Employee benefits plans that have adopted the liquidation basis of accounting are subject to the guidance in ASC 205-30-45-1 with respect to the financial statements required to be prepared. A comparative statement of net assets available for benefits is required by ERISA, such that a plan that has adopted the liquidation basis of accounting in the current year must still present the prior year ongoing statement of net assets available for benefits.

Financial statements and footnotes for the plan would generally include black-line presentation of the two reporting periods (i.e., liquidation basis and ongoing) to highlight the different bases of reporting for the reader, with corresponding labels of “in liquidation” and “ongoing” for each of the columns. A discussion of the basis for presentation should also be included in the footnotes to notify the reader that as a consequence of termination, the plan’s statement of net assets available for benefits and the statement of changes in net assets available for benefits are not comparable with those prior to the liquidation period. In the case of a defined benefit plan, the financial statements will include the statement of accumulated plan benefits and statement of changes in accumulated plan benefits. Alternatively, the financial statements that are prepared on an ongoing basis may be presented separately from the financial statements that are prepared on a liquidation basis.

Employee benefit plans should follow the guidance in BLG 6.5 when recording accounting adjustments to apply the liquidation basis of accounting, including accrued liquidation costs (e.g., audit and actuarial fees), as well as any remeasurement required at each subsequent reporting date following the initial adoption date of the liquidation basis. The disclosure within the notes to the plan financial statements of the accounting adjustments required upon adopting the liquidation basis of accounting should follow the guidance in BLG 6.6.

Subsequent to the adoption of the liquidation basis of accounting and the recognition of the associated initial estimates, a reporting entity may be required to remeasure such estimates based on new information not available as of the imminent date. Such information may, for example, relate to additional costs arising from an unexpected lawsuit or other unanticipated events as a result of the plan termination. Such changes in estimates should be recorded within the statement of changes of net assets available for benefits during the liquidation period.

Examples of accrued liquidation costs by the type of benefit plan are included in Figure BLG 6-6.

Figure BLG 6-6
Defined benefit plan and defined contribution plan accrued liquidation costs

There may be changes in assumptions with respect to a defined benefit plan in liquidation, as illustrated in BLG Figure 6-7. For purposes of this figure, assume that the board of directors approved the termination of the plan on May 17, 20X1.

Figure BLG 6-7
Defined benefit plan changes in assumptions ¹

Certain transactions will continue in the liquidation period, such as net appreciation (depreciation) in the fair value of investments and benefit payments. In the case of cash balance plans, the interest and/or pay credits would also continue to be accrued in the liquidation period at the present value of accumulated plan benefits because they are earned due to the passage of time.

Investments reported at contract value should be evaluated to determine whether an adjustment to their carrying values is triggered as a result of the adoption of the liquidation basis of accounting. For plans with beginning of year actuarial information in the ongoing period, the present value of accumulated plan benefits and related actuarial assumptions would need to be updated to an end-of-year valuation as part of the adjustments to adopt the liquidation basis of accounting on the imminent date. While ASC 960-205-45 permits the presentation at the beginning of the year, it also requires disclosure of unusual or infrequent events occurring after the latest benefit information date. Therefore, the impact of the plan’s termination on the obligation information is required to be presented or disclosed.

For employee benefit plan financial statements presented on the liquidation basis of accounting, the financial statements will continue to have the “look” of a standard set of financial statements in that there is no activity presented in a “remeasurement of assets and liabilities” financial statement line item as is the case for entities in liquidation that are not employee benefits plans.

For Form 5500 purposes, the Schedule H – Financial Information (Schedule H) should follow the financial statements. However, depending on the treatment of the black-line accruals on the Schedule H, there may be a need to include a reconciling footnote to the financial statements. Additionally, the Schedule SB – Single Employer Defined Benefit Actuarial Information (Schedule SB) should only include the current year contributions, not future contributions. No reconciling footnote is needed in the financial statements for Schedule SB.

Often, the terminating plan’s final day of operation does not coincide with the traditional year-end date of the plan. In these instances, the entity will need to file a separate Form 5558 – Application for Extension of Time (Form 5558) from its other plans (as they do not have the same year end) and the due date of the Form 5500 will be earlier than the traditional 15th of the extended month.

A defined benefit plan’s provisions may direct excess assets at termination to be distributed in several ways, such as being allocated to participants in the form of an increased benefit, paying the plan’s expenses, transferred to another plan, or reverted to the plan sponsor. Plan management should consider disclosure of the plan’s provisions for the treatment of excess plan assets in the notes to the financial statements. Excess assets should be determined after the defined benefit plan is fully liquidated as it may not be possible to estimate whether there will be excess assets prior to full liquidation.