Memo No. Issue Summary No. 1 Memo Issue Date May 27, 2016 Meeting Date(s) EITF June 10, 2016 Contact(s) Lisa Muehlbauer Lead Author, Project Lead (203) 956-5258 Peter Proestakes Assistant Director (203) 956-5347 Mark Pollock EITF Coordinator (203) 956-3476 Mark Scoles EITF Liaison - Project Project Stage Dates previously discussed by EITF EITF Issue No. 16-B, Employee Benefit Plan Master Trust Reporting Initial Deliberations May 12, 2016 (Educational Meeting) Objective of This Memo 1. The objective of this memo is to assist EITF members as they consider master trust presentation and disclosure requirements 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. 2. This memo is structured as follows: Background Information Issue 1 Presentation of Master Trust Balances and Activity on the Face of the Plan s Financial Statements The alternative views presented in this Issue Summary are for purposes of discussion by the EITF. No individual views are to be presumed to be acceptable or unacceptable applications of Generally Accepted Accounting Principles until the Task Force makes such a determination, exposes it for public comment, and it is ratified by the Board. Page 1 of 34
Issue 2 Disclosure of Master Trust Financial Statements Issue 3 Master Trust Financial Statement Reporting Issue 4 Disclosure for Plans with Divided Interests Issue 5 Disclosure of Investment-Related Accruals Issue 6 Other Applicable GAAP Disclosures for Investments Held in a Master Trust Issue 7 Section 401(h) Account Investment Disclosures Issue 8 Consistency between Topics Transition Transition Disclosures Appendixes: Appendix A: Current Master Trust Guidance Appendix B: 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. Many plans hold investments in master trusts. A master trust is a trust for which a regulated financial institution (bank, trust company, or similar financial institution that is regulated, supervised, and subject to periodic examination by a state or federal agency) serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. A bank or trust company ordinarily serves as the trustee for a master trust, acts as custodian, and may or may not have discretionary control over the assets. 5. Each plan has an interest in the net assets of the master trust. Plan interests in master trusts may be divided interests, undivided interests, or a combination thereof. 6. A plan has an undivided interest in a master trust when the plan holds a proportionate interest in the net assets of the master trust, but has no specific ownership interest in any of the individual investments of the master trust. Page 2 of 34
7. A plan has a divided interest (or a specific interest) in a master trust when the plan has a specific ownership interest in individual investments of the master trust. All interest, dividends, other income, expenses, and any proceeds from the sale or disposition of the investments of a master trust in which a plan has a divided interest are allocable to the plan that holds the divided interest. The trustee of a master trust may segregate a portion of the master trust to hold investments in which a plan has a divided interest by establishing one or more separate investment accounts to hold such investments. 8. Historically, most benefit plans were defined benefit plans in which the sponsor promised to pay a specific benefit that was determined by specific factors (age, years of service, compensation, and so forth). Under those defined benefit plans, the investments were typically directed by the sponsor (and otherwise known as nonparticipant-directed investments). When a master trust was used to hold those investments, the plans typically held an undivided interest in that master trust. However, employee benefit plans have evolved over time. The vast majority of plans are now defined contribution plans that involve more participant-directed investments (that is, the participant can elect specific investments based on options that the plan provides). Today, it is more common for plans to have divided interests in master trusts. 9. Some stakeholders believe that the evolution of employee benefit plans has resulted in a need to update some of the GAAP presentation and disclosure requirements relating to master trusts. 10. Current guidance relating to master trusts, in Topics 960 and 962, requires the following disclosures in the plan financial statements: a. The fair value of investments of the master trust, detailed by general type of investment b. The net change in the fair value of investments of the master trust c. The total investment income of the master trust by type (for example, interest, and dividends) d. A description of the basis used to allocate net assets, net investment income, and gains and losses to participating plans e. The plan s percentage interest in the master trust. 11. Refer to Appendix A for the specific GAAP requirements. Page 3 of 34
12. Many preparers find the master trust disclosure requirements within GAAP to be limited and incomplete. Most preparers rely on the AICPA Audit and Accounting Guide, Employee Benefit Plans (the Guide), to develop their master trust disclosures in plan financial statements. In addition to the GAAP requirements, the Guide includes recommendations from the AICPA s Financial Reporting Executive Committee (FinREC). Those recommendations include disclosing the master trust's statement of net assets and changes in net assets (see Issue 2) and disclosing the plan s percentage interest in each type of investment when the plan holds divided interests (see Issue 4). The Guide also provides a practice tip reminding preparers and auditors to include the necessary investment disclosures relating to the underlying investments held in a master trust (see Issue 6). Because many employee benefit plans hold investments in master trusts, the AICPA Employee Benefit Plan Expert Panel (AICPA EBP EP) concluded that master trust disclosures is an area in which standard-setting action is needed. 13. 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. To achieve its goal, 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. 14. 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). 15. 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 such Page 4 of 34
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. 16. Form 5500 was jointly developed by the DOL, the IRS, and the 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 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. 17. 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 and many employee benefit plans with calendar year-ends file their Form 5500 on or shortly before October 15. However, ERISA plans that file with the U.S. Securities and Exchange Commission (SEC) are due 180 days or 90 days after the plan s year-end, depending on the format used (ERISA or SEC, respectively). Most of these plans use the ERISA format and file within 180 days after year end (thus, approximately June 29 for a calendar year-end plan). 18. 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, plan participants generally are not able to use these statements to make investment decisions. When determining the primary users of the financial statements. FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Page 5 of 34
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. 19. 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. 20. 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 these other groups. 21. 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 who is typically considered while setting accounting standards: a. Participants are different because they may 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 that 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 the general public, plan participants generally do not obtain or use 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. Regulators most frequently use plan financial statements; however, Concepts Page 6 of 34
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. 22. For purposes of this Issue Summary the staff has considered the DOL to be the primary user of plan financial statements. The staff notes that this is consistent with how the Task Force and Board evaluated the decisions made for FASB Codification Update No. 2015-12, 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 (which resulted from the consensus on EITF Issue No. 15-C, Employee Benefit Plan Simplifications ). 23. The views of stakeholders discussed below represent feedback received from members of the AICPA EBP EP, multiple preparers and auditors, and the main regulatory user. Issue 1 Presentation of Master Trust Balances and Activity on the Face of the Plan s Financial Statements 24. When a plan holds investments in a master trust, the plan is required to present balances and activity of the master trust within the plan s financial statements both on the face of the financial statements and in the disclosures. Issue 1 focuses on the presentation of master trust information on the face of the plan s financial statements. 25. Presentation guidance is not consistently provided within GAAP. Paragraph 960-30-45-11 requires that defined benefit plans present investments within a master trust in a single line-item in the statement of net assets available for benefits. However, similar guidance is not included in Topics 962 or 965, and no guidance is included in any of the Topics on how to present investments within a master trust in the statement of changes in net assets available for benefits. Page 7 of 34
26. There is diversity in practice in the presentation of master trust balances and activity. This includes the presentation of investment-related receivables and/or payables and/or expenses at year-end. 27. Some stakeholders have suggested that the Task Force provide explicit guidance on the presentation of master trust balances and activity. 28. There are two approaches for the Task Force to consider: Approach A Balances and activity are shown net, as a single line-item Approach B Balances and activity are shown gross. Question 1 for the Task Force 1. Does the Task Force want to provide guidance on the presentation of master trust balances and activity in the plan s financial statements? If so, which approach does the Task Force support? Staff Analysis Issue 1 29. Under Approach A, the master trust balances and activity are shown net, within a single master trust line-item. That is, the plan s interest in master trust investments is combined with investment-related receivables and/or payables, and net investment income is combined with expenses. Stakeholders supporting this approach note that the plan holds an interest in the master trust and, therefore, such presentation is a more accurate reflection of the plan s holdings. 30. The following is an example of Approach A in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits: Page 8 of 34
C&H Company 401(k) Statement of Net Assets Available for Benefits December 31, 20X2 20X1 Assets Interest in C&H Master Trust 8,540,000 8,270,000 A Receivables - Employer's contribution 40,000 35,000 Cash - noninterest bearing 200,000 90,000 Total assets 8,780,000 8,395,000 Liabilities Accrued expenses 15,000 10,000 B Total Liabilities 15,000 10,000 Net assets available for benefits 8,765,000 8,385,000 C&H Company 401(k) Statement of Changes in Net Assets Available for Benefits Year Ended December 31, 20X2 Additions to net assets attributed to: Plan's interest in net investment income and expenses in C&H Master Trust 860,000 H Contributions Participants 500,000 Employer 325,000 Total contributions 825,000 Total additions 1,685,000 Deductions from net assets attributed to: Benefits paid to participants 1,295,000 Administrative expenses 10,000 I Total deductions 1,305,000 Change in net assets 380,000 Net assets available for benefits Beginning of the year 8,385,000 End of the year 8,765,000 Page 9 of 34
31. As shown in the above examples, under Approach A all master trust balances and activity are included within the first highlighted lines. 32. Conversely, Approach B presents the master trust balances and activity gross. That is, the plan s interest in master trust investments, receivables, payables, and income and expense are presented in separate line items. 33. The following is an example of Approach B in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits. For purposes of demonstrating the differences between the two approaches, the staff has highlighted the affected lines and included a key to demonstrate how one would reconcile the two approaches. C&H Company 401(k) Statement of Net Assets Available for Benefits December 31, 20X2 20X1 Assets Investments in C&H Master Trust, at fair value 8,455,000 8,202,000 C = A - D - E + F + (G - B) Receivables Employer's contribution 40,000 35,000 Due from broker for securities sold 100,000 75,000 D Accrued interest and dividends 50,000 48,000 E Total receivables 190,000 158,000 Cash - noninterest bearing 200,000 90,000 Total assets 8,845,000 8,450,000 Liabilities Due to broker for securities purchased 50,000 40,000 F Accrued expenses 30,000 25,000 G Total Liabilities 80,000 65,000 Net assets available for benefits 8,765,000 8,385,000 Page 10 of 34
C&H Company 401(k) Statement of Changes in Net Assets Available for Benefits Year Ended December 31, 20X2 Additions to net assets attributed to: Investment income Net appreciation in fair value of investments 800,000 J = H - K - L + (M - I) Interest 25,000 K Dividends 40,000 L Total investment income 865,000 Contributions Participants 500,000 Employer 325,000 Total contributions 825,000 Total additions 1,690,000 Deductions from net assets attributed to: Benefits paid to participants 1,295,000 Administrative expenses 15,000 M Total deductions 1,310,000 Change in net assets 380,000 Net assets available for benefits Beginning of the year 8,385,000 End of the year 8,765,000 34. Based on outreach, the staff understands that in practice, Approach A is more common. The staff also notes that those who support Approach A are concerned that the master trust balances and activity are commingled with the plan activity in Approach B. For instance, in the example above, under Approach B it is impossible to tell which accrued expenses and administrative expenses relate to the plan and which relate to the master trust (although some note that this concern could be mitigated through additional presentation or disclosure requirements). However others note that Approach A obscures the amount of administrative expenses incurred by the master trust. 35. Approach A aligns more closely with regulatory reporting and is supported by almost all stakeholders during outreach. Page 11 of 34
36. One stakeholder (an auditor) thinks that selection of the presentation approach should depend on whether the plan holds an undivided or divided interest in the master trust. That stakeholder believes that Approach A is more appropriate for plans with undivided interests, while Approach B is more appropriate for plans with divided interests. This stakeholder places greater emphasis on looking through to the underlying holdings of the plan when there is a divided interest, as compared to the majority of stakeholders who place greater emphasis on the legal structure of the master trust and/or alignment with regulatory reporting. Staff Recommendation 37. Consistent with the vast majority of views communicated during outreach, the staff recommends that guidance should be provided to promote greater consistency with respect to the presentation of master trust balances and activity in the financial statements of all plans. To achieve that end, the staff recommends Approach A. The staff thinks that net presentation provides a more appropriate reflection of the plan s interest in the master trust because it retains the distinction between the interest in the master trust and all other plan activity (such as the investments the plan holds directly). 38. The staff also notes that Approach A is less costly than Approach B because it more closely aligns the plan s reporting requirements under GAAP with the reporting requirements under Form 5500. 39. Lastly, the staff does not think there should be different presentation requirements for plans with an undivided interest and for plans with divided interests because both types of plans hold an interest in the master trust. Instead, the staff thinks that those differences should be addressed in disclosures where more specific information about the holdings is provided. Issue 2 Disclosure of Master Trust Financial Statements 40. While there are some specific disclosure requirements in Topics 960 and 962 (which are noted in the Background section of this Issue Summary), there are no requirements to disclose information on the investment-related receivables and/or payables and/or Page 12 of 34
expenses. In addition, plan expenses or other additions/deductions of the master trust are not required to be disclosed in the plan's footnotes. Some question whether additional financial information about master trusts is needed in the plan financial statements. 41. Some stakeholders recommend disclosing a full statement of net assets available for benefits and statement of changes in net assets available for benefits of the master trust in the footnotes of the plan s financial statements. Question 2 for the Task Force 2. Does the Task Force believe that plans should be required to disclose the statement of net assets available for benefits and statement of changes in net assets available for benefits of the master trusts that they hold investments in? Staff Analysis 42. Based on outreach, some believe that additional information is necessary to provide users with greater transparency regarding the plan s risk within the master trust. Those individuals, including the AICPA EBP EP and FinREC, recommend including the master trust s financial statements in the plan s footnotes. They believe that such a disclosure will help standardize the extent of reporting, while not resulting in significant cost. They note that the disclosure would provide the users of the financial statements with additional information regarding all net assets (such as, the investments and investment-related accruals (receivables and/or payables)) and changes in net assets (such as, trust-related expenses) of the master trust. 43. Opponents, including some auditors and preparers, believe that such disclosure is not necessary. These individuals note that the plan already provides disclosures about the master trust investments, which are the primary focus (and vast majority of total assets) of master trusts. These individuals also note that additional financial information can be found on the master trust s Form 5500, which is required (although not required to be audited). 44. The primary regulatory user did not advocate for this disclosure because the information is accessible elsewhere. Page 13 of 34
Staff Recommendation 45. The staff does not recommend adding a requirement for plans to disclose master trust financial statements. The staff thinks the benefits of the disclosure do not outweigh the costs of providing such information. That is, there is minimal benefit to providing this disclosure because the information can be found elsewhere and regulatory users can easily access that information. 46. In addition, the staff notes that the vast majority of the master trust account balances are required to be disclosed, by general type of investment, through the investment disclosures, and that the components of master trust net investment income are also required to be disclosed. 47. Finally, the staff thinks that some of the concerns raised about increasing transparency can be addressed in a more direct format as recommended elsewhere in this Issue Summary specifically, refer to the additional disclosure of investment-related accruals (trust-related receivables and/or payables) noted in Issue 5. Issue 3 Master Trust Financial Statement Reporting 48. Master trusts are required to file Form 5500 for regulatory purposes, similar to employee benefit plans. However, unlike employee benefit plans, master trusts are not required to prepare and provide audited financial statements with Form 5500 although some master trusts do prepare financial statements. 49. There is no specific guidance in GAAP related to master trust financial statement reporting. Some stakeholders have noted that when master trusts provide financial statements, it is unclear whether they should follow the guidance under investment companies or the guidance under the plan accounting Topics or, as most commonly done in practice, some combination of the two. 50. Stakeholders noted that, depending on which guidance is applied when preparing master trust financial statements, there are reporting differences. Those stakeholders identified the following differences: Page 14 of 34
a. The terminology used. Terms such as contributions and benefit payments (consistent with employee benefit plan guidance) or transfers in and transfers out (consistent with investment companies), can vary. b. The level of detail within fair value disclosures. That is, whether assets in the Topic 820 disclosures are detailed by general type of investment (consistent with employee benefit plan guidance that was amended as a result of Update 2015-12 to provide relief on the level of investment detail required in plan financial statements) or by nature, characteristics, and risks (consistent with the guidance for all other entities including investment companies). 51. Based on outreach, the staff understands that most master trusts that prepare financial statements use a combined approach that uses the transfers in and transfers out terminology and provides fair value disclosures detailed by general type of investment. 52. The staff also notes that, to a certain extent, there is interaction between Issues 2 and 3. However, when it comes to putting the master trust statements in the plan disclosures, the only issue relates to the terminology used. Question 3 for the Task Force 3. Does the Task Force want to clarify which set of guidance master trusts should follow for purposes of financial statement reporting? Staff Analysis 53. Based on outreach performed, almost all stakeholders see strong similarities between employee benefit plans and master trusts including the purposes of their financial statements and needs of their users and, therefore, think that the master trusts should generally follow the guidance for employee benefit plans, particularly for investment disclosures. These individuals noted that because master trusts are utilized by plans to hold investments, there is no need for master trust financial statement disclosures to provide greater detail than that required for purposes of plan disclosures. Said differently, they think the relief that has been provided to plans should be extended to master trusts. They noted that many of the reasons supporting the simplification of plan investment Page 15 of 34
disclosures, including the format in which investment information is provided and the detail needed for regulatory reporting purposes, also apply for master trusts. 54. Others believe that in order to follow plan guidance, master trusts would have to meet the definition of a plan because employee benefit plans have been classified as a unique entity (that is, not a public business entity, not a private company, and not a not-for-profit). These stakeholders note that a trust is not a plan it is a separate legal entity and think that master trusts are more akin to an investment company than an employee benefit plan. 55. The staff notes some key challenges in determining where and how master trust financial reporting guidance could be provided. The first challenge relates to the location of the guidance within the Codification. While the staff agrees that master trusts are more akin to employee benefit plans than investment companies (and should be afforded the same simplifications as plans), the staff does not believe that any or all of Topics 960, 962, or 965 would be the appropriate location for that guidance. This is because master trusts are unique entities that are not plans and, therefore, guidance for those entities does not appropriately fit within the plan accounting topics. 56. While providing guidance within Topics 960, 962, or 965 does not seem appropriate and could be confusing, the staff is also equally concerned about providing guidance within the investment company Topic. That is because if certain disclosure simplifications are going to be provided for master trusts, similar entities could look to apply the guidance by analogy, which would be inappropriate. As such, the staff does not believe that the answer to the concerns about master trust financial reporting, or the drafting of such guidance, would necessarily be straight-forward. In fact, it could require that the guidance be provided under a new Topic. 57. The second key challenge that the staff notes is the differences between investment company and employee benefit plan presentation and disclosure requirements. During outreach, stakeholders identified two key differences (as noted above); however, the staff believes that there could be more and that any guidance provided would need to be rather specific. Said differently, even if the guidance uses plan reporting as a starting point, differences could go beyond the points noted above. For instance, plans are subject to general disclosure requirements such as those included in paragraph 962-205-50-1 which requires, among other things, that plans disclose a brief description of the plan Page 16 of 34
agreement including vesting and allocation provisions, as well as the basis for determining contributions. These disclosures would not be directly applicable to a master trust and therefore would need to be amended. The staff believes that additional research on master trust presentation and disclosure would need to be performed to ensure that the requirements are appropriate for master trusts. 58. Based on outreach discussions, almost all stakeholders agreed that this issue either was beyond the scope of Issue 16-B or did not need to be formally addressed because the statements are not required. Staff Recommendation 59. The staff does not recommend that the Task Force clarify which set of guidance (or combination of guidance) master trusts should follow for purposes of financial statement reporting. The staff notes that master trust financial statements are not required and believes that master trust financial reporting, for the reasons noted in the staff analysis section, is beyond the scope of an employee benefit plan project. 60. As such, the staff does not believe that there is a simple solution for providing guidance on master trust financial reporting. We believe that these are different types of entities and that additional research would need to be performed to ensure the requirements are appropriate for those different entities. 61. Nevertheless, the staff acknowledges that the applicable simplifications from Update 2015-12 were carried forward from the plan s disclosures to the plan s master trust disclosures and, therefore, thinks that it could be reasonable for one to conclude that the master trust, itself, would also receive that disclosure relief if similar investment disclosures were prepared and provided. The staff notes that there is no guidance that would preclude such treatment. 62. Lastly, if the Task Force decides to require plans to disclose master trust financial statements (under Issue 2), the staff believes that within that plan disclosure requirement, the Task Force could provide some guidance as to how those statements should be prepared for purposes of meeting that disclosure requirement. In that regard, the staff believes that those statements should refer to transfers in/transfers out as opposed to contributions/benefit payments because participants do not make contributions to or Page 17 of 34
receive benefit payments from master trusts. The staff notes that no additional guidance is needed to address the level of detail for the fair value disclosures in plan financial statements because Topics 960 and 962 already specify that master trust investment fair values should be disclosed by general type of investment in the plan financial statements. Issue 4 Disclosures for Plans with Divided Interests 63. GAAP requires the gross amounts of investments held by the master trust to be detailed by general type of investment and for an employee benefit plan to disclose its percentage interest in a master trust. Because the percentage interest in a master trust is disclosed as a total, users could come to the conclusion that all investments in the master trust represent an undivided interest in a pool of assets. 64. Historically, that representation may have been more appropriate, as noted in the Background section of this Issue Summary. That is because master trusts were commonly utilized by defined benefit plans, which often had an undivided interest in the pool of assets. However, as defined contribution plans have become more common, so have master trusts in which plans have divided interests. 65. Some stakeholders question whether plans with divided interests should disclose the plan s interests in the trust, detailed by general type of investment, in a format similar to the disclosure providing the gross investments held by the master trust (detailed by general type of investment). Others suggested that disclosure of the plan s net investment balances in the master trust, detailed by general type of investment, is sufficient. Question 4 for the Task Force 4. Does the Task Force want to require plans with divided interests to disclose their interest in the master trust for each general type of investment? If so, should that disclosure be provided on a gross or net basis? Staff Analysis Should there be an additional disclosure of the plan s interest by general type of investment? 66. Proponents of the additional disclosure find the current requirement, without additional information, to be misleading when plans hold divided interests in the master trust. For Page 18 of 34
example, if a master trust holds investments for Plan A and Plan B and there is a hard-tovalue asset (for example, Level 3 corporate bonds) that relates only to Plan A, under the GAAP requirement, a very similar master trust disclosure would be provided within the defined benefit plan and the defined contribution plan financial statements. The disclosure would include the investments within the master trust, detailed by general type of investment, as follows: Total Mutual funds 13,560,000 Self-directed brokerage account 308,000 Common stock 2,245,000 U.S. government securities 575,000 Corporate bonds 327,500 Total assets at fair value 17,015,500 67. The disclosure would also include the plan s total percentage interest in the master trust. For purposes of the example, say that 49 percent is held by Plan A and 51 percent is held by the Plan B. However, because of the participant-directed investments in Plan B, the plan actually holds 48 percent of the mutual funds, 100 percent of the self-directed brokerage account, and 73 percent of the common stock. Plan B holds no U.S. government securities and no corporate bonds (some of which are Level 3 assets). 68. In this example, users may assume that the master trust's investments are representative of the plan s investments held in the master trust and in this case, the user may assume that Plan B owns 51 percent of that hard-to-value asset (that is, the Level 3 corporate bonds), even though the plan owns no Level 3 assets. As such, stakeholders recommend requiring the additional disclosure of the plan s interest by type (as opposed to a total) to increase transparency on the types of assets that the plan actually holds. 69. Furthermore, stakeholders noted that the situation described above is fairly common, particularly for master trusts that have been combined (for instance, when plans that participate in a master trust merge). Those stakeholders believe that additional information is necessary to help ensure users are provided with the necessary information to understand which master trust investments are held by the plan and how extensive those holdings are. Page 19 of 34
70. All stakeholders agreed that this would be a useful disclosure. Many also noted that the additional disclosure would not be costly to prepare because the plan s interest is already known for purposes of other financial reporting requirements. Should the disclosure be presented on a gross or net basis? 71. Most stakeholders recommend that the disclosure use a gross format that is, keeping the disclosure consistent with the current requirement and simply adding a column to show the plan s interest in the master trust. Here is an example: GROSS Total Plan's Interest Mutual funds 13,560,000 48% Self-directed brokerage account 308,000 100% Common stock 2,245,000 73% U.S. government securities 575,000 0% Corporate bonds 327,500 0% Total assets at fair value 17,015,500 72. Stakeholders who support this display noted that providing the gross investment amounts retains some focus on the legal structure of the master trust. Others, including the regulatory user, noted that a gross presentation is helpful for purposes of reconciling the master trust s Form 5500 to the plan s financial statements. 73. A couple of stakeholders (auditors) think that the disclosure should use a net format, as shown here: NET - Balance Total Mutual funds 6,508,800 Self-directed brokerage account 308,000 Common stock 1,638,200 Total assets at fair value 8,455,000 74. These stakeholders believe that it is not helpful to show investments in the master trust that the plan does not own. Under this approach, the plan essentially looks through the Page 20 of 34
master trust to underlying assets that the plan holds as opposed to looking at the master trust as a legal structure. Staff Recommendation 75. Consistent with the view of all stakeholders, the staff recommends requiring an additional disclosure under which plans that hold divided interests in a master trust would disclose the plan s interest in master trust investments by general type of investment. The staff believes that the disclosure will provide greater transparency for users of plan financial statements. The staff also recommends a gross presentation of that disclosure. While the staff understands the logic behind net presentation, the staff agrees with the majority of stakeholders that gross presentation appropriately provides further information about the legal structure that is the master trust. 76. Furthermore, the staff finds value in the gross presentation of this disclosure because it would retain some consistency with the current disclosure required for plans with undivided interests. The only difference between the disclosures would be the additional column where plans with divided interests provide their interest in the master trust. The staff believes that some level of consistency between the disclosures and types of plans may be helpful from a user perspective. Issue 5 Disclosure of Investment-Related Accruals 77. Some stakeholders also question whether disclosure of other master trust account balances should be required (that is, investment-related accruals, such as trust related receivables and/or payables). Stakeholders noted that if the Task Force decides not to require master trust financial statements within the plan disclosures (that is, under Issue 2 in this Issue Summary), then many see this alternative as a less costly and more targeted disclosure. This disclosure could be provided net or gross. Question 5 for the Task Force 5. Does the Task Force want to require disclosure of other master trust account balances? If so, should the disclosure be provided on a gross or a net basis? Page 21 of 34
Staff Analysis Should there be a disclosure of other master trust account balances? 78. Many stakeholders also believe that there should be a disclosure of other master trust account balances. Those stakeholders noted that because the balance presented on the face of the plan financial statements is (usually) a net number (note: see Issue 1 in this Issue Summary), the current GAAP disclosures do not provide enough information for a user to understand what balances affect the net number, that is, the plan s total interest in the master trust. 79. Almost all stakeholders believe that the disclosure of other master trust balances should be required. These individuals think that the additional disclosure would provide greater insight into the amount that is provided on the plan s statement of net assets available for benefits. 80. Furthermore, many noted that the cost of doing so (particularly with a gross presentation, as discussed below) would be minimal. Should that disclosure be presented on a gross or net basis? 81. Almost all stakeholders recommend the disclosure use a gross format that is, by providing the other master trust balances at the master trust level. These individuals believe that the cost would be minimal because the numbers would come directly from the master trust s statement of net assets available for benefits (as provided in the master trust s Form 5500). Similar to the points noted above in support of gross presentation for Issue 4, supporters of this approach noted the importance of the legal structure to the master trust and the regulatory user also noted the ability to reconcile with the master trust s Form 5500 is beneficial. 82. One stakeholder recommends that the disclosure use a net format that is, by providing the specific balances at the plan level. That individual notes that providing the disclosure net will provide a reconciliation between the investment disclosures and the face of the financial statements. While the disclosure would be more costly to preparer, the stakeholder believes that the benefit of information provided would outweigh that cost. Page 22 of 34
Staff Recommendation 83. Consistent with the vast majority of stakeholders, the staff recommends requiring the disclosure of other master trust balances on a gross basis. The staff believes that the additional disclosure would not be costly because the information is already available through the master trust s Form 5500, but believes that the disclosure would provide increased transparency as to which balances (other than investments) affect the plan s total interest in the master trust. Issue 6 Other Applicable GAAP Disclosures for Investments Held in a Master Trust 84. Stakeholders noted that there is great diversity in practice regarding the extent to which disclosures are provided for investments held within a master trust. 85. Based on outreach, all stakeholders believe that it is important to include disclosures, such as securities lending activities, derivatives, or fair value disclosures, where applicable. However, many auditors noted that this is a common question and that there is currently a Technical Practice Aid explaining that other disclosures, beyond those explicitly noted in Topics 960 and 962, should be carried forward to assets held within a master trust. As such, they recommend more explicit guidance be provided within the employee benefit plan guidance. 86. In addition, many question whether these disclosures should be limited to the plan s holdings. For example, must plans with divided interests provide disclosures for investments in which the plan does not hold a percentage interest? Question 6 for the Task Force 6. Does the Task Force want to add an explicit statement in GAAP noting that other applicable GAAP should be considered for purposes of master trust investment disclosures? Should those disclosures be limited to the plan s holdings? Staff Analysis 87. Some think of a master trust as being similar to a fund because one would not look through to the underlying assets; however, most believe that master trusts are different from funds Page 23 of 34
because a master trust is not required to produce financial statements and, therefore, the information is not necessarily available elsewhere. During outreach discussions, all stakeholders the staff met with agreed that the investment disclosures should be provided within the plan financial statements. 88. Based on outreach performed, the regulatory user agreed and noted that these disclosures are necessary for their analysis. The user also noted that even if a master trust provides financial statements, those financial statements may not be audited, and, therefore, they rely on the plan disclosures to have the audited investment disclosures. 89. In addition, all stakeholders noted that these investment disclosures can be limited to the types of investments that the plan actually holds in a master trust. Therefore, when a plan holds a divided interest in the master trust it should not be required to provide investment disclosure relating to the types of investments that it does not have an interest in. 90. For example, consider the example discussed under Issue 4 in which the plan holds the following interests: Master Trust Assets at Fair Value as of December 31, 20X2 Level 1 Level 2 Level 3 Total Plan's % Mutual funds 13,560,000 13,560,000 48% Self-directed brokerage account 308,000 308,000 100% Common stock 2,245,000 2,245,000 73% U.S. government securities 575,000 575,000 0% Corporate bonds 307,500 20,000 327,500 0% Total assets at fair value 16,113,000 882,500 20,000 17,015,500 91. Some suggest that the following disclosure could be provided for purposes of meeting the Topic 820 fair value hierarchy disclosure requirement when the plan s investments by general type are not spread across multiple fair value hierarchy levels: Page 24 of 34
Master Trust Assets at Fair Value as of December 31, 20X2 Level 1 Level 2 Level 3 Total Plan's % General Types of Assets the Plan Holds an Interest in: Mutual funds 13,560,000 13,560,000 48% Self-directed brokerage account 308,000 308,000 100% Common stock 2,245,000 2,245,000 73% 16,113,000 16,113,000 General Types of Assets the Plan Does Not Hold an Interest in: U.S. government securities 575,000 0% Corporate bonds 327,500 0% Total assets at fair value 17,015,500 *Note the above is simply one example of how this disclosure could look. 92. The individuals who support an approach consistent with the one above noted that by limiting the investment disclosures to the specific types of investments that the plan actually holds, costs will be reduced. For instance, in the example above there would be cost savings under an approach that does not require the plan to disclose the U.S. government securities and the corporate bonds according to the fair value hierarchy levels of those investments. 93. Another example of how disclosure relief would be provided by this approach is the fact that this plan would not provide the Topic 820 Level 3 asset disclosures (such as the Level 3 rollforward and disclosures about unobservable inputs, range of inputs, and so forth). Stakeholders noted that this would not only provide cost relief, but it would also reduce the volume of investment disclosures and allow the remaining disclosures to be targeted and focused on the investments that the plan actually holds. Staff Recommendation 94. The staff recommends adding a general statement reminding preparers to consider other relevant disclosures within GAAP (such as fair value and derivative disclosures). The staff thinks that because of the current practice issues, this would be a worthwhile reminder. 95. The staff also recommends limiting the other relevant disclosures to the plan s actual holdings. The staff thinks it is only necessary to require the disclosures for the investments that the plan actually holds an interest in. Page 25 of 34
Issue 7 Section 401(h) Account Investment Disclosures 96. Some defined benefit plans allocate funds to provide postretirement medical-benefits through a health and welfare plan, pursuant to Section 401(h) of the Internal Revenue Code. Employers may fund a portion of their postretirement medical-benefit obligations related to their health and welfare benefit plans through a health benefit account (401(h) account) in their defined benefit plans (subject to certain restrictions and limitations). In practice, this situation typically occurs when a defined benefit plan is overfunded. 97. Because the 401(h) account net assets are used to provide medical benefits through the health and welfare plan, the balance may not be used to satisfy pension obligations. That is, the defined benefit plan s net assets must not include net assets held in the 401(h) account. The 401(h) account s assets less liabilities (that is, the net assets of the 401(h) account) are required to be shown in defined benefit plan financial statements on the face of the statements, but are not included in the total net assets available for pension benefits for purposes of GAAP reporting. 98. Currently, the investment disclosures are provided in both the defined benefit plan financial statements and the health and welfare plan financial statements. Therefore, some question whether the health and welfare plan should include the investment disclosures relating to the 401(h) account. And if those investment disclosures are not included, some believe that there should be a disclosure providing the name of the defined benefit plan so that participants can easily find the information. Question 7 for the Task Force 7. Does the Task Force want to eliminate the investment disclosure requirement for Section 401(h) account assets within a health and welfare plan? Should an additional disclosure be provided for the health and welfare plan to disclose the name of defined benefit plan in which those Section 401(h) accounts investment disclosures can be found? Staff Analysis 99. During outreach, stakeholders agreed that the investment disclosures should not be required to be reported in both plan s financial statements. Many believe that the investment disclosures should continue to be included in the defined benefit plan financial Page 26 of 34