The views in this summary are not Generally Accepted Accounting Principles until a consensus is reached and it is ratified by the Board.

Transcription

1 Memo No. Issue Summary No. 1 Memo Issue Date March 5, 2015 Meeting Date(s) BM March 19, 2015 Contact(s) Lisa Muehlbauer Lead Author, Project Lead (203) Peter Proestakes Assistant Director (203) Jennifer Hillenmeyer EITF Coordinator (203) Jackson Day EITF Liaison - Project Project Stage Dates previously discussed by EITF EITF Issue No. 15-C, "Employee Benefit Plan Simplifications" Initial Deliberations January 22, 2015 EITF Education Session Objective of This Memo 1. The objective of this memo is to assist EITF members as they consider certain disclosure and measurement simplifications for employee benefit plans. The accounting guidance for employee benefit plans is included in Topic 960, Plan Accounting Defined Benefit Pension Plans; Topic 962, Plan Accounting Defined Contribution Pension Plans; and Topic 965, Plan Accounting Health and Welfare Benefit Plans (referred to collectively throughout as the Plan Accounting Topics). 2. This memo is structured as follows: a. Background Information b. Issue 1 Fully Benefit-Responsive Investment Contracts (FBRICs) c. Issue 2 Topic 820 Disclosures versus Plan Accounting Disclosures for Plan Assets i. Issue 2A Disaggregation of Classes of Assets ii. Issue 2B Details About Plan Assets iii. Issue 2C Changes in Plan Assets Page 1 of 37

2 d. Issues 1 and 2 Transition e. Issue 3 Measurement Date Practical Expedient f. Issue 3 Transition g. Appendixes: i. Appendix A: Fully Benefit-Responsive Investment Contracts and Contract Value Definitions From the Master Glossary ii. Appendix B: NAV Disclosures iii. Appendix C: Topic 250 Transition Disclosures Background Information 3. The primary objective of employee benefit plan financial reporting is to provide financial information that is useful in assessing a plan s present and future ability to pay benefits as they become due. 4. The assets held by employee benefit plans to pay those benefits often consist of securities with a readily determinable market value, such as common or preferred stocks, fixed income securities, or shares of registered investment companies. However, some other assets held by employee benefit plans may not have a readily determinable market value and, thus, are more difficult to measure. Those other investments may include common or collective trust funds (CCTs) maintained by a bank or a trust entity, guaranteed investment contracts (GICs), limited partnerships, hedge funds, private equity investments, real estate, mortgages or other loans, repurchase or reverse repurchase agreements, and derivative investments, such as futures, options, or swap contracts. 5. Investment management arrangements vary by type of employee benefit plan (that is, defined contribution plans, defined benefit plans, and health and welfare plans). Defined contribution plans, as well as some health and welfare plans, typically have participantdirected investments (that is, participants select which investments will be purchased with their contributions). In a typical defined contribution plan, a menu of investment options is offered to participants that ordinarily includes shares of mutual funds, CCTs, and pooled separate accounts (PSAs). Those plans also may offer participants the option Page 2 of 37

3 to invest in an almost unlimited selection of investment choices, which is commonly known as self-directed brokerage accounts. 6. Conversely, defined benefit plans consist of nonparticipant-directed investments (although it is not uncommon for defined contribution and health and welfare plans to have some investments that also are nonparticipant-directed). In a typical defined benefit plan, investment managers are responsible for preserving capital, generating income, or a combination thereof, to ensure that the future benefits to be paid by the plan are appropriately funded. 7. Within the past decade, many plans have adopted investment strategies that incorporate a variety of techniques or specialized products to achieve their investment objectives and generate higher returns. As a result, the complexity of employee benefit plan investment portfolios has increased and the complexity of determining the fair value of securities also has increased. 8. In addition to preparing financial statements in compliance with GAAP, employee benefit plans are also subject to Part 1 of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) a federal law that sets the minimum standards for most employee benefit plans in private industry to provide protection for participants in those plans. ERISA: a. Requires plans to provide participants with plan information including important information about plan features and funding b. Imposes fiduciary responsibilities for those who manage and control plan assets c. Requires plans to establish grievance and appeals processes for participants to receive benefits from their plans d. Gives participants the right to sue for benefits and breaches of fiduciary duty. 9. The responsibility for the interpretation and the enforcement of ERISA is divided among the U.S. Department of Labor (DOL), the U.S. Department of the Treasury (specifically, the Internal Revenue Service (IRS)), and the Pension Benefit Guaranty Corporation (PBGC). 10. Title I of ERISA usually applies to employee benefit plans established or maintained by employers engaged in interstate commerce or in any industry or activity affecting interstate commerce, by employee organizations representing employees engaged in Page 3 of 37

4 such activities, or by both employer and employee organizations. In general, ERISA does not cover group health plans established or maintained by government entities or churches, or plans that are maintained solely to comply with applicable workers compensation, unemployment, or disability laws. In addition, ERISA does not cover plans maintained primarily for the benefit of non-resident aliens or unfunded excess benefit plans outside the U.S. 11. Form 5500 was jointly developed by the DOL, IRS, and PBGC to be used by employee benefit plans to satisfy the annual reporting requirements under ERISA. An employee benefit plan filing Form 5500 as a large plan (a plan with 100 or more participants), is generally required to engage an independent qualified public accountant (IQPA) pursuant to ERISA Section 103(a)(3)(A). An IQPA s opinion, accompanying financial statements, and notes are attached to the Form 5500 when submitted. An employee benefit plan that files Form 5500-SF as a small plan (a plan with fewer than 100 participants) and meets some additional qualifications (such as, the plan is 100 percent invested in certain secure, easy-to-value assets) is exempted from the requirement to be audited annually by an IQPA. 12. Plan financial statements that are filed with Form 5500 are due 7 months after year-end and can be extended an additional two-and-a-half months. This extension is very commonly used, thus many employee benefit plans with a calendar year-end file their Form 5500 around October 15. However, ERISA plans that file with the U.S. Securities and Exchange Commission (SEC) are due 180 days or 90 days after a plan s year-end, depending on the format used (SEC or ERISA). Most of these plans use the ERISA format and file 180 days after year end (thus, approximately June 30 for a calendar yearend plan). 13. The timing of financial statement issuance is a key consideration when discussing the reporting requirements for employee benefit plans and determining the primary user of financial statements. More specifically, on the basis of the timing of financial statement issuance, users of plan financial statements generally are not able to use these statements to make investment decisions. 14. Another key consideration in setting accounting standards for employee benefit plans is determining the primary users of the financial statements for each type of employee Page 4 of 37

5 benefit plan (defined benefit, defined contribution, and health and welfare). FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information (Concepts Statement 8), indicates that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. 15. Paragraph OB5 of Concepts Statement 8 states that many existing and potential investors, lenders, and other creditors cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports for much of the financial information they need. Consequently, they are the users to whom general purpose financial reports are directed. 16. Paragraph OB10 of Concepts Statement 8 states that other parties, such as regulators and members of the public other than investors, lenders, and other creditors, also may find general purpose financial reports useful. However, those reports are not primarily directed to those other groups. 17. The users of plan financial statements include the DOL, the IRS, the PBGC, the SEC (when applicable), plan sponsors, trustees, and plan participants. Although each type of user (participants, sponsors, and regulators) may use the financial statements to assess the plan s present and future ability to pay benefits, they are all different from the user that is typically considered while setting accounting standards: a. Participants are different because they provide resources to the plan and receive benefits from the plan but do not buy or sell based on the plan s financial statements. Under Concepts Statement 8, the staff believes the participants are the users to whom the financial statements should be directed because the cash flows of the plan directly affect the benefits they will receive from the plan. However, it is the staff s understanding that while plan financial statements are available to plan participants, they generally do not obtain those financial statements. b. Regulators do not provide or receive any resources from employee benefit plans. However, the disclosures do provide this group with the information needed to evaluate whether the plan sponsor is fulfilling its fiduciary responsibilities. Page 5 of 37

6 Regulators most frequently use plan financial statements; however, Concepts Statement 8 notes that general purpose financial statements are not primarily directed towards regulators. c. Sponsors provide resources to the plan and have an interest in net cash flows. However, the plan sponsor is an internal user, who, according to Concepts Statement 8, is not a user to whom the general purpose statements are directed. 18. Due to the unique characteristics and considerations involved in plan accounting, a Working Group was developed to provide the staff with input on this Issue. The Working Group was composed of preparers, practitioners, an investment manager for benefit plans, and regulatory users and met on January 12, Feedback from the Working Group has been included in each subissue below, as applicable. Issue 1 Fully Benefit-Responsive Investment Contracts (FBRICs) 19. FBRICs are measured at contract value but an adjustment to reconcile that amount to fair value (measured using the requirements in Topic 820, Fair Value Measurement and Disclosures) is provided on the face of the plan financial statements. These investment contracts are reported at contract value for purposes of regulatory reporting. 20. FBRICs and contract value are defined terms within GAAP (see Appendix A for definitions). FBRICs were discussed in AICPA Statement of Position 99-4, Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans, which indicates that some employer-sponsored defined contribution plans offer an investment alternative, often referred to as a stable value fund. These funds primarily invest in GICs issued by insurance companies and other financial services institutions, referred to as traditional GICs and synthetic GICs. In addition, stable value funds may invest in contracts of various forms that have similar characteristics including, but not limited to, bank investment contracts (BICs) and insurance company separate account GICs. The issuer of a traditional GIC takes a deposit from the fund and purchases investments that are held in the issuer s general Page 6 of 37

7 account. The issuer is contractually obligated to repay the principal and specified interest guaranteed to the fund. 21. SOP 99-4 asserts that contract value is considered the relevant measurement attribute because that is the amount participants receive if they were to initiate permitted transactions (for example, withdrawals) under the terms of the underlying defined contribution plan. 22. Some stakeholders have suggested that measuring FBRICs at fair value is inconsistent with SOP 99-4 because fair value is not a relevant measurement for these contracts. These stakeholders believe that the Task Force should consider whether to exempt plans from disclosing and presenting the fair value of FBRICs. Question 1 for the Task Force FBRICs 1. Does the Task Force want to eliminate the presentation and disclosure requirements related to fair value measurement for FBRICs? Staff Analysis Issue If the requirement to present and disclose the fair value of FBRICs was removed, employee benefit plans would no longer be required to measure the fair value of FBRICs and would not be subject to the fair value disclosures in Topic 820 (that is, because FBRICS would not be measured at fair value, they would not be subject to the disclosure requirements in Topic 820). Instead, a plan would measure these investments only at contract value and continue to provide the relevant disclosures within the Plan Accounting Topics for FBRICS (discussed further below). 24. The staff understands that there is diversity in practice as to how the fair value of FBRICs is measured for purposes of providing the required disclosures. Some preparers use models to determine the fair value of these investment contracts (noting that while changes in interest rates and credit ratings often impact the fair value and can result in small differences between fair value and contract value, the amount that the participant receives remains constant). Other preparers assert that contract value is a reasonable approximation of fair value and therefore use contract value as a proxy for fair value with no further analysis performed. However, the use of contract value as a proxy for Page 7 of 37

8 fair value is often challenged by auditors and even when an entity and its auditor ultimately conclude contract value is a reasonable approximation of fair value, time and effort are needed to reach that conclusion. 25. During the staff's outreach efforts, all stakeholders, including preparers, auditors, and users, questioned the benefit of reporting FBRICs at fair value since such investments generally transact at contract value. Because FBRICs typically transact at contract value, the stakeholders interviewed recommended that the only relevant measurement attribute for FBRICs is contract value. Furthermore, multiple preparers and practitioners thought that reporting FBRICs at fair value can be confusing and misleading to participants. 26. However, there are limited instances in which a plan changes its investment options and transacts at an amount other than contract value. During those rare circumstances (which, as discussed below, are required to be disclosed), the plan typically makes the decision far in advance, allowing for significant time to ensure that this change would not negatively affect its participants. Furthermore, stakeholders noted that even during the financial crisis, the vast majority of participants still received contract value for their FBRICs. 27. In addition, specific criteria need to be met before an investment can be classified as a FBRIC and measured using contract value. For example, there is a requirement that states, If an event has occurred such that realization of full contract value for a particular investment contract is no longer probable (for example, a significant decline in creditworthiness of the contract issuer or wrapper provider), the investment contract shall no longer be considered fully benefit-responsive. That is, the investment would then have to be measured at fair value in the plan financial statements rather than contract value. The staff believes that this guidance effectively, and appropriately, limits the scope of FBRICs that are using contract value rather than fair value, thus further disclosure of fair value is not necessary. 28. If contract value is the only relevant measurement for FBRICs, the Task Force also should consider whether the FBRIC disclosures within the Plan Accounting Topics are appropriate. The staff believes that many of the disclosures under current guidance remain relevant. Some of those disclosures (as shown in Appendix A) include a general description of the investment contracts, possible events that limit the ability of plans to Page 8 of 37

9 transact at contract value, and descriptions of events and circumstances that allow issuers to terminate the contract with the plan and settle at an amount different from contract value. One regulatory user noted that it is very important to understand the events and circumstances that could result in an amount other than contract value. 29. However, the staff does not believe that the other disclosures in paragraph , which include or rely upon fair value calculations, should be retained. For example, the disclosure relating to the average yield (paragraph (b)) is calculated using fair value. If those disclosures were retained, any cost reduction that is achieved by deciding not to measure FBRICs at fair value would be negated because fair value still would be required to be measured for disclosure purposes. The regulator in our outreach initially expressed a preference for retaining those disclosures because of an interest in understanding the rate of return participants would receive on FBRICs. However, that user ultimately agreed it would not be unreasonable to remove those disclosures. Working Group Feedback: 30. At the January 12, 2015 Working Group meeting, Working Group members agreed that the relevant measurement attribute for FBRICs is contract value, for the reasons noted above, and that no presentation or disclosure of fair value should be required. Some Working Group members also noted that presenting and disclosing those investments at fair value can be misleading. Staff Recommendation Issue Consistent with the Working Group recommendation, the staff recommends that employee benefit plans should no longer be required to measure the fair value of FBRICs and should not be subject to the related fair value disclosures (both in Topic 820 and the FBRIC disclosures that require a calculation of fair value). The staff believes that the only relevant measurement attribute for FBRICs is contract value because contract value is the amount participants will receive and it is very rare that a FBRIC would transact at anything other than contract value. Page 9 of 37

10 32. The staff also believes that the criteria within the definition of a FBRIC sufficiently restrict the investments that can use contract value as a basis for measurement (that is, it can only be used if it is probable the investment will transact at contract value) and that the disclosure requirements within (a)(1), 50-3(d), and 50-3(e) provide information that users need to understand the circumstances in which a FBRIC might not transact at contract value. Issue 2 Topic 820 Disclosures versus Plan Accounting Disclosures for Plan Assets Background 33. The Plan Accounting Topics primarily were derived from FASB Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans, which was issued in March of Very few changes have been made directly to the Plan Accounting Topics since the issuance of Statement 35, but as other standards have been added or updated, additional disclosure requirements have been made applicable to employee benefit plan financial statements. Stakeholders have questioned whether the effects on employee benefit plans were specifically considered because those additions and updates were made over time. 34. Specifically, Topic 820 and all of the Plan Accounting Topics include disclosures for financial assets that sometimes require aggregation, or organization of similar information, in different ways. Stakeholders have said that disclosing similar investment information in multiple ways is costly for preparers and makes the financial statements more cumbersome. 35. During the staff's outreach efforts, stakeholders (users, preparers, and practitioners) spoke about the volume of plan financial statements prepared annually, noting that in 2014 there were over 80,000 plan audits with over 7,000 CPA firms performing those audits. Stakeholders emphasized that many preparers, and even some practitioners, may not have the strong technical accounting backgrounds in employee benefit plan financial reporting and often struggle to handle some of the more complex accounting standard requirements. Because of that lack of expertise, some stakeholders (particularly users) Page 10 of 37

11 have concerns about the Topic 820 disclosure requirements not being applied correctly and/or consistently. Many practitioners said that they often have to actively help their clients complete (almost to the point of preparing) their employee benefit plan financial statements. 36. The disclosures under Topic 820 generally require more time and resources to compile than those under the Plan Accounting Topics. That is, in part, because the disclosures in the Plan Accounting Topics are typically less detailed or provided at a higher level of aggregation than the disclosures under Topic 820 and because the disclosures in Topic 820 are more subjective (for example, when assessing measurement risk and determining the appropriate categorization within the fair value hierarchy table disclosures). Most of the disclosure information required by the Plan Accounting Topics can be pulled directly from investment statements, which are provided by the service providers who manage a plan s investments (such as, Fidelity or TIAA-CREF), while the Topic 820 disclosures must be manually prepared. Proponents of the disclosures under the Plan Accounting Topics note that they are less costly and align with regulatory reporting. 37. While the costs of preparing the Topic 820 disclosures are greater than costs of preparing the Plan Accounting Topics disclosures, so are the benefits to users of financial statements. Proponents of the Topic 820 disclosures note that the disclosures provide significantly more valuation information for example, valuation methodologies and categorization of financial assets based measurement risk relating to the plan s investment portfolio. At least one regulatory user uses the Topic 820 disclosures to assess whether employee benefit plans are meeting their fiduciary responsibilities by providing sufficient investment options to plan participants. That user looks to the Topic 820 disclosures because neither the Plan Accounting Topic disclosures nor the information provided in Form 5500 provides the necessary information to pinpoint certain types of investments that require further investigation (that is, these disclosures are used as a red flag approach). However, some stakeholders do not believe that the benefits of additional disaggregation justify the costs, particularly for participant-directed investments. Page 11 of 37

12 38. Some believe that while the Topic 820 disclosures provide better information about measurement risk for all users, certain exceptions should be provided for participantdirected investments because the benefits of providing those disclosures do not justify the costs. Those individuals note that participant-directed investments already have different reporting requirements within GAAP that originated with AICPA Statement of Position 99-3, Accounting for and Reporting of Certain Defined Contribution Plan Investments and Other Disclosure Matters (now codified within Topics 962 and 965). SOP 99-3 provides the basis for guidance, such as paragraph , which states that participant-directed investments may be shown in the aggregate, as one-line item, in the statement of net assets available for benefits, and not disaggregated by general type in the notes. Conversely, nonparticipant-directed investments are required to be further disaggregated by general type. 39. SOP 99-3 reduced the amount of information that was required to be presented in the plan s financial statements for participant-directed investments on the basis that financial information for these investments was available to plan participants, often with more frequency and in a more timely manner than the issuance of plan financial statements (for example, through prospectuses on mutual funds, summary of annual reports, and other retirement and financial planning resources from provider websites). Thus, the cost of providing the additional detailed investment information in financial statements was not warranted. SOP 99-3 indicated that more detailed investment information was necessary for nonparticipant-directed investments because such information is useful in providing information about plan resources and how the plan trustee s stewardship responsibility for those resources has been discharged. Some stakeholders stated that the reduction in information provided by SOP 99-3 was negated by the disclosures required in Topic As an alternative to retaining the disclosure requirements in Topic 820 or those in the Plan Accounting Topics, some recommend reducing disclosures for only participantdirected investments. Proponents of this alternative believe that it would result in a significant cost reduction for plans on which most, if not all, investments are participantdirected, while still providing detailed disclosures for nonparticipant-directed Page 12 of 37

13 investments. The staff understands that the vast majority of plans are defined contribution plans with only participant-directed investments. 41. Nevertheless, not all users view participant-directed and nonparticipant-directed investments as inherently different. One regulatory user stated that both types of investments have a degree of measurement risk. That user is not only concerned with who directs the investments, but also with how accurately all investments are measured and reported. To that point, if investments are inaccurately measured and reported at the plan level, they are likely to be inaccurate in the information received by the plan participants (that is, outside the financial statements), which is a key concern of that user. Furthermore, it is important for the regulator to understand whether participants have been offered sufficient investment alternatives. Therefore, that regulatory user would not support different additional disclosure relief for participant-directed investments. 42. For purposes of this discussion, the staff grouped the disclosures related to plan assets into three subissues (Issue 2A through 2C below) and identified three general alternatives: a. Alternative 1 Exempt plans from following the Topic 820 requirements b. Alternative 2 Remove the requirements within the Plan Accounting Topics and require plans to follow Topic 820 c. Alternative 3 Exempt participant-directed investments from following Topic 820 requirements. Questions 2 4 for the Task Force Topic 820 Disclosures versus Plan Accounting Disclosures for Plan Assets 2. Does the Task Force believe that plan assets should be disaggregated by nature, risks, and characteristics (Topic 820) or by general type (Plan Accounting Topics)? Should there be different reporting requirements for participant-directed investments? 2(a). If the Task Force decides to disaggregate by general type, does the Task Force want to clarify that self-directed brokerage accounts should be considered one type? 2(b). Does the Task Force want to align the Plan Accounting Topics such that plan assets are required to be disaggregated either on the face of the financial statements or in the notes? Page 13 of 37

14 3. Does the Task Force want to eliminate or amend any of the requirements in Topic 820 related to the fair value hierarchy and the related details about the valuation of plan assets or the requirements in the Plan Accounting Topics to break out all investments over 5 percent? Should there be different reporting requirements for participant-directed investments? 4. Does the Task Force want to eliminate either the rollforward of investments classified in Level 3 of the fair value hierarchy required by Topic 820 for employee benefit plans or the disclosure of net appreciation and depreciation in the Plan Accounting Topics? Should there be different reporting requirements for participant-directed investments? Issue 2A Disaggregation of Plan Assets 43. Under Topic 820, classes of assets are based on nature, characteristics, and risks, and under the Plan Accounting Topics, classes of assets are based on general type. Examples of classes of assets by general type include registered investment companies, government securities, common collective trusts, pooled separate accounts, short-term securities, corporate bonds, common stocks, mortgages, and real estate. These types of assets might be inconsistent with the nature and risk of the investments, which often results in plans grouping their investments in two different ways. For example, an employee benefit plan may identify mutual funds as a general type of investment but then further break down the mutual fund into index funds, balanced funds, and fixed income funds to group those mutual funds by their nature, risks, and characteristics. Some stakeholders have recommended that the plan assets should be grouped in only one of the two ways in order to simplify the disclosures related to plan assets. Staff Analysis Issue 2A 44. The staff understands that in practice, plan assets are usually tracked by general type, which aligns closely with Form 5500, and are then further disaggregated by nature, characteristics, and risks for purposes of meeting the Topic 820 disclosure requirements. Often, those preparing plan financial statements manually compile the plan asset information by nature, characteristics, and risks because service providers generally do not provide information in that format. Page 14 of 37

15 45. While classification by nature, characteristics, and risks is more costly, it provides more information about measurement risk for users of financial statements. However, many stakeholders do not believe that the benefits of additional disaggregation justify the costs. Furthermore, proponents of aggregating by general type note that if a user wants more information about the investments that are offered, a list of all investments is included in the Form 5500 (which is publicly available) and a user could use that information to further analyze the types of investments offered. Working Group Feedback: 46. At its January 12, 2015 meeting, the Working Group agreed that all investment information (that is, both participant-directed and nonparticipant-directed investments) should be aggregated based on general type consistent with Alternative 1. The Working Group noted that much of the cost and complexity encountered in preparing the Topic 820 disclosures is driven from manually compiling the information in a format that differs from what is provided to the plans (that is, from the service providers). The Working Group did not find that users receive significantly more benefits from the nature, characteristics, and risks classification; therefore, the costs of providing those disclosures are not justified. 47. The Working Group also highlighted that self-directed brokerage accounts should be reported as one type of investment. Current practice is to further disaggregate these investments by nature, characteristics, and risks and by general type. Based on that discussion, trying to disaggregate the information in self-directed brokerage accounts can be very time consuming and costly for preparers because, in part, it comes from multiple sources. Because the investments are self-directed (that is, the participants are given the discretion to invest their contributions in virtually any investment), the risk in the investment option lies with the participant and disaggregating the information does not provide the user with information on whether appropriate investments opportunities are being provided by the plan. However, because there is some risk involved in the plan even allowing self-directed investments as an option that is, the investments are not fully vetted by the plan it could be argued that it is most beneficial to the user to see the extent of plan assets that are self-directed. Otherwise, it may not be transparent in the Page 15 of 37

16 financial statements that there are self-directed investments because those investments could be buried in the other general types (for example, if some self-directed investments are in mutual funds, they may be lumped into the mutual fund disclosures). Furthermore, self-directed investments are reported in one line item on the Form Additionally, some Working Group members thought that the Task Force should be explicit and state that disaggregation is required either on the face of the financial statements or in the notes. Those Working Group members noted that defined benefit plans generally present investment information by general type both on the face of the financial statements and in the notes because of the combination of requirements in Topic 960 and Topic 820. Defined contribution plans and health and welfare plans generally disaggregate investment information only in the notes as a result of the requirements in Topic 820. The Working Group saw no benefit in requiring that level of detail in both places. Staff Recommendation Issue 2A 49. The staff recommends that classification be based on general type (consistent with Alternative 1 above), for two main reasons. First, this approach is the least costly of the alternatives. The staff believes that by aligning the financial reporting and regulatory reporting requirements, the Task Force will provide significant relief, particularly because the format is consistent with how most service providers provide investment information. Second, stakeholders in the Working Group, including the users, agreed that this was a reasonable approach indicating that providing the information only by general type would not result in a significant loss of information provided to users. 50. The staff considered that SOP 99-3 even further reduced the level of disaggregation required for participant-directed investments (that is, by allowing those investments to not be further disaggregated by general type and presented as only one-line item); however, the staff does not think the same distinction would be appropriate for Topic 820 disclosures. The staff believes that aggregating all investment information into one line-item for the purposes of providing Topic 820 information would defeat the purpose of those disclosures because it would be difficult to provide those disclosures in a Page 16 of 37

17 meaningful way at the consolidated investment level. The next subissue discusses further whether any of those Topic 820 disclosures should be further simplified. 51. Consistent with the feedback from the Working Group, the staff also believes that selfdirected brokerage accounts should be considered one general type of asset, as opposed to being further disaggregated. The staff understands that the current practice of disaggregating those disclosures is costly and the staff agrees with the observations above that it is arguably more beneficial to present self-directed investments as one type of investment. 52. Finally, the staff agrees with the recommendation made by some Working Group members to clarify that the general type of plan assets can be broken out either on the face of the financial statements or in the notes under each of the Plan Accounting Topics. The staff believes that as long as the information is available in the financial statements, whether it is disaggregated on the face of the financial statements or in the notes is not important. Issue 2B Details about Plan Assets 53. Under Topic 820, an entity is required to disclose detailed information about financial assets by class of investments (for example, quantitative disclosures of fair value measurements, reconciliations of the opening and closing balances of recurring fair value measurements categorized within Level 3, and descriptions of valuation techniques). Under the Plan Accounting Topics, a plan is required to identify investments that are equal to, or greater than, 5 percent of the net assets available for benefits as of the end of the year but there are no further disclosures about how those individual investments are valued. Staff Analysis Issue 2B 54. In practice, some have noted challenges in preparing the plan asset disclosures in Topic 820 because of the inherent subjectivity required (such as determining the appropriate level to categorize an investment). Furthermore, consistent with challenges noted in Issue 2A, preparers and practitioners noted that service providers do not typically provide the investment information necessary to provide the details on plan assets Page 17 of 37

18 required by Topic 820, which results in the disclosure process being manual and very time consuming, often with significant effort spent understanding service providers valuation methodologies. 55. However, while less costly to prepare, users noted that providing a list of investments over 5 percent in the notes of the plan financial statements is not beneficial. Furthermore, if that information is needed, the information is publicly available in regulatory schedules and fairly easy for a user to identify (that is, it would not require additional research but would only require a review of the schedule of investments to determine which ones are the largest). 56. One regulatory user noted the disclosure information provided by Topic 820, while more costly to prepare, is critical to their analysis of a plan s financial statements and is not available in the Form 5500 or through other means. For example, that user looks to the Topic 820 disclosures to pinpoint certain types of investments that require further investigation (that is, these disclosures are used as a red flag approach) as a part of that regulator s responsibility to evaluate whether a plan sponsor is meeting its fiduciary responsibilities. The regulator noted that there is no difference in how they use the disclosures in Topic 820 for participant-directed versus nonparticipant-directed investments. Working Group Feedback: 57. Working Group members agreed that plan assets (that is, both participant-directed and nonparticipant-directed investments) should follow the disclosure requirements in Topic 820. They agreed that the valuation information provided was useful and that the costs of preparing the disclosures, while significant, would be reduced significantly if the Task Force agrees with the recommendations made in Issue 2A (that is, to classify assets by general type) because the information provided would not be as disaggregated as it is today. 58. Some members also noted that the volume of investments included in many of the Topic 820 disclosures would be further reduced if the Net Asset Value (NAV) proposal is finalized (which, pending discussion of Issue 14-B in this meeting, is expected to be removed from the fair value hierarchy) and if the Task Force agrees with the Page 18 of 37

19 recommendations for FBRICs (which, pending the decisions in Issue 1 in this Issue Summary, would no longer require the use of a fair value measurement for FBRICs). 59. The Working Group members agreed that those decisions would significantly decrease the volume of participant-directed investments that are classified as anything other than Level 1 in the fair value hierarchy. Thus, many of the Topic 820 disclosures about plan assets, such as the quantitative and qualitative information about significant unobservable inputs for Level 3 measurements or reconciliations of transfers in and out of the different levels of the fair value hierarchy, would no longer be relevant in plan financials (or would at least be significantly reduced). Because of that expected reduction in complexity in the Topic 820 disclosures resulting from other decisions, the Working Group members did not see a need in this Issue to differentiate between participant-directed and non-participant directed investments. 60. The Working Group agreed that eliminating the schedule of assets over 5 percent would provide some cost relief by eliminating one disclosure and that maintaining the Topic 820 disclosures for any investments that continue to be included in Level 2 or Level 3 of the fair value hierarchy could provide users with important information about the measurement risk for plan assets. 61. The Working Group members also noted that the disclosure about investments greater than 5 percent that is required by the Plan Accounting Topics is not useful. Subsequent Feedback on NAV: 62. When the details about plan assets (Issue 2B) were discussed at the Working Group meeting and the recommendation was made that there should be no distinction for participant-directed versus non-participant directed investments, the NAV disclosures in paragraph A (included in Appendix B) were not specifically discussed. Subsequent to the Working Group meeting, some members of the Working Group challenged whether all the NAV disclosures are necessary for certain investments specifically noting concerns about providing the description of significant investment strategies and redemption restrictions. Those stakeholders noted that the disclosures are unnecessary and costly to prepare for certain investments within employee benefit plans. Page 19 of 37

20 63. Initially, some working group members suggested limiting those disclosures for participant-direct investments because participants would have access to that information through other means. However, that information is not accessible to other users (such as regulators). 64. Others suggesting reducing the NAV disclosures for funds held by plans that also file Form 5500 as direct filing entities (DFEs). 65. Proponents of reducing the NAV disclosures for funds that file Form 5500 as DFEs have highlighted that a user can find similar information to that provided within the investment strategy disclosures by looking at the underlying investments provided in the Form 5500 supplemental schedule for that DFE. From the listing of investments, some think that the regulator can infer the fund s strategy (or perform research on that investment to understand the strategy). 66. One regulatory user noted that the investment strategy disclosure is used to better understand whether participants have been provided with appropriate opportunities to diversify their investments and mitigate risks. More specifically, the regulator looks to the underlying investments to better understand the composition of the fund. When asked about not requiring the investment strategy disclosure for funds that file Form 5500 as DFEs, the regulator supported the recommendation, agreeing that the necessary underlying investment information would be available through the DFEs Form 5500s, and not overly challenging to access. 67. Conversely, the regulator noted that information provided in the restriction disclosures, which is used to better understanding liquidity risk, is not accessible elsewhere (even for funds that file Form 5500 as DFEs). The redemption disclosures were initially designed to provide further insight into cash flow considerations for investments using the practical expedient because there were not specific inputs that could be disclosed as a part of the valuation of those investments. Thus, the staff notes significant cost relief has already been provided by allowing entities to disclosure the information about these investments as opposed to performing a more complicated measurement of fair value. 68. Furthermore, some stakeholders noted that some plans may not be aware of certain restrictions until they are required to prepare these disclosures. That is, the disclosures Page 20 of 37

21 force management to track these restrictions more closely, which those stakeholders think is beneficial. 69. However, others highlighted that the disclosures often are applicable only to the plan and not the plan participant thus they do not affect a participant s ability to receive its cash. Furthermore, the staff has been told there is diversity in practice in how the redemptions are disclosed today (that is, whether they are from the view of the plan or the plan participant), thus the information provided may be inconsistent or not meaningful depending on what the user is trying to understand. The regulatory user indicated that it would be helpful to understand the restrictions from the perspective of both the plan and the participant. Staff Recommendation Issue 2B 70. Consistent with the Working Group recommendation, the staff recommends that the requirement to disclose individual investments over 5 percent in the Plan Accounting Topic be eliminated (consistent with Alternative 2 above). The staff recommends retaining the disclosures in Topic 820 because the disclosures provide the necessary information to users that is not accessible to all users outside of the financial statements. In addition, because of the expected reduction in complexity in the Topic 820 disclosures (resulting from other changes herein and in other Issues, as noted above), the staff does not believe that it is necessary to differentiate between participant-directed and nonparticipant-directed for purposes of the disclosures discussed above, even for the disclosures related to NAV. 71. However, the staff acknowledges the challenges faced in providing the NAV disclosures and recommends exempting funds that file Form 5500 as DFEs from the investment strategy disclosures. The staff s conversations with stakeholders indicated those disclosures are time consuming to prepare and the information can be accessible in other ways (either through participant statements or the DFE s Form 5500). Therefore, the staff believes this recommendation would provide cost relief while not reducing the information provided to users of financial statements. 72. Conversely, the staff does not think there should be relief provided for redemption restriction disclosures because that information is not available to all users in other Page 21 of 37

22 ways. In addition, unlike with the investment strategy disclosures (because that information is available through other means), the staff does not see the concerns raised about redemption restrictions as being particularly unique to employee benefit plans. Therefore, the staff does not recommend any relief specific to plans, but notes that there is an ongoing workstream to look at all fair value disclosures for all entities as a part of the FASB Disclosure Framework project and the usefulness of NAV disclosures will be challenged as a part of that review. Issue 2C Changes in Plan Assets 73. Under Topic 820, an entity is required to disclose a rollforward of all investments categorized as Level 3. This rollforward includes breaking out realized gains/losses, unrealized gains/losses, sales, purchases and transfers. Under the Plan Accounting Topics, an entity is required to disclose the net appreciation/depreciation for all plan assets by general type. 74. There are two main differences between the disclosure requirements of Topic 820 and the disclosure requirements of the Plan Accounting Topics for changes in plan assets: the scope of investments included and the extent of detailed information provided. The scope of investments included under the Topic 820 requirements is limited to investments that are categorized in the fair value hierarchy as Level 3 while under the Plan Accounting Topics, the scope of the disclosure of net appreciation/depreciation by plan assets includes investments categorized at all levels. The extent of information provided within the disclosures also differs, with Topic 820 requiring additional details to be disclosed (including realized gains/losses, unrealized gains/losses, sales, and purchases and transfers) and with the Plan Accounting Topics requiring only net appreciation/depreciation by general type. Staff Analysis Issue 2C 75. The Plan Accounting Topics provide less information although arguably cover a greater population. Some noted that the information provided by the Plan Accounting Topics disclosure is not useful and if, by chance, that information is needed, it is publicly available in the Form 5500 filing. However, one regulatory user did indicate that it can Page 22 of 37

23 be helpful to see net appreciation/depreciation by type of asset because that disaggregation can help identify types of investments that are not performing well. While this information is available in Form 5500, that user highlighted that such information is not audited. 76. On the other hand, Topic 820 provides more detailed information about investments categorized as Level 3 but similar information is not available in Form Working Group Feedback: 77. Working Group members agreed it is appropriate to eliminate the requirement in the Plan Accounting Topics to disclose net appreciation/depreciation by general type in the notes to the financial statements. The Working Group members did not believe that this disclosure is useful. 78. Some Working Group members also questioned the usefulness of the Level 3 rollforward. However, similar to the discussion for Issue 2B, those members also noted that the vast majority of participant-directed investments categorized as Level 3 are those measured at NAV or classified as FBRICs. As such, assuming that NAV and FBRICs would no longer be reflected in the fair value hierarchy, the Working Group was comfortable retaining the Level 3 rollforward and did not think it was necessary to further differentiate between participant-directed investments and nonparticipantdirected investments. Staff Recommendation Issue 2C 79. Consistent with the Working Group recommendation, the staff recommends the requirement to show net appreciation/depreciation by general type be eliminated (consistent with Alternative 2 above). The staff believes that this alternative would provide the best information to users of financial statements while reducing the overall disclosures related to plan assets. 80. While the staff acknowledges the concerns related to the usefulness of the Level 3 rollforward, as noted above, the complexity of the Level 3 rollforward is expected to decrease significantly as a result of other decisions relating to investments measured at NAV and classified as FBRICs. That is, the Level 3 rollforward would be provided only Page 23 of 37