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ASC 715-30-20 defines plan assets.

Excerpt from ASC 715-30-20

Plan assets: Assets—usually stocks, bonds, and other investments—that have been segregated and restricted, usually in a trust, to provide for pension benefits. The amount of plan assets includes amounts contributed by the employer, and by employees for a contributory plan, and amounts earned from investing the contributions, less benefits paid.
Plan assets ordinarily cannot be withdrawn by the employer except under certain circumstances when a plan has assets in excess of obligations and the employer has taken certain steps to satisfy existing obligations.
Assets not segregated in a trust or otherwise effectively restricted so that they cannot be used by the employer for other purposes are not plan assets even though it may be intended that such assets be used to provide pensions. If a plan has liabilities other than for benefits, those nonbenefit obligations may be considered as reductions of plan assets.
Amounts accrued by the employer but not yet paid to the plan are not plan assets. Securities of the employer held by the plan are includable in plan assets provided they are transferable.

Plan assets are assets that have been contributed to the plan by the employer, or by plan participants in a contributory plan, and may be sold or transferred by the plan (i.e., the employer no longer directly controls the assets). Thus, transferable employer securities held by the plan are included in plan assets, but plan receivables for contributions due from the employer, and securities that are restricted as to transfer, are excluded. The securities held by the plan should be transferable in their present state–not, for example, upon conversion into another security. Similar considerations would also apply to nonfinancial assets contributed by the employer to the plan (e.g., real estate).
Plan assets generally cannot be withdrawn by an employer except in situations when they exceed plan obligations and the employer has taken certain steps to satisfy those obligations. The issue of whether assets must be segregated in a manner that makes them "bankruptcy proof" to qualify as plan assets is addressed in ASC 715-60-55-26. The guidance indicates it is not necessary to determine that a trust is bankruptcy proof for the assets in the trust to qualify as plan assets; however, assets held in a trust that explicitly provides that such assets are available to the general creditors of the employer in the event of the employer's bankruptcy (e.g., rabbi trusts) do not qualify as plan assets.

2.6.1 Measurement of plan assets

Plan assets should be measured at fair value in accordance with ASC 820, Fair Value Measurement. These values should be reduced by brokerage commissions and other costs normally incurred in a sale if those costs are significant (similar to fair value less cost to sell).
ASC 715 permits the use of a calculated "market-related value" of plan assets to be used in developing the expected return on plan assets (see PEB 3.2.5) and for determining the amount of gains and losses subject to recognition (see PEB 3.2.7). This approach can mitigate volatility in expected asset returns and gains/losses because it delays the impact of asset-related gains and losses on the calculation of the expected return assumption. Use of the calculated market-related value for purposes of determining the expected return on plan assets is an accounting policy election. See further discussion of market-related value in PEB 2.6.5. Importantly, regardless of whether a calculated market-related value of plan assets is used for determining benefit costs, the funded status of the plan is still measured based on the fair value of plan assets determined under ASC 820.

2.6.2 OPEB plan assets

Unlike pension plans, which, subject to IRS qualification requirements, provide the opportunity for employers to deduct contributions to the plan currently and are subject to minimum funding requirements under ERISA, most employers do not prefund their other postretirement benefit plans. However, some employers may set aside some assets for OPEB benefits. ASC 715-60-55-26 through ASC 715-60-55-28 provides guidance to assess whether those assets should be considered “plan assets” and included in the determination of the plan’s funded status and benefits cost.
Investments that are intended to fund postretirement benefits but that are not segregated in a trust or otherwise effectively restricted to pay only postretirement benefits are not plan assets. For example, a voluntary employees’ beneficiary association (VEBA) may exist to pay benefits of both active and retiree health care plans. Unless the VEBA assets are legally segregated only for retiree benefits, those assets would not be considered plan assets, but instead would be accounted for as other employer assets of a similar nature and with similar restrictions (generally accounted for as reporting entity assets under ASC 320, Investments - Debt and Equity Securities or ASC 321, Investments - Equity Securities) (see PEB 6.7). Assets held in a rabbi trust (see PEB 7.5) and the cash surrender value of corporate-owned life insurance (COLI or BOLI) are also excluded from plan assets, as both are not restricted solely for the payment of OPEB benefits. Rabbi trust assets revert to the sponsoring entity in the event of bankruptcy and the employer is the owner or beneficiary of a COLI policy.

2.6.3 Fair value

ASC 820-10-20 defines fair value.

Excerpt from ASC 820-10-20

Fair value: 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.

Fair value is considered to be the most relevant information for assessing the plan's ability to pay benefits as they become due and the future contributions necessary to provide benefits promised.
See PwC’s Fair value measurements guide for additional information regarding fair value.

2.6.4 Insurance contracts

A plan may purchase insurance contracts. Some contracts may be accounted for as the settlement of benefit obligations (see PEB 4.3); others are reported as plan assets.

2.6.4.1 Insurance contracts as assets in a pension plan

ASC 715-30-35-60 addresses the valuation of insurance contracts that are not purchased annuities that qualify as a settlement (see PEB 4.3), but rather are held as investments of the plan.
ASC 715-30-55-36 addresses the treatment of life insurance policies owned by the employer that are used to fund pension benefits. We believe that, for cash surrender value to be included as plan assets, the policy should designate the plan as owner and beneficiary.
For ASC 715 purposes, the best evidence of fair value of such investments may be the "contract value," "cash surrender value," or "conversion value." Such values are typically quantified by insurance companies. Although a cash surrender value may be available, it is important to consider the presence of any penalty provisions associated with the termination of such contracts. When there is a significant penalty for termination, the cash surrender value may not serve as a proxy for fair value. In these instances, it is necessary to consider any available conversion value (for example, into annuities), or fair value can be estimated based on the amount at which the contract could be sold to a willing third-party buyer. A third-party buyer price will likely include similar considerations as were used by the insurer when originally pricing the insurance contract, including factors based on assumptions about the plan participants covered under the contract, such as expected mortality. This value would be based on the current discount rate inherent in the contract.

2.6.4.2 Insurance contracts as assets in an OPEB plan

Insurance contracts may also be used in OPEB plans. An insurance contract is defined in ASC 715-60-20.

Excerpt from ASC 715-60-20

Insurance contracts: A contract in which an insurance entity unconditionally undertakes a legal obligation to provide specified benefits to specific individuals in return for a fixed consideration or premium. An insurance contract is irrevocable and involves the transfer of significant risk from the employer (or the plan) to the insurance entity

Benefits covered by insurance contracts that meet the glossary definition are excluded from the APBO and the contract is excluded from plan assets, except for any participation right (as described in PEB 2.6.4.3).
There may be some situations when employers could have significant contingent liabilities as a result of employee benefit plan investments in instruments of financially troubled insurance companies. Consideration of reporting issues applicable to employer financial statements may be necessary under ASC 450-20, Loss Contingencies. These contingencies could include the following:
  • Because selection of an insurance carrier is a fiduciary decision, participants, unions, and/or the Department of Labor (DOL) may attempt to charge plan trustees with violation of their fiduciary duties. This may be more likely to occur in situations involving defined contribution plans and annuities purchased in settlement of a defined benefit plan liability.
  • Employers may decide to subsidize defined contribution plan participants or defined benefit pension plan annuitants for some or all of any loss in value resulting from investments made in financially troubled insurance companies. This is technically a prohibited transaction and may require DOL approval.

2.6.4.3 Participating and nonparticipating insurance contracts

Insurance contracts may be either participating or nonparticipating. Participating arrangements allow the purchaser (the employer or plan) to participate in the investment performance or other experience of the insurer. If the substance of the participating arrangement causes the employer or plan to remain subject to most or all of the risks and rewards of ownership of the obligation or assets transferred to the insurer, the insurance contract would be considered a plan asset, and the related promise to provide benefits would be included in the APBO. ASC 715-60 does not provide specific quantitative criteria for determining whether significant risks and rewards of ownership have effectively been transferred. As a general rule, we believe that, if the cost of the participation right (the difference between the cost of a participating and nonparticipating contract for otherwise equivalent underlying coverage) exceeds 10% of the nonparticipating contract premium, a significant portion of the risks and rewards have not been transferred.
For participating contracts in which a significant portion of the risks and rewards of ownership have been transferred, the cost of the participation right (not the entire contract), measured as the difference between the purchase price of the participating insurance contract and the price of an equivalent insurance contract without a participation right, is established as an asset on the date of purchase and remeasured subsequently at its fair value, if fair value is reasonably estimable. If the fair value of the participation right cannot be reasonably estimated, it would be measured at its amortized cost (not in excess of its net realizable value), and the cost amortized systematically over the expected dividend period under the contract. The carrying value should be assessed for recoverability on an ongoing basis. Dividends paid on such contracts are accounted for as a return on plan assets.
The purchase of a nonparticipating insurance contract results in a settlement (see settlement accounting discussion in PEB 4.3.4). The purchase of a participating contract may also result in a settlement if the substance of the contract allows the employer (or plan) to transfer a significant portion of the risks and rewards associated with the PBO and plan assets to the insurer. However, ASC 715-60-35-156 requires that the settlement gain that is otherwise recognizable must be reduced. Since the enterprise is still at risk for the participation right, an unrecognized net gain (but not an unrecognized net loss) must first be reduced by the cost of the participation right before calculating the amount to be recognized in income.
Some employers enter into agreements whereby benefits earned in the current period are covered by the annual purchase of an insurance annuity contract. The premium cost of those benefits is the service cost component of the net periodic pension or OPEB cost, except as described above for the cost of any participation right (see ASC 715-60-55-7 and ASC 715-60-55-8). Annuity contracts may also be purchased to provide for benefits earned for past years' services (i.e., to settle the PBO).

2.6.4.4 Annuity contracts

An annuity contract is an irrevocable contract in which an insurance company unconditionally undertakes a legal obligation to provide specified benefits to specific individuals in return for a fixed consideration or premium. The insurer should be a company authorized to do business as an insurance carrier under state law or under comparable laws outside the United States.
Once the premium is paid, the insurance company assumes a legal obligation to pay the benefits to retired employees on behalf of the employer; accordingly, the employer no longer bears significant risk. Therefore, if benefits earned in the current period pursuant to the plan's benefit formula are covered by annuity contracts, the premium cost of such annuity contracts generally is the service cost component of net periodic pension cost. Annuities purchased for previously accumulated benefits may reflect a settlement of such benefits (see PEB 4.3).
Participating annuity contracts cause the purchaser (employer or plan) to share in the experience of the insurance company, generally by way of a dividend. The annuity cost should be reduced by the cost of the participation right, which should be recognized as an asset of the participation right beneficiary (either the plan or the employer). Dividends actually received by the plan are considered to be a return on plan assets and are accounted for like any other fund earnings.
Benefits covered by annuity contracts should be excluded from the projected and accumulated benefit obligations because the obligation has been assumed and the risk has been transferred to the insurer; annuity contracts should also be excluded from the determination of plan assets. The only exception arises when an annuity contract has been purchased from a captive insurance company, or if there is reasonable doubt of the insurer's ability to meet its annuity payment obligations under the contract. In these situations, the contract is not deemed to be an annuity contract; it is considered a plan investment.

2.6.5 Market-related value of assets

Market-related value can be either fair value or a calculated value that defers recognition (for certain purposes) of changes in fair value over not more than five years through a systematic and rational amortization method. This delayed recognition concept can be applied for either pension or OPEB plan assets. The market-related value can be determined using different methods for different classes of assets (e.g., stocks, bonds, real estate). As noted in ASC 715-30-55-37, the classes of assets identified and approach utilized should be consistently applied from period to period both within and across plans. In situations when the employer has several plans with similar investments, it would typically use the same asset valuation methods for each class of asset, unless facts and circumstances warrant use of a different method.
Example 3 in ASC 715-60-55-79 through ASC 715-60-55-95 depicts an approach for calculating the market-related value of plan assets. ASC 715-30-55-37 through ASC 715-30-55-40 provides additional guidance on the application of the market-related value technique for measuring plan assets.
The market-related value is used in calculating expected return on plan assets (see PEB 3.2.5), which impacts the net gain or loss to be amortized (see PEB 3.2.7), as that in turn incorporates the difference between the expected return on the market-related value of plan assets and the actual return on plan assets. Further, asset gains and losses not yet reflected in market-related value are not required to be amortized (see PEB 3.2.7).
The illustration in ASC 715-30-55-101 through ASC 715-30-55-107 demonstrates the accounting for gains and losses, including the interplay of actual return (based on fair value) and expected return (based on market-related value) on plan assets. It also illustrates one approach for computing market-related value that has been widely used by employers under ASC 715, although other approaches may also be acceptable.

2.6.5.1 Changes to the method of determining market-related value

The specific market-related value methodology (i.e., fair value or a calculated value method) is an accounting policy that the employer should consistently follow. Any change in method is a change in accounting principle under ASC 250, Accounting Changes and Error Corrections, subject to preferability requirements and retrospective application to prior periods.
We generally believe it is preferable to use fair value as the market-related value of plan assets rather than a calculated value, which delays the recognition of changes in fair value over a period of up to five years. Accordingly, we believe it is difficult for an employer that uses fair value to justify switching to a calculated value. Making such a change solely or primarily to avoid the effect that volatility in the financial markets would have on the employer’s reported earnings would not be sufficient to justify such a change.

2.6.6 Transfers of plan assets between defined benefit plans

An asset transfer from a pension plan can occur for a number of reasons, including a sale or other transfer of a business, a merger or amalgamation as part of a business rearrangement of pension plans or as a result of a transfer of individual participants or participating employers between plans. An asset transfer occurs when all or any part of the assets of a pension plan are transferred to another pension plan. If the transfer is between unrelated employers, it will likely trigger settlement accounting as discussed in PEB 4.3. The accounting within this section is for transfers of assets between pension plans established for the same employer.
Question PEB 2-3 discusses the appropriate accounting treatment when plan assets are transferred from one defined benefit plan to another defined benefit plan within the same entity.
Question PEB 2-3
PEB Corporation has a defined benefit pension plan that is overfunded by $1,500,000 and a defined benefit postretirement health and welfare plan that is underfunded by $700,000.
In light of the plans' funded positions, PEB Corporation is transferring $700,000 of the plan assets from the pension plan to the postretirement benefit plan in accordance with Section 420 of the Internal Revenue Code. Section 420 permits the transfer of excess assets of a defined benefit pension plan to a retiree healthcare account in another plan. In the pension and postretirement footnote disclosures, the transfer would be shown as a reconciling item in the funded status for each of the plans.
In accounting for this transfer of plan assets in the financial statements, should this be recorded as a balance sheet entry between the prepaid pension asset and the accrued postretirement benefit liability, or should an unrecognized actuarial gain/loss in each of the plans be created (a loss in the pension plan and a gain in the postretirement plan)?
PwC response
PEB Corporation should record the $700,000 transfer of plan assets from the defined benefit plan to the postretirement benefit plan as a balance sheet entry with a debit to the postretirement benefit liability and a credit to the pension asset.
Dr. Accrued Postretirement Liability
$700,000
Cr. Prepaid Pension Asset
$700,000
The transfer would not be recorded as an unrecognized gain/loss, but rather as a direct contribution into the postretirement plan assets and direct distribution from the pension plan assets.
PEB Corporation would still have to calculate, at its next measurement date, an unrecognized gain/loss based on the original expected return on plan assets.
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