The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update 2015-12 (ASU 2015-12), which will have a significant impact on employee benefit plan financial statements.
Though the amendments in ASU 2015-12 aren’t effective until fiscal years beginning after December 15, 2015, earlier adoption is permitted. Once implemented, these updates will simplify financial reporting.
Here’s a summary of the amendments:
Part I: Fully Benefit-Responsive Investment Contracts
Part I simplifies reporting of investments that are classified as fully benefit-responsive investment contracts.
Under the amendments, those investment contracts are measured, presented, and disclosed only at contract value. Once adopted, retrospective application is appropriate.
Previously, generally accepted accounting principles (GAAP) required investment contracts to be measured at fair value for presentation and disclosure purposes while acknowledging contract value as the relevant measure. Therefore, the financial statements presented an adjustment from fair value to contract value. There are also simplifications to the related investment contract disclosures. While the footnotes still must describe the nature of the investment contract and how it operates, some previously required disclosures were eliminated, including the requirement to disclose information on the crediting rate and average yield for the investment contracts.
In addition, these simplifications also apply to investment contracts held in a master trust.
Part II: Plan Investment Disclosures
Previously, nonparticipant-directed investments were grouped by general type in the statement of net assets available for benefits and in certain footnotes; they were required to be grouped and disclosed on the basis of nature, characteristics, and risk in the fair value footnote.
Participant-directed investments could be presented as a single line item in the statement of net assets available for benefits (and must now be presented by general type) but were also grouped and disclosed on the basis of nature, characteristics, and risk in the fair value footnote.
Under the amendments, investments—both nonparticipant-directed and participant-directed—are grouped only by general type (mutual funds, government securities, common stocks, and pooled separate accounts, for example) throughout the financial statements and footnotes, eliminating the need to disaggregate investments in multiple ways.
Investment contracts measured at contract value should also be separately presented in the statement of net assets available for benefits by type under the caption “investments at contract value.”
The following disclosures were eliminated:
- Disclosure of net appreciation in fair value of investments by investment type. It’s now a single line item on statement of changes in net assets available for benefits.
- Disclosure of investments by nature, characteristics, and risk in the fair value hierarchy. Investment breakout is now required only by general type, such as a mutual fund, collective trust, or common stock.
- Identification of individual investments that represent 5 percent or more of net assets available for benefits.
- Disclosure of investment strategy for investments measured using the net asset value (NAV) practical expedient for investment funds filing as a direct filing entity with the Department of Labor.
Application for the provisions in Part II is also retrospective.
Part III: Measurement Date Practical Expedient
Not as widely applicable as the changes discussed above, Part III impacts plans with fiscal year-ends when the fiscal period doesn’t coincide with a month-end.
The amendments provide a practical expedient to permit plans to measure investments and related activity as of a month-end date that’s closest to the fiscal year-end.
Application of Part III provisions is on a prospective basis only.
Other Considerations
You may also consider adopting ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which was issued in May 2015.
For nonpublic entities, this amendment is effective for fiscal years beginning after December 15, 2016; however, early adoption is permitted.
For plans holding certain investments for which fair value is measured using the NAV-per-share practical expedient (pooled separate accounts, collective trusts, hedge funds, certain private equity funds), this amendment removes the requirement to categorize these types of investments within the fair value hierarchy.
These investments may be grouped together on a line titled “Investments Measured at Net Asset Value” directly below the “Total Assets at Fair Value” summation of the hierarchy table. The summation of these two lines should equal the total investments on the statement of net assets available for benefits.
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These amendments will have a significant impact on employee benefit plan financial statements. Contact your Moss Adams professional to help you understand how these changes will affect your particular plan and to determine the ideal timing for adopting these updates.