Posted by Chris Ciminera, CPA, QKA
Disclaimer: All blog posts are valid as of the date published.
Users of accounting information make informed decisions using information contained in the financial statements. Primary qualities of accounting information are relevance and reliability, while constraints to reporting information include cost vs. benefit and materiality. Accounting principles and disclosures have become fairly involved over the years as the Financial Accounting Standards Board (FASB) has issued numerous updates to the Accounting Standards Codification (ASC), including 17 ASUs in 2015 and 5 exposure drafts so far in 2016. Despite the continued changes, the FASB realizes that additional rules and disclosures are costly and make financial statements less useful with overly complex disclosures. In July 2015, the FASB issued Accounting Standards Update (ASU) 2015-12, in part to reduce cost and complexity while maintaining the usefulness of the financial statement disclosures. ASU 2015-12 amends ASC Topic 960, Defined Benefit Plans, Topic 962, Defined Contribution Pension Plans, and Topic 965, Health and Welfare Benefit Plans.
There are three parts to ASU 2015-12. Part 1 covers fully benefit-responsive investment contracts, Part 2 covers plan investment disclosures, and Part 3 covers the measurement date practical expedient. ASU 2015-12 is effective for fiscal years beginning after December 15, 2015 with early adoption permitted. Below I briefly highlight the major portions of each part of the ASU.
Part I – Fully Benefit-Responsive Contracts
Investments are required to be reported at fair value. However, in practice, fully benefit-responsive contracts are measured at contract value. Contract value is the relevant measurement attribute, because it is the amount participants normally receive if they initiate a permitted transaction. Contract value is relevant to participants in the plan; however, fair value of the fully benefit responsive investment contract currently needs to be disclosed along with an adjustment to contract value if there is a difference. ASU 2015-12 removes the requirement to report fully benefit-responsive investment contracts at fair value and to show the adjustment from fair value to contract value on the face of the financial statements.
The required note disclosures are also reduced for fully benefit-responsive investment contracts. Currently, certain disclosures need to be made for fully benefit-responsive investment contracts including, but not limited to: the interest crediting rate, the basis for and frequency of interest crediting rate resets, the minimum interest crediting rate, the average yield earned by the plan, and the average yield earned by the plan with an adjustment to reflect the actual interest rate credited to participants. ASU 2015-12 removes the requirement to disclose these items for fully benefit-responsive investment contracts. Plans are still required to disclose a description of events that limit the ability of the plan to transact at contract value with the issuer. A new required disclosure will report contract value of each type (synthetic or traditional) of fully benefit-responsive investment contract. Currently different types of investments held in a self-directed brokerage account have to be broken out by investment types. ASU 2015-12 allows self-directed brokerage accounts to be reported as one type of investment rather than to be broken out by investment type.
Part II – Plan Investment Disclosures
Currently, plan financial statements are required to report investments that represent 5 percent or more of net assets available for benefits and net appreciation or depreciation of investments by general type. Additionally, investments are required to be reported by general type (e.g., mutual fund, common stock) and by nature, characteristic, risk (e.g., fixed income, balanced fund, domestic equity, foreign equity, etc). ASU 2015-12 removes the requirement to report investments that represent 5 percent or more of net assets available for benefits and, although it still requires disclosures of the net appreciation or depreciation of investments, it does not require disaggregation by investment type. Additionally, investments are only required to be reported by general type and are not required to be broken down further to report the nature, characteristic, and risk.
Part III – Measurement Date Practical Expedient
For plans whose fiscal year-end does not coincide with a month-end, the plan may measure investments and investment related accounts (e.g., a liability for a pending trade with a broker) using the month-end closest to the plan’s fiscal year-end. A plan should disclose the accounting policy election. If a significant transaction such as a contribution,distribution, and/or significant event occurs between the measurement date and the plan’s fiscal year-end, the plan is required to disclose it.