New Developments Summary

Transcription

1 September 1, 2015 NDS New Developments Summary New ASUs impact employee benefit plans Guidance simplifies and/or eliminates reporting and disclosures requirements Summary In May 2015 the FASB issued ASU , Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), followed in July by ASU , Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965): Part (I) Fully Benefit- Responsive Investment Contracts, Part (II) Plan Investment Disclosures, Part (III) Measurement Date Practical Expedient. These ASUs simplify or eliminate some of the financial statement reporting and disclosures that were previously required for employee benefit plans. This bulletin summarizes the significant changes prescribed by these ASUs. Both ASUs require retrospective application (except for the guidance in Part III of ASU , which should be applied prospectively), and permit early adoption. The amendments in ASU are effective for fiscal years beginning after December 15, 2015, and plans can early adopt any of the three parts without early adopting the other parts. When a part is adopted, it must be adopted in its entirety. The amendments in ASU are effective for plans for fiscal years beginning after December 15, Contents A. Overview... 2 B. ASU Part I: Fully Benefit-Responsive Investment Contracts... 3 Part II: Plan Investment Disclosures... 4 Part III: Measurement-Date Practical Expedient... 4 C. ASU D. Sample disclosure when adopting the new ASUs... 5 Appendix... 7

2 New Developments Summary 2 A. Overview Earlier this year, the FASB simplified or eliminated some of the financial reporting and disclosure requirements for employee benefit plans with the issuance of ASU , Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965): Part (I) Fully Benefit-Responsive Investment Contracts, Part (II) Plan Investment Disclosures, Part (III) Measurement Date Practical Expedient, and ASU , Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU simplifies employee benefit plan reporting with respect to fully benefit-responsive investment contracts and plan investment disclosures, and provides for a measurement-date practical expedient for plans with a fiscal year-end that does not coincide with a month-end. The guidance in this ASU does not apply to the financial reporting for the plan sponsor; it applies only to the plan s financial statements. The amendments under ASU are effective for fiscal years beginning after December 15, 2015, and early application is permitted. Entities are required to apply the amendments in Parts I and II retrospectively for all financial statements presented and should apply the amendments in Part III prospectively. When a part is adopted, it must be adopted in its entirety. For investments that use the practical expedient in FASB ASC 820, Fair Value Measurements and Disclosures, ASU removes the requirement to present investments within the individual levels in the fair value hierarchy. The amendments in ASU are effective for public business entities for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires an entity to remove an investment for which fair value is measured using the net asset value (NAV) per share practical expedient from the fair value hierarchy in all periods presented in its financial statements. Earlier application is permitted. Summarized below are some of the significant changes to employee benefit plan financial statement reporting and disclosure as a result of the new guidance. Note that the ASUs require retrospective application (except for Part III of ASU , which must be applied prospectively), so entities must remove applicable prior-year amounts and disclosures from the financial statements. As with the adoption of any new accounting standards, plan management should disclose the new standards, as applicable, and their impact in accordance with the requirements of ASC 250, Accounting Changes and Error Corrections: Disclosures. An illustrative footnote is provided in Section D, but it should be tailored to reflect the specifics of each plan. No disclosure regarding the effect of future accounting pronouncements is required for plans that do not adopt early and do not file with the SEC (for example, those that file Form 11-K). B. ASU ASU has three parts that affect different aspects of financial reporting and disclosure for employee benefit plans.

3 New Developments Summary 3 Part I: Fully Benefit-Responsive Investment Contracts The definition of a fully benefit-responsive investment contract (FBRIC) has not changed. However, Part I of ASU amends the guidance for FBRICs in ASC 962, Plan Accounting Defined Contribution Pension Plans, and in ASC 965, Plan Accounting Health and Welfare Benefit Plans, as described below: No adjustment from fair value to contract value is required for any FBRICs on the face of the financial statements. Plans must report FBRICs only at contract value, which is the value that most trustees report in certified trust statements. Plans are still required to include the following disclosures for FBRICs: Total contract value of each type of FBRIC (e.g., traditional investment contracts and synthetic investment contracts) on either the face of the plan s financial statements or in the notes A description of the nature of each investment contract and how each one operates A description of the events that would cause the plan to transact at an amount different from contract value, including a statement that these events are not probable of occurring A description of events that would allow the issuer to terminate the contracts or settle at an amount different than contract value Certain other disclosures related to FBRICs are eliminated, such as Average-yield disclosures ASC 820 hierarchy leveling, valuation techniques and inputs, and the Level 3 rollforward FBRICs, including the underlying investments of a synthetic guaranteed investment contract, are not included in the ASC 820 hierarchy table. Master trusts that hold FBRICs are subject to the same presentation and disclosure requirements as FBRICs held directly by a plan. Indirect investments in FBRICs Indirect investments in FBRICs (for example, investments in stable value common or collective trusts (CCTs)) are not in the scope of the FBRIC guidance. The Basis for Conclusions in Part I of ASU indicates that when a plan invests in a stable value CCT, those holdings are generally in an investment company that calculates NAV per share (or its equivalent) in a manner consistent with the measurement principles in ASC 946, Financial Services Investment Companies. Those measurement principles indicate that when determining the NAV of a stable value CCT, the relevant measurement for a FBRIC held by the CCT is contract value. As such, the amount previously presented as contract value in a plan s financial statements is now presented as fair value consistent with other CCTs and reported on the statement of net assets available for benefits with investments at fair value under the new guidance. Total net assets available for benefits does not change, and the adjustment from fair value to contract value that was previously reported is eliminated.

4 New Developments Summary 4 Part II: Plan Investment Disclosures Part II of ASU amends all of the plan accounting guidance (ASC 960, 962, and 965) as described below for plan investment disclosures: No disclosure is required for individual investments greater than 5 percent of net assets. Net appreciation/depreciation must be disclosed only in aggregate, not by investment type. Plan investments must be disaggregated only by general type on the statement of net assets available for benefits or in the footnotes. In addition, investments in the ASC 820 hierarchy table are no longer segregated by nature, characteristics, and risk, but only by general type of investment (e.g., bonds, mutual funds, collective funds, etc.). Self-directed brokerage accounts are considered one general type of investment (similar to Form 5500, Annual Return/Report of Employee Benefit Plan, reporting). Investment strategy disclosures for investments measured at NAV (or its equivalent) using the practical expedient in ASC 820 are not required if that investment is in a fund that files an annual report on Form 5500 as a direct-filing entity (DFE). Schedule D to a plan s Form 5500, information from a plan s third-party service provider, and the search tool on the government s EFAST2 system (which allows users to search for an investment s Form 5500) are helpful resources in determining whether an investment files as a DFE. The amendments in Part II also apply to investments held in a master trust. Part III: Measurement-Date Practical Expedient The amendments in Part III of ASU provide a practical expedient to permit plans to measure investments and investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that is closest to the plan s fiscal year-end if the fiscal period does not coincide with a month-end. If a plan applies the practical expedient and a contribution, distribution, and/or significant event occurs between the alternative measurement date and the plan s fiscal year-end, the plan must disclose the amount of the contribution, distribution, and/or significant event. The plan must also disclose the accounting policy election to use the practical expedient and the date used to measure investments and investment-related accounts. C. ASU The guidance in ASU excludes certain investments from the fair value hierarchy by amending the existing guidance as follows: No leveling in accordance with ASC 820 is required for investments valued using NAV as a practical expedient (for example, CCTs and pooled separate accounts (PSAs)). Investments eligible for the practical expedient, but for which the practical expedient has not been applied, must still be included in the fair value hierarchy. Entities are required to disclose the amount of investments measured at NAV (or its equivalent) so that financial statement users can reconcile total investments in the fair value hierarchy to total investments measured at fair value on the statement of net assets.

5 New Developments Summary 5 The requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV practical expedient is eliminated. Rather, those disclosures are required only for investments to which the entity applies the practical expedient to estimate fair value. Entities must continue to disclose information about investments for which fair value is measured using NAV (or its equivalent) so that financial statement users understand the nature and risks of the investments, including whether they are probable of being sold at amounts different from NAV. These disclosures include A general description of the terms and conditions upon which the plan may redeem its investments Significant investment strategies of the investments (however, see Part II of ASU for plan investments that file as a DFE) The amount of the plan s unfunded commitments The circumstances in which an otherwise redeemable investment might not be redeemable An estimate of the time period over which the investee will liquidate underlying assets that include investments that can never be redeemed with the investees but that will pay the plan distributions when the underlying assets are liquidated Any other significant restriction on a plan s ability to sell investments at the measurement date D. Sample disclosure when adopting the new ASUs Under the guidance in ASC , Accounting Changes and Error Corrections, entities are required to disclose the following information (in the year of adoption) when there has been a change in accounting principle 1 : The nature of and reason for the change in accounting principle The method of applying the change, including a description of the prior-period information that has been retrospectively adjusted, if any, and the effect on the financial statements The new guidance under ASUs and will impact each employee benefit plan differently, and the disclosures should be tailored to each individual plan. The following illustration shows a sample disclosure for a plan that is early adopting both ASU and ASU : In May 2015, the FASB issued ASU , Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which exempts investments measured using the net asset value (NAV) practical expedient in ASC 820, Fair Value Measurement, from categorization within the fair value hierarchy. The guidance requires retrospective application and is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, For all other entities, the guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, Early adoption is permitted. Management elected to early 1 Plans that file financial statements with the SEC (for example, plans that file Form 11-K) should disclose the impact on the plan s financial statements for new authoritative accounting guidance that has not yet been adopted (SEC Staff Accounting Bulletin 74 (Topic 11:M), Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period).

6 New Developments Summary 6 adopt the provisions of this new standard. Accordingly, the amendment was retrospectively applied resulting in (insert information regarding the effect, such as prior-period information that has been adjusted). In July 2015, the FASB issued ASU , Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965): Part (I) Fully Benefit-Responsive Investment Contracts, Part (II) Plan Investment Disclosures, Part (III) Measurement Date Practical Expedient. This three-part standard simplifies employee benefit plan reporting with respect to fully benefit-responsive investment contracts and plan investment disclosures, and provides for a measurement-date practical expedient. Parts I and II are effective for fiscal years beginning after December 15, 2015 and should be applied retrospectively, with early application permitted. Part III is effective for fiscal years beginning after December 15, 2015 and should be applied prospectively, with early application permitted. Management has elected to adopt Parts I and II early. Accordingly, the amendments were retrospectively applied resulting in (insert information regarding the effect, such as prior-period information that has been adjusted). Part III is not applicable to this Plan Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP bulletin provides information and comments on current accounting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in the bulletin. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this bulletin. For additional information on topics covered in this bulletin, contact your Grant Thornton LLP professional.

7 New Developments Summary 7 Appendix This appendix features two examples that illustrate the application of certain provisions of the new ASUs. For illustrative purposes, these examples are only for one year. Note that comparative information is required. Example 1 below shows a statement of net assets available for benefits in accordance with the guidance in ASU for a defined contribution retirement plan that directly invests in a FBRIC. Example 1: Statement of Net Assets Available for Benefits-Defined Contribution Plan December 31, 201 Assets: Investments at fair value 1 (Note C) $ Investments at contract value 2 (Note D) Receivables: Employee contributions Notes receivable from participants Total receivables Total assets Liabilities: Accrued expenses Excess contributions payable Total liabilities Net assets available for benefits $

8 New Developments Summary 8 1 Note C should provide the relevant ASC 820 fair value measurement disclosures (including the fair value hiearchy disclosure illustrated in Example 2). If this plan invested in a stable value CCT (an indirect investment in a FBRIC), the plan s interest in the net asset value of the stable value CCT would be reported on this line (and the fund s NAV would be calculated based on the fund s net assets, which includes FBRICs at contract value as required by ASC 946). 2 Note D should describe the relevant disclosures for investment contracts (direct investments in a FBRIC), including total contract value of each type, the nature of each investment contract and how each one operates, the events that would cause the plan to transact at an amount different from contract value including a statement that these events are not probable of occurring, and the events that would allow the issuer to terminate the contracts or settle at an amount different than contract value. Example 2 shows a fair value hierarchy disclosure updated to reflect the guidance in ASU , illustrating how a plan might disclose the amount of investments measured at NAV (or its equivalent) so that financial statement users can reconcile total investments in the fair value hierarchy to total investments measured at fair value on the statement of net assets. This example also illustrates the investments segregated by general type of investment in accordance with ASU Example 2: Fair Value Hierarchy Disclosure Assets at Fair Value as of December 31, 201 Level 1 Level 2 Level 3 Total Mutual funds $ $- - $ Self-directed brokerage account - - Common stock - - U.S. government securities - - Total assets in the fair value hierarchy $ $ $ Investments measured at net asset value Investments at fair value $