Recent standards have been updated that have implications for employee benefit plan auditors and accountants.
Securities lending in employee benefit plans
Auditors of employee benefit plans need to be aware of the disclosure requirements for offsetting assets and liabilities. The appropriate disclosures and the original scope were provided in Accounting Standards Update (ASU) 2011-11, Disclosures about Offsetting Assets and Liabilities.
ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, clarified the scope of the disclosures after questions were raised about the original scope in ASU 2011-11.
Offsetting arrangements are common in defined benefit plans as a result of securities lending arrangements. While less common, securities lending with offsetting arrangements are also found in defined contribution plans.
Securities lending arrangements typically lend investments to a third party for a period of time in exchange for collateral. They also permit offsetting of positions in some circumstances by means of an enforceable master netting agreement.
As discussed above, if a plan offsets or is subject to an enforceable master netting agreement, the required ASU 2011-11 disclosures apply.
While these disclosure requirements have been in effect for a couple of years (effective for annual reporting periods beginning on or after Jan. 1, 2013), the AICPA Employee Benefit Plan Expert Panel has noted noncompliance with disclosure requirements in this area. A lack of awareness probably explains some of the noncompliance. Accordingly, it’s important to re-emphasize these requirements for year-end reports.
Mortality tables and related Technical Practice Aid
U.S. GAAP (generally accepted accounting principles) requires a “best estimate” when considering assumptions such as life expectancy. Selecting appropriate assumptions is critical to measuring benefit plan components and can significantly affect a plan sponsor’s financial statements.
In October 2014, the Society of Actuaries (SOA) issued the updated “RP-2014 Mortality Tables Report.” While use of the SOA tables is not explicitly required, the most current RP tables are almost universally accepted as the “best estimate” for mortality.
The presumption is that the updated tables should be used immediately in actuarial calculations for financial reporting. Sponsors of defined benefit plans, their actuaries, and auditors should discuss these new tables and the potential effect on benefit obligations as soon as possible.
The AICPA issued Technical Practice Aid (TPA) 3700.01, Effect of New Mortality Tables on Nongovernmental Employee Benefit Plans and Nongovernmental Entities that Sponsor Employee Benefit Plans. The TPA clarifies that all information available through the date of the financial statements is available to be issued and should be evaluated to determine if the information provides additional evidence about conditions that existed at the balance sheet date. Therefore, new mortality tables should be used whenever possible.
Net asset value per share of investment
Some employee benefit plans will invest in entities that do not have a readily determinable fair value (as defined by FASB ASC 820) but do provide net asset value (NAV) per share, which is based on the fair value of the underlying investments. FASB ASC 820 permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the NAV per share of the investment (FASB ASC 820-10-35-59).
On May 1, 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent). The amendments in ASU 2015-07 remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient.
Instead, the amounts measured using the NAV per share (or its equivalent) must be provided to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
In addition, the amendments in ASU 2015-07 remove the requirement to make certain disclosures (FASB ASC 820-10-50-6A) for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.
The amendments in ASU 2015-07 also removed a disclosure requirement (FASB ASC 820-10-50-6A(g)) that related solely to investments that were probable of being sold for an amount different from NAV and were therefore not valued using the practical expedient.
The amendments in ASU 2015-07 apply to reporting entities that elect to measure the fair value of an investment within the scope of FASB ASC 820-10-15-4 through 15-5 using the NAV per share (or its equivalent) practical expedient in FASB ASC 820-10-35-59.
For public business entities, the amendments to ASU 2015-07 are effective for fiscal years beginning after Dec. 15, 2015, as well as any interim period within those fiscal years. For other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2016, and any interm period within those fiscal years.
A reporting entity should apply the amendments retrospectively to all periods presented in the financial statements. This requirement means that an investment for which fair value is measured using the NAV per share practical expedient must be removed from the fair value hierarchy in all periods presented. Earlier application is permitted. – Bob Durak, CPA, CGMA, Director of AICPA Center for Plain English Accounting.