On April 23, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) proposed a three-part plan to make it easier to account for defined benefit plans, defined contribution plans, and health and welfare benefit plans. The proposal aims to simplify the measurement of the plans and the disclosures they’re required to make.
Part 1: Contract value, not fair value
The first part of proposed Accounting Standards Update (ASU) No. EITF-15C, Plan Accounting: Defined Benefit Pension Plans (Topic 960); Defined Contribution Pension Plans (Topic 962); Health and Welfare Benefit Plans (Topic 965): Fully Benefit-Responsive Investment Contracts, Plan Investment Disclosures, Measurement Date Practical Expedient — a consensus of the FASB Emerging Issues Task Force, would require benefit-responsive investment contracts to be measured, presented and disclosed at contract value.
The proposal aims to simplify Topic 962, Plan Accounting: Defined Contribution Pension Plans, and Topic 965, Plan Accounting: Health and Welfare Benefit Plans. These standards require investment contracts in which the benefit values are guaranteed to be measured at contract value. They also require an adjustment to reconcile the contract value to fair value on the face of the plan financial statements.
Many businesses and accountants believe that contract value is a more relevant measurement than fair value, because it’s the amount participants would receive if they were to make withdrawals from their plans. Furthermore, the plans are reported at contract value for regulatory reporting.
Part 2: Simplified investment disclosures
The second part of the proposal deals with plan investment disclosures. It covers plans in Topic 962, Topic 965 and Topic 960, Plan Accounting: Defined Benefit Pension Plans.
Under the proposal, the FASB would remove several disclosure requirements that overlap with similar disclosures required in other areas of U.S. Generally Accepted Accounting Principles, particularly Accounting Standards Codification Topic 820, Fair Value Measurement. For example, the proposal eliminates the need for entities to disclose their investment strategy if an investment is measured using the net asset value per share or its equivalent practical expedient. It also eliminates the requirement that the net appreciation or depreciation for participant-directed investments or nonparticipant-directed investments be disclosed by general type.
Part 3: Measurement-date exception
The final part of the proposal extends the measurement-date exception published in ASU No. 2015-04 (see the sidebar “Practical expedient approved for retirement benefits”) to defined benefit pension plans, defined contribution pension plans, and health and welfare benefit plans. This change helps financial statement users understand the measurement dates that plans use, as well as changes in value that occur between the measurement date and a plan’s fiscal year end.
Under the proposal, companies would be allowed to measure retirement plan assets and liabilities as of the last day of the month closest to the end of their fiscal year, when the fiscal period doesn’t coincide with month end. However, the FASB would require contributions, distributions and other significant events that occur between the measurement date and a plan’s fiscal year end to be disclosed in a company’s footnotes.
Comments on the proposal were due by May 18. However, like any of the FASB’s recent simplification projects, approval of proposed ASU No. 2015-04 isn’t a sure win. Contact your accounting professional for the latest accounting requirements for benefit plans.
Sidebar: Practical expedient approved for retirement benefits
On April 15, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-04, Compensation — Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.
Third-party service providers typically report the fair value of plan assets and liabilities at the end of a month. So when a company’s fiscal year end doesn’t coincide with the end of a month, it may incur more costs than other entities when measuring the fair value of plan assets and obligations of a defined benefit pension or other postretirement benefit plan. The reason is that the information must be adjusted to reflect the fair value as of the fiscal year end.
The FASB’s recent update provides a practical expedient that permits companies to measure defined benefit plan assets and obligations using the month end that’s closest to their fiscal year end. The practical expedient should be applied consistently from year to year and to all plans if an entity has more than one plan.
If a contribution or significant event — such as a plan amendment or settlement that calls for a remeasurement in accordance with existing standards — occurs between the month end date used to measure fair value and a company’s fiscal year end, the company must adjust the measurement of defined benefit plan assets and obligations to reflect those effects. But a company needn’t adjust the measurement of fair value for other events that occur between the month end measurement and the company’s fiscal year end that are caused by external events. Examples of externally driven events include changes in market prices or interest rates.
For public companies, ASU No. 2015-04 is effective for financial statements issued for fiscal years beginning after December 15, 2015. Private companies have until fiscal years beginning after December 15, 2016, and interim periods in years beginning after December 15, 2017, to make the changes. Earlier application is permitted.