8. Supersede paragraphs 962-325-45-1 through 45-4 and their related heading and paragraph 962-325-45-7 and amend paragraph 962-325-45-5 and supersede its related heading, with a link to transition paragraph 962-10-65-2, as follows: [Note: Paragraph 962-325-45-5 also contains amendments from Part I on fully benefit-responsive investment contracts.]
Plan Accounting—Defined Contribution Pension Plans— Investments—Other
Other Presentation Matters
> Participant-Directed Investments
962-325-45-1 Paragraph superseded by Accounting Standards Update 2015-12 (Part II). Paragraphs 962-325-45-2 through 45-4 and 962-325-45-7 apply to all defined contribution plans with participant-directed investment programs.
962-325-45-2 Paragraph superseded by Accounting Standards Update 2015-12 (Part II). Defined contribution plans are not required to present participant-directed plan investments in the statement of net assets available for benefits by general type.
962-325-45-3 Paragraph superseded by Accounting Standards Update 2015-12 (Part II). Participant-directed plan investments may be shown in the aggregate, as a one-line item, in the statement of net assets available for benefits.
962-325-45-4 Paragraph superseded by Accounting Standards Update 2015-12 (Part II). The presentation shall indicate whether the fair values of the investments have been measured by quoted market prices in an active market or were determined otherwise.
> Nonparticipant-Directed Investments
962-325-45-5 The presentation of non-participant-directed investments
Investments measured using fair value in the statement of net assets available for benefits or in the notes shall be
detailed
presented by general type, such as the following:
a. Registered investment companies (for example, mutual funds)
b. Government securities
c. Common-collective trusts
d. Pooled separate accounts
e. Short-term securities
f. Corporate bonds
g. Common stocks
h. Mortgages
j. Real estate.
k. Self-directed brokerage accounts (that is, an investment option that allows participants to select investments outside the plan’s core options).
For the presentation of fully benefit-responsive investment contracts, which are measured at contract value, see paragraphs 962-325-35-5A and 962-325-50-3.
962-325-45-6 The presentation shall indicate whether the fair values of the investments have been measured by quoted market prices in an active market or were determined otherwise.
962-325-45-7 Paragraph superseded by Accounting Standards Update 2015-12 (Part II). In addition to the requirement to identify those investments that represent 5 percent or more of net assets available for benefits (see paragraph 962-325-501A), defined contribution plans shall specifically identify those investments that represent 5 percent or more of net assets available for benefits that are non-participant-directed.
9. Amend paragraphs 962-325-50-1 and 962-325-50-6 through 50-7, supersede paragraph 962-325-50-1A, and add paragraph 962-325-50-9 and its related heading, with a link to transition paragraph 962-10-65-2, as follows:
[Note: Paragraph 962-325-50-6 also contains amendments from Part I on fully benefit-responsive investment contracts.]
Disclosure
962-325-50-1 Disclosure of a defined contribution plan’s accounting policies shall include a description of the valuation techniques and inputs used to measure the fair value less costs to sell, if significant, of investments (as required by Section 820-10-50) and a description of the methods and significant assumptions used to measure the reported value of insurance contracts (if any). However, defined contribution pension plans are exempt from the requirements in paragraph 820-10-50-2B(a) to disaggregate assets by nature, characteristics, and risks. The disclosures of information by classes of assets required by Section 820-10-50 shall be provided by general type of plan assets consistent with paragraph 962-325-45-5.
962-325-50-1A Paragraph superseded by Accounting Standards Update 2015-12 (Part II).Financial statement disclosures also shall include the identification of investments that represent 5 percent or more of the net assets available for benefits as of the end of the year. Consideration should be given to disclosing provisions of insurance contracts included as plan assets that could cause an impairment of the asset value upon liquidation or other occurrence (for example, surrender charges and fair value adjustments).
> Master Trust Investments
962-325-50-6 In the notes to financial statements the investments of a master trust
measured using fair value shall be
detailed
presented by general type, such as the following, as of the date of each statement of net assets available for benefits presented:
a. Government securities
b. Short-term securities
c. Corporate bonds
d. Common stocks
e. Mortgages
f. Real estate.
g. Self-directed brokerage accounts (that is, an investment option that allows participants to select investments outside the plan’s core options).
For the presentation of fully benefit-responsive investment contracts, which are measured at contract value, see paragraphs 962-325-35-5A and 962-325-50-3.
962-325-50-7 The
total net change in the fair value of
each significant type of investment
investments of the master trust and total investment income of the master trust by type, for example, interest, and dividends,
also shall
also
be disclosed in the notes for each period for which a statement of changes in net assets available for benefits is presented.
> Investments Measured Using the Net Asset Value per Share Practical Expedient
962-325-50-9 If an investment is measured using the net asset value per share (or its equivalent) practical expedient in paragraph 820-10-35-59 and that investment is in a fund that files U.S. Department of Labor Form 5500 as a direct filing entity, disclosure of that investment’s significant investment strategy, as discussed in paragraph 820-10-50-6A(a), is not required.
10. Supersede paragraph 962-325-55-16 and its related heading and add paragraph 962-325-55-17 and its related heading, with a link to transition paragraph 962-10-65-2, as follows:
[For ease of readability, superseded paragraph 962-325-55-16 is not shown here.]
Implementation Guidance and Illustrations
> Illustrations
> > Example 2: Illustrative Financial Statements and Disclosures of a Defined Contribution Plan
962-325-55-17 This Example illustrates certain applications of the provisions of this Subtopic to the annual financial statements of a defined contribution plan. The following are illustrative financial statements and disclosures.
Key assumptions in the Example include:
a. The stable value collective trust fund that is referenced throughout the financial statements files Form 5500 as a direct filing entity, and, as a result, the plan has not disclosed that investment’s significant investment strategies as allowed under paragraph 962-325-50-9.
b. The plan assets are measured as of the plan’s fiscal year-end on December 31, 20X1, and December 31, 20X0.
[For ease of readability, the new tables are not underlined.]
XYZ Company 401(k) Plan
Statements of Net Assets Available for Benefits
XYZ Company 401(k) Plan
Statement of Changes in Net Assets Available for Benefits
Notes to Financial Statements
A. Description of Plan
The following description of the XYZ Company (Company) 401(k) Plan (Plan) provides only general information. Participants should refer to the plan agreement for a more complete description of the Plan’s provisions.
1. General. The Plan is a defined contribution plan covering all full-time employees of the Company and its wholly owned subsidiaries who have 1 year of service and are age 21 or older. The Plan is subject to the provisions of the Employment Retirement Income Security Act of 1974 (ERISA). In November 20X1, the Company sold its wholly owned subsidiary, Sub Company. As a result of its sale, on December 1, 20X1, the accounts of all Sub Company employees were transferred out of the Plan to GHI Plan (an existing plan controlled by the acquiring company).
2. Contributions. Each year, participants may contribute up to XX percent of pretax annual compensation, as defined in the Plan. Participants who have attained age 50 before the end of the Plan year are eligible to make catch-up contributions. Participants also may contribute amounts representing distributions from other qualified defined benefit or defined contribution plans (rollover). Participants direct the investment of their contributions into various investment options offered by the Plan. The Plan includes an auto-enrollment provision whereby all newly eligible employees are automatically enrolled in the Plan unless they affirmatively elect not to participate in the Plan. Automatically enrolled participants have their deferral rate set at 2 percent of eligible compensation and their contributions invested in a designated balanced fund until changed by the participant. The Company contributes 25 percent of the first 6 percent of base compensation that a participant contributes to the Plan. The matching Company contribution is invested as directed by the participant.
3. Participant accounts. Each participant’s account is credited with the participant’s contributions and the Company’s matching contributions, as well as allocations of Plan earnings. Participant accounts are charged with an allocation of administrative expenses. Allocations are based on participant earnings, account balances, or specific participant transactions, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
4. Vesting. Participants are vested immediately in their contributions plus actual earnings on the contributions. Vesting in the Company’s contribution portion of their accounts is based on years of continuous service. A participant is 100 percent vested after 3 years of credited service.
5. Notes receivable from participants. Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50 percent of their account balance. The loans are secured by the balance in the participant’s account. The loan interest rate, determined quarterly, is set at 2 percent above the prime rate, as defined. Principal and interest is paid ratably through monthly payroll deductions.
6. Payment of benefits. On termination of service due to death, disability, or retirement, a participant may elect to receive either a lump-sum amount equal to the value of the participant’s vested interest in his or her account or annual installments over a 10-year period. For termination of service for other reasons, a participant may receive the value of the vested interest in his or her account as a lump-sum distribution.
7. Forfeited accounts. At December 31, 20X1, and 20X0, forfeited nonvested accounts totaled $7,500 and $5,000, respectively. These accounts will be used to reduce future employer contributions. Also, in 20X1, employer contributions were reduced by $5,000 from forfeited nonvested accounts.
B. Summary of Accounting Policies
Basis of Accounting
The financial statements of the Plan are prepared on the accrual basis of accounting.
Investments held by a defined contribution plan are required to be reported at fair value, except for fully benefit-responsive investment contracts. Contract value is the relevant measure for the portion of the net assets available for benefits of a defined contribution plan attributable to fully benefit-responsive investment contracts because contract value is the amount participants normally would receive if they were to initiate permitted transactions under the terms of the Plan.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes in those assets and liabilities, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Investment Valuation and Income Recognition
Investments are reported at fair value (except for fully benefit-responsive investment contracts, which are reported at contract value). Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Plan’s Investment Committee determines the Plan’s valuation policies utilizing information provided by the investment advisers, custodians, and insurance company. See Note C for discussion of fair value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation includes the Plan’s gains and losses on investments purchased and sold as well as held during the year.
Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Interest income is recorded on the accrual basis. Related fees are recorded as administrative expenses and are expensed when they are incurred. No allowance for credit losses has been recorded as of December 31, 20X1, or 20X0. Delinquent participant loans are recorded as distributions on the basis of the terms of the Plan agreement.
Excess Contributions Payable
Amounts payable to participants for contributions in excess of amounts allowed by the Internal Revenue Service are recorded as a liability with a corresponding reduction to contributions. The Plan distributed the 20X1 excess contributions to the applicable participants before March 15, 20X2.
Payment of Benefits
Benefits are recorded when paid.
Expenses
Certain expenses incurred maintaining the Plan are paid directly by the Company and are excluded from these financial statements. Investment-related expenses are included in net appreciation of fair value of investments.
Subsequent Events
The Plan has evaluated subsequent events through [insert date], the date the financial statements were available to be issued.
C. Fair Value Measurements
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy under Topic 820 are described as follows:
[For ease of readability, the new table is not underlined.]
Level 1 |
Inputs to the valuation methodology are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Plan can access at the measurement date. |
Level 2 |
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as:
- Quoted prices for similar assets or liabilities in active markets
- Quoted prices for identical or similar assets or liabilities in inactive markets
- Inputs other than quoted prices that are observable for the asset or liability
- Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
Level 3 |
Inputs that are unobservable inputs for the asset or liability. |
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 20X1, and 20X0.
1. Common stocks. Valued at the closing price reported on the active market on which the individual securities are traded.
2. Self-directed brokerage accounts. Accounts primarily consist of mutual funds and common stocks that are valued on the basis of readily determinable market prices.
3. Corporate bonds. Valued using pricing models maximizing the use of observable inputs for similar securities. This includes basing the value on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, those corporate bonds are valued under a discounted cash flow approach that maximizes observable inputs, such as current yields or similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks.
4. Mutual funds. Valued at the daily closing price as reported by the fund. Mutual funds held by the Plan are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
5. Stable value collective trust fund. A stable value fund that is composed primarily of fully benefit-responsive investment contracts that is valued at the net asset value of units of the bank collective trust. The net asset value is used as a practical expedient to estimate fair value. This practical expedient would not be used if it is determined to be probable that the fund will sell the investment for an amount different from the reported net asset value. Participant transactions (purchases and sales) may occur daily. If the Plan initiates a full redemption of the collective trust, the issuer reserves the right to require 12 months’ notification in order to ensure that securities liquidations will be carried out in an orderly business manner.
6. U.S. government securities. Valued using pricing models maximizing the use of observable inputs for similar securities.
The following table sets forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of December 31, 20X1, and 20X0. Classification within the fair value hierarchy table is based on the lowest level of any input that is significant to the fair value measurement.
[For ease of readability, the new tables are not underlined.]
Transfers between Levels
For years ended December 31, 20X1, and 20X0, there were no significant transfers between Levels 1 and 2 and no transfers in or out of Level 3.
Changes in Fair Value of Level 3 Assets and Related Gains and Losses
The following table sets forth a summary of changes in the fair value of the Plan’s Level 3 assets for the year ended December 31, 20X1.
[For ease of readability, the new table is not underlined.]
Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements
The following table represents the Plan’s Level 3 financial instruments, the valuation techniques used to measure the fair value of those financial instruments, and the significant unobservable inputs and the ranges of values for those inputs.
[For ease of readability, the new table is not underlined.]
Investments Measured Using the Net Asset Value per Share Practical Expedient
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient as of December 31, 20X1, and 20X0, respectively. There are no participant redemption restrictions for these investments; the redemption notice period is applicable only to the Plan.
[For ease of readability, the new table is not underlined.]
D. Fully Benefit-Responsive Investment Contracts
The Plan holds a portfolio of investment contracts that comprises a traditional investment contract and a portfolio of synthetic investment contracts. These contracts meet the fully benefit-responsive investment contract criteria and therefore are reported at contract value. Contract value is the relevant measure for fully benefit-responsive investment contracts because this is the amount received by participants if they were to initiate permitted transactions under the terms of the Plan. Contract value represents contributions made under each contract, plus earnings, less participant withdrawals, and administrative expenses. The following represents the disaggregation of contract value between types of investment contracts held by the Plan.
[For ease of readability, the new table is not underlined.]
The key difference between a synthetic investment contract and a traditional investment contract is that the Plan owns the underlying assets of the synthetic investment contract. A synthetic investment contract includes a wrapper contract, which is an agreement for the wrap issuer, such as a bank or insurance company, to make payments to the Plan in certain circumstances. The wrapper contract typically includes certain conditions and limitations on the underlying assets owned by the Plan. With traditional investment contracts, the Plan owns only the contract itself. Synthetic and traditional investment contracts are designed to accrue interest based on crediting rates established by the contract issuers.
The synthetic investment contracts held by the Plan include wrapper contracts that provide a guarantee that the credit rate will not fall below 0 percent. Cash flow volatility (for example, timing of benefit payments) as well as asset underperformance can be passed through to the Plan through adjustments to future contract crediting rates. Formulas are provided in each contract that adjusts renewal crediting rates to recognize the difference between the fair value and the book value of the underlying assets. Crediting rates are reviewed monthly for resetting.
The traditional investment contract held by the Plan is a guaranteed investment contract. The contract issuer is contractually obligated to repay the principal and interest at a specified interest rate that is guaranteed to the Plan. The crediting rate is based on a formula established by the contract issuer but may not be less than 4 percent. The crediting rate is reviewed on a quarterly basis for resetting. The contract cannot be terminated before the scheduled maturity date.
The Plan’s ability to receive amounts due in accordance with fully benefit-responsive investment contracts is dependent on the third-party issuer’s ability to meet its financial obligations. The issuer’s ability to meet its contractual obligations may be affected by future economic and regulatory developments.
Certain events might limit the ability of the Plan to transact at contract value with the contract issuer. These events may be different under each contract. Examples of such events include the following:
1. The Plan’s failure to qualify under Section 401(a) of the Internal Revenue Code or the failure of the trust to be tax-exempt under Section 501(a) of the Internal Revenue Code
2. Premature termination of the contracts
3. Plan termination or merger
4. Changes to the Plan’s prohibition on competing investment options
5. Bankruptcy of the plan sponsor or other plan sponsor events (for example, divestitures or spinoffs of a subsidiary) that significantly affect the Plan’s normal operations.
No events are probable of occurring that might limit the ability of the Plan to transact at contract value with the contract issuers and that also would limit the ability of the Plan to transact at contract value with the participants.
In addition, certain events allow the issuer to terminate the contracts with the Plan and settle at an amount different from contract value. Those events may be different under each contract. Examples of such events include the following:
1. An uncured violation of the Plan’s investment guidelines
2. A breach of material obligation under the contract
3. A material misrepresentation
4. A material amendment to the agreements without the consent of the issuer.
E. Rollover Contributions
On January 20, 20X1, XYZ Company acquired ABC Company and approved an amendment to terminate the ABC 401(k) Plan effective November 1, 20X1. All participants in the ABC 401(k) Plan became 100 percent vested in that plan upon termination and were provided with the option to have their account balance rolled into any qualified plan (including the Plan) or IRA, receive a lump-sum distribution, or be paid through an annuity contract. An aggregate of $XXX,000 was rolled into the Plan during the year ended December 31, 20X1, and is included in rollovers on the statement of changes in net assets available for benefits.
F. Related-Party Transactions and Party-in-Interest Transactions
Certain Plan investments are shares of mutual funds managed by Prosperity Investments. Prosperity Investments is the trustee as defined by the Plan, and, therefore, these transactions qualify as party-in-interest transactions. Fees incurred and paid directly by the Plan for the investment management services were $10,000.
G. Plan Termination
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants would become 100 percent vested in their employer contributions.
H. Tax Status
The IRS has determined and informed the Company by a letter dated August 30, 20XX, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code. Although the Plan has been amended since receiving the determination letter, the Plan administrator and the Plan’s tax counsel believe that the Plan is designed, and is currently being operated, in compliance with the applicable requirements of the Internal Revenue Code and, therefore, believe that the Plan is qualified and that the related trust is tax-exempt.
I. Risks and Uncertainties
The Plan invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market, and credit risks. Because of the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.
J. Reconciliation of Financial Statements to Form 5500
The following is a reconciliation of net assets available for benefits per the financial statements at December 31, 20X1, and 20X0, to Form 5500:
[For ease of readability, the new tables are not underlined.]
The following is a reconciliation of benefits paid to participants per the financial statements for the year ended December 31, 20X1, to Form 5500:
Amounts allocated to withdrawing participants are recorded on Form 5500 for benefit claims that have been processed and approved for payment before year-end, but not yet paid as of that date.