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FASB Proposes Changes to Simplify Employee Benefit Plan Accounting


6/19/15

Synopsis

In April 2015, the Financial Accounting Standards Board (FASB) issued a proposal designed to simplify employee benefit plan (EBP) accounting and improve its value to users of financial statements such as plan participants and the Department of Labor. The updates, developed by the Emerging Issues Task Force (EITF), were part of the FASB’s broader initiative to reduce the complexity of U.S. accounting rules. The updates focus on certain aspects of EBP financial reporting requirements, which include: simplifying the measurement of fully benefit-responsive investment contracts; simplifying certain plan investment disclosures; and allowing EBPs with fiscal year-ends that do not coincide with the end of a calendar month to choose an alternative way to measure investments and investment-related accounts.

Key Components of Proposal

  • Fully benefit-responsive investment contracts – Currently, guidance for EBP financial statements requires all investments to be reported at fair value for the purpose of presentation and disclosure under U.S. Generally Accepted Accounting Principles (GAAP). However, defined contribution retirement plans and health and welfare benefit plans require fully benefit-responsive investment contracts to also be measured at contract value. This includes a reconciliation of fair value to contract value on the face of the plan financial statements, when such measures differ. Under the new proposal, fully benefit-responsive investment contracts would be measured, presented, and disclosed only at contract value, since contract value is the relevant measurement most meaningful to its financial statement users. A plan would be required to continue to provide disclosures that help users understand the nature and risks of fully benefit-responsive investment contracts.

  • Plan investment disclosures – Investments of employee benefit plans (both participant-directed and nonparticipant-directed) would be grouped only by general type (i.e., stocks, mutual funds, bonds) as opposed to disaggregating the investments based on their nature and risk. Furthermore, self-directed brokerage accounts would be considered one general type of investment. EBPs would no longer be required to disclose the net appreciation/depreciation in fair value of investments by general type, needing only to disclose this amount in the aggregate. In addition, EBPs would no longer be required to disclose investments greater than 5% of plan net assets. They would also not be required to disclose information about significant investment strategies for an investment in a fund that files an annual report on Form 5500 as a direct filing entity, when the EBP measures that investment using the net asset value per share as a practical expedient. However, an EBP would continue to disclose other existing requirements related to the fair value measurement of plan investments.
     
  • Measurement date practical expedient For plans with a fiscal year-end that does not coincide with the end of a calendar month, the proposal permits an alternative measurement date which allows for the measurement of investments and investment-related accounts using the month-end closest to its fiscal year-end. EBPs that choose to follow this procedure would be required to disclose the alternative measurement date and the financial effects of contributions, distributions, and/or significant events that occur between the alternative measurement date and the EBP’s fiscal year-end.

What Does CohnReznick Think?

CohnReznick supports the proposed regulations. The new regulations are expected to simplify the reporting of employee benefit plans. They are expected to be issued during the third quarter of 2015. Plan administrators may choose to wait until this time to issue their 2014 financial statements in order to early adopt the new regulations.

Contact

For more information, please contact Mathew Krukoski, a CohnReznick partner, at mathew.krukoski@cohnreznick.com or 959-200-7222, or Jennifer Lange, a CohnReznick partner, at jennifer.lange@cohnreznick.com or 973-618-6239.

To learn more about CohnReznick’s Employee Benefit Plan Practice, visit our webpage.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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