FASB ASC 820 defines fair value, sets out a framework for measuring fair value, and requires certain disclosures about fair value measurements.
Help desk. The area of fair value continues to evolve. Auditors should monitor FASB developments regarding fair value measurements at https://asc.fasb.org/home.
Form 5500 also requires the current value of investments to be reported and indicates that current value represents fair market value where available or as determined in good faith under the terms of the plan by a trustee or a named fiduciary. Even though the current value of assets must be determined each year, there is no requirement that the assets be valued annually by an independent appraiser (except for certain nonpublicly traded securities held in employee stock ownership plans). However, Form 5500 requires disclosure of assets whose values were not readily determinable on an established market or which were not valued by an independent third-party appraisal. Normally the auditor’s primary concern is for overstatement of an asset, however, in a defined contribution benefit plan, understatement of value is as much of a concern since a withdrawing participant could receive a lesser value than he or she would be entitled to.
A plan’s accounting policies should 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 FASB ASC 820-10-50) and a description of the methods and significant assumptions used to measure the reported value of insurance contracts. However, defined benefit pension plans, defined contribution pension plans, and health and welfare benefit plans are exempt from the requirements in item (a) of FASB ASC 820-10-50-2B to disaggregate assets by nature, characteristics, and risk. The disclosures of information by classes of assets required by FASB ASC 820-10-50 should be provided by general type of plan assets consistent with FASB ASC 960-325-45-2, FASB ASC 962-325-45-5, and FASB ASC 965-325-45-2.
The breakdown of investments by general type should be presented in the statement of net assets available for benefits or in the notes to the financial statements. Common investment types include registered investment companies (for example, mutual funds), government securities, common- collective trusts, pooled separate accounts, short-term securities, corporate bonds, common stocks, mortgages or other loans (excluding loans to participants), and real estate. The presentation of investments should indicate whether fair value has been measured by quoted market price or otherwise determined.
Participant-directed investments may be reported as a single-line item on the statement of net assets available for benefits. In addition, if any of those investments are nonparticipant-directed, they should be separately identified. The plan should disclose the detail of net assets and significant components of related changes for nonparticipant-directed investment programs, in either the financial statements or accompanying notes.
Help desk. The instructions to Form 5500 permit certain self-directed investments, to be reported in aggregate as a single line item on Form 5500, Schedule H and related schedule of assets. Though self-directed investments may be shown as a single line item in the GAAP financials if the underlying investments belong in different levels, those amounts would need to be broken out into the appropriate levels for the purposes of the fair value hierarchy disclosures. These differences in reporting may create issues for auditors when requesting brokerage window investment information for these accounts. Therefore, it is important for plan administrators and service organizations to maintain detailed records for financial reporting.
Purchases and sales of securities should generally be recorded on the trade date. Dividend income should be recorded on the ex-dividend date. Interest income should be recorded on the accrual basis.
Net appreciation or depreciation includes realized gains and losses on investments that were purchased and sold during the period, as well as unrealized appreciation or depreciation of the investments held at year end. Investment income, such as interest or dividends, should be separately reported on the statement of changes in net assets available for benefits. There is no requirement to disclose the net appreciation or depreciation in fair value of investments by general type.
Accounting and reporting for investment contracts
FASB ASC 962, Plan Accounting – Defined Contribution Plans, and FASB ASC 965, Plan Accounting – Health and Welfare Benefit Plans, provide guidance for determining the appropriate reporting and valuation of investment contracts.
Defined contribution pension plans and health and welfare benefit plans are to report direct investments in fully benefit-responsive investment contracts at contract value because 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. Contract value is the amount participants normally would receive if they were to initiate permitted withdrawals under the terms of the underlying plan. A synthetic guaranteed investment contract that meets the definition of a fully benefit-responsive investment contract and that is held by an employee benefit plan is also subject to this guidance and is reported in one line item on the statement of net assets available for benefits. However, for the Schedule of Assets (Held at End of Year), the wrapper and underlying investments of a synthetic investment contract are to be listed separately.
Help desk. Non-fully benefit-responsive contracts are to be reported at fair value.
In addition, fully benefit-responsive investment contracts, as defined by the FASB ASC glossary, are limited to direct investments between the plan and the issuer. Plans may indirectly hold fully benefit-responsive investment contracts through beneficial ownership of common collective trust funds (CCTs), which own investment contracts. Insurance company pooled separate accounts (PSAs) that hold investment contracts also have similar characteristics. In the conclusions reached in paragraph BC9 of Part I of FASB ASU No. 2015-12, indirect investment holdings do not meet the definition of fully benefit-responsive as the investment contract is not effected directly between the plan and the issuer. Although these do not meet the definition of fully benefit-responsive investment contracts and, therefore, are not reported at contract value, they may qualify for the net asset value per share (or its equivalent) measurement practical expedient in FASB ASC 820.
The definition of benefit responsiveness considers an investment contract to be fully benefit responsive if all of the following criteria are met:
1 The investment contract is between the plan and the issuer; it cannot be assigned or sold without consent of the issuer.
2 The contract issuer must be obligated torepay principal and interest; orprovide prospective interest crediting rate that will be not less than zero.
3 The contract requires all permitted participant initiated transactions (such as withdrawal of benefits, loans or transfers between funds within the plan) to occur at contract value without conditions, limits, or restrictions.
4 An event that limits the ability of the plan to transact at contract value with the participants in the plan and the issuer (such as premature termination of the contract, plant closing, layoffs, plan termination, bankruptcy, mergers, and early retirement incentives) must be probable of not occurring.
5 The plan itself must allow participants reasonable access to their funds.
Help desk. Presentation example:
Example presentation for the statement of net assets available for benefits:
| Investments (at fair value) | $ 2,900,000 |
| Investments (at contract value) | 7,000,000 |
| Receivables |