, Compensation–Retirement Benefits
, provides guidance on employers’ accounting and reporting for pension and other postretirement benefits; and ASC 960
, Plan Accounting–Defined Benefit Pension Plans
; ASC 962
, Plan Accounting–Defined Contribution Pension Plans
; and ASC 965
, Plan Accounting–Health and Welfare Benefit Plans
, provide guidance for accounting and reporting in the separate plan financial statements.
In accordance with plan guidance, plan investments—including equity and debt securities, real estate, and other investments—should be measured at fair value using the principles in ASC 820
. ASC 820
does not apply to the measurement of pension and other postretirement benefit obligations because the liabilities for those obligations are not measured at fair value.
In evaluating the impact of ASC 820
on plan assets, an employer or plan should consider the following guidance.
Publicly-traded equity and debt securities
As noted in FV 184.108.40.206
, a reporting entity should have a consistent policy for measuring the fair value of plan assets when there is a bid-ask spread.
: Restrictions on the sale or transferability (i.e., a restricted security) of a security only impact the fair value if the restriction is not considered entity-specific. The fair value measurement should be adjusted to reflect the discount a market participant would require as a result of the restriction, regardless of the duration of the restriction. See FV 6.2.4
for further discussion.
Investments reported at NAV
Certain investments may be held in fund investment structures that are reported at NAV. As noted in FV 6.2.6, a practical expedient to measure fair value at NAV, without adjustment, is available to investments that meet certain criteria. These may include fund investments, open-ended mutual funds, alternative investment funds, and private equity funds.
When the practical expedient is not utilized, some employers/plans may need to reconsider their estimates of fair value when illiquid investments, such as real estate, are a significant component of fund assets. See discussion of unobservable inputs in FV 4.5
There are certain investment arrangements common to plans such as investments in master trusts or separate (not pooled) accounts which may appear to operate as a fund vehicle, but the plan’s trust actually owns the underlying investments of the vehicle. For such arrangements, the fair value of the underlying investments would be the appropriate starting point when determining the fair value measurement. In these investments, employers and plan management need to consider the terms of the investment arrangement to understand whether they have an interest in the underlying assets or in a pooled fund vehicle.
states that the fair value of an asset or liability generally should not be adjusted for transaction costs; however, ASC 820
also states that transaction costs should be accounted for in accordance with the provisions of other accounting pronouncements. ASC 715-30-35-50
specifies that the fair value of plan assets should be reduced by brokerage commissions and other costs normally incurred in a sale, if those costs are significant. Therefore, employers should reduce the fair value of plan assets by such “selling costs” if those costs are significant.
Many US employers and plans use information provided by third parties as part of their process for developing fair value estimates. Because employers and plan management are ultimately responsible for the valuations (even in a limited-scope ERISA audit), they should develop an understanding of the valuation methodology and practices by those third parties. Employers and plan management should also understand their third-party information providers’ approach for generating the information required to meet the disclosures, including their methodology for determining the appropriate classification within the fair value hierarchy. The AICPA Employee Benefit Plans Audit Quality Center Advisory, Valuing and Reporting Plan Investments, provides guidance regarding plan management responsibilities of valuation and reporting of investments.
Investments in insurance contracts
provides guidance for employers as to which specific types of insurance contracts should be measured at fair value and when other values, such as cash surrender value, which is typically calculated by insurance companies, or conversion value, are appropriate.
The following excerpt provides guidance for employer’s accounting of insurance contracts in pension plans.
Insurance contracts that are in substance equivalent to the purchase of annuities shall be accounted for as such. Other contracts with insurance entities shall be accounted for as investments and measured at fair value. For some contracts, the best available evidence of fair value may be contract value. If a contract has a determinable cash surrender value or conversion value, that is presumed to be its fair value.
Similar guidance exists for other postretirement benefit plans in ASC 715-60
Other contracts with insurance entities may not meet the definition of an insurance contract because the insurance entity does not unconditionally undertake a legal obligation to provide specified benefits to specified individuals. Those contracts shall be accounted for as investments and measured at fair value. If a contract has a determinable cash surrender value or conversion value, that is presumed to be its fair value. For some contracts, the best available estimate of fair value may be contract value.
The fair value of such contracts as determined for ASC 715
purposes will not necessarily be the same as fair value of such contracts determined under ASC 960
, ASC 962
, or ASC 965
for the plan’s financial statements. Hence, there will often be a lack of symmetry between employer accounting and plan accounting for these contracts.
Practical expedient – employers
Employers with fiscal year-ends that do not fall on a month-end may measure the fair value of the defined benefit plan assets and obligations as of the month-end that is closest to the entity’s fiscal year-end and to follow that measurement date methodology consistently from year to year.
If a contribution to plan assets is made or other significant event (as defined in ASC 715-30-35-66
) occurs between the date used to measure plan assets and benefit obligations and a reporting entity’s fiscal year-end, the entity would adjust the funded status recognized on the balance sheet to reflect the contribution as an addition to plan assets (for contributions made after the measurement date but before fiscal year-end) or as a deduction from plan assets (for contributions made after fiscal year-end but before the measurement date). Also, the reporting entity would not adjust the classes of plan assets and the fair value hierarchy for the effects of the contribution. Instead, an employer would present the amount of the contribution separate from the classes of plan assets and the fair value hierarchy to permit reconciliation to the ending balance of the fair value of plan assets.
The practical expedient is also available for interim remeasurements of significant events.
Practical expedient – plans
Employee benefit plans may apply the same measurement date practical expedient established for plan sponsors. This enables the employee benefit plans to measure their plan assets on the nearest month-end date to the fiscal year-end. If the measurement date practical expedient is elected, disclosure for significant events between the fiscal year end and measurement date, including contributions and distributions is required.