After years of disclosures for employee benefit plan financial statements continually expanding, the Financial Accounting Standards Board (FASB) unanimously agreed to commence activities to improve accounting for employee benefit plans. At a recent meeting on November 5, 2014, the FASB discussed the unique features of employee benefit plans, the users of employee benefit plan financial statements and the timing of the annual reporting requirements under the Employee Retirement Income Security Act of 1974 (ERISA). Users of employee benefit plan financial statements include not only plan sponsors, trustees, and plan participants, but also members of the Department of Labor, Internal Revenue Service, Pension Benefit Guaranty Corporation, and U.S. Securities and Exchange Commission (SEC) (for Form 11-K filers). Further, employee benefit plan financial statements that are filed with Form 5500 are due seven months after year-end and that deadline can be extended an additional two and a half months. Meanwhile, employee benefit plan financial statements that file with the SEC using the ERISA format are due 180 days after a plan’s year-end, while those filed under the SEC format are due 90 days after year-end. Clearly, employee benefit plan financial statements are not useful to those attempting to make investment decisions due to the timing of financial statement issuance.
The following three issues have been identified as resulting in significant challenges when applying current accounting guidance and are in need for simplification within the employee benefit plan accounting requirements:
- Fair value hierarchy – Consider the extent of detail necessary for participant-directed investments and disclosures about appreciation/depreciation.
- Classes of assets – Consider conflicting disclosure requirements within accounting principles generally accepted in the United States for ways to disaggregate assets. Under Accounting Standards Codification Topic 820, assets are classified based upon nature, characteristics and risks, and under plan accounting topics, assets are classified based upon general type.
- Fully benefit-responsive investment contracts – Consider whether fully benefit-responsive investments should be measured at contract value, which is how most are reported on the Form 5500, or at fair value, which is how they are measured under GAAP.
This agenda item was moved to the Emerging Issues Task Force (EITF), and the FASB encouraged the EITF to consider additional projects related to employee benefit plan accounting. Stay tuned for additional information as these items are discussed and decisions are made.
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