Society Agrees With FASB Master Trust Disclosure Proposal, but Points Out Glaring Omission

Chris Gaetano
Published Date:
Oct 7, 2016

Teamwork.smallThe Financial Accounting Standards Board (FASB) has proposed new presentation and disclosure requirements for employee benefit plans that account for changes in how they relate to master trusts. While the NYSSCPA largely agreed with the proposal, it expressed concern over the FASB’s decision to exclude the fair value hierarchy from part of these disclosures.

The Society expressed its views in a Sept. 16 comment letter, written in response to the FASB proposal, Plan Accounting—Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting, which was issued in late July.

The proposal concerns the relationship between employee benefit plans and master trusts—a type of trust that has a regulated financial institution, such as a bank, serving as its trustee or custodian. The assets within this trust are held in common control by at least two plans, with the financial institution acting as trustee or custodian, having no discretionary control.

Plans can have undivided or divided interests in the master trust. If a plan has divided interest, then there are specific ownership interests in individual investments within the trust, with all the benefits and costs from those interests allocated to that plan. A plan with an undivided interest holds a proportionate interest in the master trust’s net assets but has no specific ownership interest in any of its individual investments.

Defined benefit plans (i.e., pensions) tended to hold undivided interests in master trusts, according to an FASB Emerging Issues Task Force (EITF) memo on the subject. Today, however, the vast majority of plans are defined contribution plans—such as 401(k) plans—which tend to be more active in their investments and, therefore, more likely to hold divided interests in master trusts. Stakeholders have said that presentation and disclosure requirements need to evolve to better suit today’s employee benefit plan, according to the EITF memo.

Margaret A. Wood, the current vice chair of the Society’s Financial Accounting Standards Committee and one of the comment letter drafters, said that the FASB is trying to modernize standards for the way employee benefit plans operate now.

“When FASB created the codification, rather than creating new guidance, [the board] took the existing accounting guidance in the AICPA employee benefit plan guide and codified it,” she said.“Now what they are doing is revisiting this codification, reorganizing the section, providing consistency for disclosure requirements for the three types of plans—defined contribution, defined benefit, and health and welfare.”

She also said that the modernization of these standards includes improving transparency and requiring additional information—such as disclosing both a list of the general types of investment as well as the dollar amount of its ownership in each general investment type, if the ownership of the individual investment is not the same as the ownership percentage of the master trust. 

Under the proposal, plans would present their interest in a master trust and any change in interest in that master trust as single line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively.

It would also require that all plans with a divided interest disclose both a list of the general types of investments held by the master trust, as well as the dollar amount of their interest in each of those general types of investments. This is in contrast to the current practice of disclosing percentage interest in the master trust and a list of its investments—the FASB warned that this can be misleading when the plan has a divided interest.

In addition, plans would need to disclose the master trust’s other asset and liability balances, along with the dollar amount of the plan’s interest in each of those balances, which are not currently required under U.S. generally accepted accounting principles (GAAP). The proposal would also remove what the FASB says is a redundant disclosure regarding assets held in 401(h) accounts, which relate to medical benefits. Right now, those assets are listed in both the health and welfare benefit plan statement and the defined benefit plan financial statement. Under the new proposal, the investment disclosures would only be listed in the latter.

What will not be required, however, is a disclosure of the fair value hierarchy leveling of the master trust’s percentages, and while the Society was generally supportive of the proposal, it took issue with this exclusion, saying that the disclosure is needed in the interests of transparency. It noted that the AICPA’s Employee Benefit Plans: Audit and Accounting Guide already requires it. The Society also felt that there needed to be disclosures about the master trust’s investment strategy, such as restrictions on types of investments or restrictions on withdrawals from the master trust.

“We think it needs to be in there. We think it’s meaningful information to people,” said Wood.

The FASB did not give an effective date if the proposal is approved, but did say that it would be applied retrospectively to all periods covered.

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