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The Daily

FASB Tackles Pensions and Benefits in New ASU

Chris Gaetano
Published Date:
Aug 3, 2015
BenefitsThe Financial Accounting Standards Board (FASB) has issued new rules on defined benefit pension plans, defined contribution pension plans, and health and welfare benefit plans in a new accounting standards update issued on July 31. The update is meant to reduce what the FASB felt was excessive complexity in current approaches to employee benefit accounting. The update is divided into three parts. The first section focuses on fully benefit-responsive contracts—that is, contracts that ensure people receive benefits at the value specific in the contract, versus the book or fair market value—in defined contribution pension plans and health and welfare plans. 

Right now, these contracts require an adjustment to reconcile contract value to fair value when these measurements differ, which stakeholders said does not provide decision-useful information. What's relevant, according to these stakeholders, is the contract value because that is the amounts participants would normally receive. Therefore, under the amendment, "fully benefit-responsive investment contracts are measure, presented, and disclosed only at contract value." 

The second part concerns investment plan disclosures. The FASB notes that the disclosure rules themselves haven't changed all that much since 1980 when they were first issued but other rules like Topics 820, 960, 962 and 965 added additional disclosure requirements to employee benefit plan financial statements. These rules, said the FASB, sometimes require aggregation or organizing similar investment information in multiple ways, which stakeholders said was costly for preparers and makes the financial statement more cumbersome for users. 

The update allows investments to be disclosed according to general type, versus by nature, characteristics and risks. So for example, instead of an investment in mutual funds being broken down further into index funds, balanced funds and fixed income funds, the CPA can (and indeed must) group investments just by general type, in this case being simply "mutual funds." Further, the update discards the requirement to disclose individual investments that represent five percent or more of net assets available for benefits, and the requirement to disclose net appreciation or depreciation for investments by general type. This applies to both participant-directed investments and non-participant directed investments. Additionally, if an investment is measured using the net asset value per share practical expedient (or an equivalent), if that investment is in a fund that files a Dept. of Labor Form 5500, as a direct filing entity, it will no longer have to disclose the investment's strategy. 

The final part creates the option of a measurement date practical expedient for employee benefit plans that is similar to the one offered in ASU 2015-04, which allows employers to measure defined benefit plan assets on a month-end date that is nearest to the employer's fiscal year-end so long as that period does not coincide with the end of the month. Under the new update, employers can measure investments and investment-related accounts, such as a liability for a pending trade with a broker, as of a month-end date closest to the plan's fiscal year end, again provided that period does not coincide with a month-end. If the plan that has chosen to apply this practical expedient experiences a contribution, distribution and/or significant event between the alternative measurement date and the plan's fiscal year-end, the plan should disclose its amount, the accounting policy election and the date used to measure investments and investment-related accounts. 

All three updates are effective for fiscal years beginning after Dec. 15, 2015, and earlier application is permitted. Entities should apply the third part of the update prospectively.