,810612,020 Notes receivable from participants 9,810 7,230 Net assets reflecting investments at fair value 750, ,250 Adjustment from fair value to contract value for fully benefitresponsive investment contracts (2,861) (5,210) Net assets available for benefits $ 747, , Illustrative Statements of Net Assets Available for Benefits: Stable Value Fund Final for Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X2 and 20X1 (in thousands) 20X2 20X1 Assets: Investments at fair value $ 737, ,810 Notes receivable from participants 9,810 7,230 Net assets available for benefits $ 747, ,

9 Synthetic Investment Contracts Plan owns the underlying securities (e.g., fixed income investments, units in CCT, wrapper contract) Present as single amount at contract value with other FBRICs (do not break out underlying securities) No changes to Form 5500 and supplemental schedule requirements Present each underlying security at its fair value Wrapper will be presented at fair value (typically the amount needed to adjust the fair value of the underlying securities from fair value to contract value) 17 Illustrative Statements of Net Assets Available for Benefits: FBRICs Final for Adoption of ASU (Part I) Statements of Net Assets Available for Benefits December 31, 20X2 and 20X1 (in thousands) 20X2 20X1 Assets: Investment at fair value $ 721, ,208 Fully benefit-responsive investment contracts at contract value 16,491 17,602 Notes receivable from participants 9,810 7,230 Net assets available for benefits $ 747, ,

10 Illustrative Schedule of Assets (Held at End of Year): Synthetic Investment Contracts (a) Schedule H, Line 4i Schedule of Assets (Held at End of Year) December 31, 20X2 (in thousands) (b) Identify of issue/description (e) Current Value Investments ABC Mutual Fund Growth Fund ABC Mutual Fund International Fund ABC Mutual Fund Blended Fund ABC Mutual Fund Target Date 2015 Fund ABC Mutual Fund Target Date 2020 Fund ABC Mutual Fund Target Date 2030 Fund ABC Mutual Fund Target Date 2040 Fund ABC Mutual Fund Target Date Fund Fully benefit-responsive investment contracts $ 125,249 87, ,659 50,980 75,689 95,089 83,101 79, ,098 Bank of United States (wrap contract) Bank of the South (wrap contract) Bank of the North (wrap contract DEF A or Better Core Fixed Income Fund DEF A or Better Government/Credit Fund DEF Intermediate Bond Fund (205) (198) (107) 10,453 3,328 3,220 16,491 Notes receivable from participants, interest rates between 4.5% and 6% with maturities through December 31, 20XX 9,810 Total Assets Held $ 747, Hierarchy Table Considerations ASU Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) Eliminates the requirement to categorize investments measured at fair value using the NAV practical expedient in a hierarchy level Investments presented at contract value (e.g., FBRICs) are not included in the hierarchy table Underlying securities of a synthetic investment contract are not included in the hierarchy table 20 10

11 FBRIC Disclosures Required disclosures New disclosure: Total contract value of each type of FBRIC (e.g., synthetic investment contracts, traditional investment contracts) Previously required disclosure: Description of the nature of each type of FBRIC (including how it operates) Previously required disclosure: Description of events that limit the ability of the plan to transact at contract value, including a statement that these events are not probable of occurring Previously required disclosure: Description of events and circumstances that would allow the issuer to terminate the contracts and settle at an amount different from contract value 21 FBRIC Disclosures (continued) Eliminated disclosures Hierarchy level Valuation techniques and inputs Level 3 reconciliation Average yields 22 11

12 Additional FBRIC Guidance FBRICs held in a master trust are subject to the same presentation and disclosure requirements as FBRICs held by a plan Apply new guidance retrospectively 23 Reconciliation Between the Form 5500 and the Financial Statements ERISA requires that the financial statements include an explanation of the differences, if any, between the information contained in the separate financial statements and the assets, liabilities, income, expenses and changes in the net assets as required to be reported in the prescribed financial statements of Form

13 Part II: Plan Investment Disclosures Part II: Plan Investment Disclosures Affects all types of plans Simplifies the level of disaggregation for investments measured using fair value Disaggregate by general type of investment (e.g., common stocks, corporate bonds, mutual funds) Plans are exempt from the requirements of ASC B to disaggregate assets by class (e.g., nature, characteristics, risks) Disclosure of fair value information required by ASC 820 shall be provided by general type rather than class (e.g., valuation techniques, inputs, level 3 reconciliation) Self-directed brokerage accounts are one general type Applies to investments held in a master trust Provides consistency with the level of disaggregation provided by most trustees, custodians and insurance companies and with the information required in Form

14 Part II: Plan Investment Disclosures (continued) Disclosure simplifications No longer required: the significant investment strategies for an investment in a fund that files an annual report on Form 5500 as a direct filing entity when the plan measures that investment using the NAV practical expedient Eliminates the requirement to disclose the net appreciation or depreciation in fair value of investments by general type - Instead, plans only need to disclose this amount in the aggregate Plans are no longer required to disclose individual investments with a value equal to or greater than 5% of net assets available for benefits Applies to investments held in a master trust ASU is to be applied retrospectively 27 Part III: Measurement Date Practical Expedient 14

15 Part III: Measurement Date Practical Expedient Simplifies accounting for a plan with a fiscal year end (FYE) that doesn t coincide with a calendar month end Added to the project as a result of a similar practical expedient that the FASB recently issued for employers with FYEs that don t end at the end of a calendar month (ASU ) Allows a plan to measure its investments and investmentrelated accounts using the month end closest to its FYE (i.e., an alternative measurement date) Disclose as an accounting policy Disclose financial effects of contributions, distributions and/or significant events that occur between the alternative measurement date and the plan s fiscal year end Apply consistently year to year ASU to be applied prospectively 29 Other Auditing Considerations 15

16 Auditing Considerations Although self-directed brokerage accounts are presented as a general type of investment, consider the detail of the underlying securities when developing audit strategy (full scope audit) Although synthetic investment contracts are presented as a total amount at contract value for GAAP purposes, the DOL requires each investment to be listed in the supplemental schedule of investments held Plan owns the underlying investments Each underlying investment is included in the supplemental schedule at fair value (wrapper value adjusts total back to contract value) Consider audit strategy/certification for fair value of underlying investments 31 Auditing Considerations (continued) CCTs or similar investment funds that invest in FBRICs Fund issuer no longer needs to provide a calculation of the fair value and contract value For a full scope audit, if the plan is using the NAV practical expedient to measure fair value perform procedures to test the NAV and units used by management to determine the fair value of the CCT as of the plan s measurement date (NAV x units held = fair value) - Typically this will be the same value presented in the trust statement For a limited scope audit, the certification provided by the trustee will typically include the value presented in the trust statement which should be fair value 32 16

17 Plan Administrator Responsibilities Accounting for the adoption of ASU , including the applicable transition provisions, and the effect it has on the financial statements Preparing documentation supporting the accounting for the adoption of ASU Documentation should include the following: Description of ASU including effective date and the effect it will have on current and, when applicable, prior financial statements Method used to adopt ASU (e.g., retrospective, prospective) and whether this method is consistent with the requirements of the standard Assessment of financial statement disclosures for adequacy 33 Plan Administrator Responsibilities (continued) Important that the plan administrator, even in a limited scope audit, determines: Investments have been valued as of the plan s year-end The method for determining the fair value/contract value is in conformity with GAAP and appropriate for reporting to the DOL on the Form

18 ASC 250 Accounting Changes and Error Corrections: Disclosures ASC states: An entity shall disclose all of the following in the fiscal period in which a change in accounting principle is made: a. The nature of and reason for the change in accounting principle, including an explanation of why the newly adopted accounting principle is preferable 35 ASC 250 Accounting Changes and Error Corrections: Disclosures (continued) ASC states: An entity shall disclose all of the following in the fiscal period in which a change in accounting principle is made: b. The method of applying the change, including all of the following: 1. A description of the prior-period information that has been retrospectively adjusted, if any 2. The effect of the change on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), any other affected financial statement line item, and any affected per-share amounts for the current period and any prior periods retrospectively adjusted. Presentation of the effect on financial statement subtotals and totals other than income from continuing operations and net income (or other appropriate captions of changes in the applicable net assets or performance indicator) is not required. 3. The cumulative effect. 4. If retrospective application

19 ASC 250 Accounting Changes and Error Corrections: Example Disclosure In July 2015, the FASB issued ASU , Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient. Part I eliminates the requirements to measure the fair value of fully benefit-responsive investment contracts and provide certain disclosures. Contract value is the only required measure for fully benefit-responsive investment contracts. Part II eliminates the requirements to disclose individual investments that represent 5 percent or more of net assets available for benefits and the net appreciation or depreciation in fair value of investments by general type. Part II also simplifies the level of disaggregation of investments that are measured using fair value. Plans will continue to disaggregate investments that are measured using fair value by general type; however, plans are no longer required to also disaggregate investments by nature, characteristics and risks. Further, the disclosure of information about fair value measurements shall be provided by general type of plan asset. Part III is not applicable to the Plan. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. Parts I and II are to be applied retrospectively. Management has elected to adopt Parts I and II early. 37 SEC Financial Statements Disclose the impact that recently issued accounting standards have on a registrant when adopted in a future period: Refer to paragraph S99-5, SAB Topic 11.M, for SEC Staff views 38 19

20 AU-C 708 Consistency of Financial Statements Change in Accounting Principle.07 The auditor should evaluate a change in accounting principle to determine whether a. the newly adopted accounting principle is in accordance with the applicable financial reporting framework, b. the method of accounting for the effect of the change is in accordance with the applicable financial reporting framework, c. the disclosures related to the accounting change are appropriate and adequate, and d. the entity has justified that the alternative accounting principle is preferable. 39 AU-C 708 Consistency of Financial Statements (continued) Change in Accounting Principle. 08 If the auditor concludes that the criteria in paragraph.07 have been met, and the change in accounting principle has a material effect on the financial statements, the auditor should include an emphasis-of-matter paragraph in the auditor s report that describes the change in accounting principle and provides a reference to the entity s disclosure. If the criteria in paragraph.07 are not met, the auditor should evaluate whether the accounting change results in a material misstatement and whether the auditor should modify the opinion accordingly. Emphasis of Matter: As discussed in Note X to the financial statements, in [insert year(s) of financial statements that reflect the accounting method change], the entity adopted new accounting guidance [insert description of new accounting guidance]. Our opinion is not modified with respect to this matter

21 Communications With Those Charged with Governance AU-C If the auditor expects to include an emphasis-ofmatter or other-matter paragraph in the auditor s report, the auditor should communicate with those charged with governance regarding this expectation and the proposed wording of this paragraph AU-C The auditor should communicate with those charged with governance their views about qualitative aspects of the entity s significant accounting practices, including accounting policies, accounting estimates, and financial statement disclosures 41 Representations from Management SEC We have not completed the process of evaluating the impact that will result from adopting FASB Accounting Standards Update (ASU) No. [XXX, Name], as discussed in Note [X]. The Plan is therefore unable to disclose the impact that adopting FASB ASU No. [XXX] will have on the its financial statements when such ASU is adopted

22 Other Considerations Change in Auditor in Year of Adoption Who will take responsibility for retrospectively adjusting the financial statement 43 Question & Answer Session 44 22

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