Being able to serve clients with sound audit advice requires practitioners to first learn, understand and explain audit requirements and financial statement disclosures in plain English. Accounting Standard Updates (ASUs) issued in the last few years presented a challenge in communication and application for early adopters. Not surprisingly, the McConnell & Jones assurance team had many questions which were clarified at this year’s AICPA Employee Benefit Plan Audit Quality Center Conference — like what constitutes a Fully Benefit Responsive Investment Contract (FBRIC) and what’s a readily determinable fair value?
- To adjust, or not to adjust – that is the question.
The greatest challenge this year is the determination of what constitutes a Fully Benefit Responsive Investment Contract for the application of the ASU 2015-12 Part I. Many of our clients’ plans hold investments in various stable value funds for which their trustees provide adjustment between fair value and contract value. That created the need to present them as a FBRIC with an adjustment to contract value on the financial statements. The definition of a FBRIC has not changed but it is confirmed that it includes investment where the “contract is effected directly between the plan and the issuer and prohibits the plan from assigning or selling the contract or its proceeds to another party without the consent of the issuer”. The standard trustee authorization to participate in the stable value fund does not constitute such a contract. Such indirect investments in FBRICs need to be presented at fair value, with no adjustment.
- What is the “published” price?
ASU 2015-10 attempted to clarify the definition of a readily determinable fair value per share/unit as being “determined and published and the basis for current transactions”. The concept is important to understand as it defines whether the investment would be included in the hierarchy table or not. While the prices of mutual funds are published daily and available through various online resources, the classification of some Common Collective Trust Funds (CCTs) and Pooled Separate Accounts (PSAs) is up for interpretation. One may argue the audited financial statements of such funds constitute a ‘published’ source even if they are available only to plan sponsors and participants upon request. Until the definition of ‘published’ is clarified further, we see the preference to use Net Asset Value (NAV) practical expedient and exclusion from the leveling table.
- Are my investments valued at Net Asset Value (NAV) per share practical expedient?
ASU 2015-07 can cause confusion among all new adopters of this standard as the definition of practical expedient can be misunderstood. The following criteria are the key to determine if a plan holds investments that are valued at NAV per share practical expedient:
- The investment does not have a readily determinable fair value
- The investment is an investment company within the scope of Topic 946 or is an investment in a real estate fund for which it is industry practice to measure investment assets at fair value on a recurring basis and to issue financial statements that are consistent with the measurement principles of Topic 946.
- What do you need to know about ASU 2015-07 Disclosures for investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)?
Investments valued at NAV per share practical expedient are not classified into any leveling. They are simply reported as a single amount outside the fair value leveling table to reconcile investments to the statement of net assets. Disclosures of unfunded commitments, redemption frequency and redemption period are only needed for investments valued at NAV per share practical expedient.
- Should you review user entity controls as part of System and Organization Controls (SOC) 1 review?
Both auditors and plan sponsors are required to review SOC reports to ensure the user organization has in place sufficient complementary controls (identified in the SOC report) to provide a comprehensive control system for the plan. . Auditor reliance on SOC reports can reduce, not eliminate, testing, even if areas like loan and benefit payment processing are outsourced to such vendors.
- My plans are in a Master Trust, what new changes are applicable to my plan’s financial statement reporting?
Effective for plans with a fiscal year beginning after December 15, 2018 (early adoption is permitted), ASU 2017-06 Employee Benefit Plan Master Trust Reporting will require the following disclosures:
- The plan’s interest in the Master Trust (MT) and the change in the value of such interest
- The MT’s investments by general type of investment and the dollar amount of each investment type
- Dollar amount of MT’s other assets and liabilities
- The net appreciation/depreciation in the FV of the MT
- Investment income of the MT.
- Basis for allocating the net assets and total investment income to the plan.
- For plans with an undivided interest in a MT, disclose the percentage interest in the MT.
Note: Disclosures a) – c) are new requirements and must be implemented when adopting this ASU. Disclosures d) – g) have been require even before this ASU came up. Something to point out is that ASU 2017-06 does not require the disclosure of the percentage interest in the master trust for plans with divided interests. Additionally, health and welfare plans are no longer required to make disclosures regarding the 401(h) account assets, but instead, these type of plans only need to disclose the name of the pension plan in which these disclosures are provided.
Gosia Kanda is an audit supervisor within the firm’s ERISA Assurance and Compliance Service Team. Having joined McConnell & Jones in 2012, she is in charge of audits for employee benefit plans including defined contribution, defined benefit and health & welfare with asset base ranging from $1 million to $5 billion. She has knowledge of the requirements of DOL, ERISA, IRS and SEC for the 11-k filings and assists clients with regulatory updates and recommendations for administration of their plans. Gosia also trains and supervises staff on audit engagements and is part of the team that prepares and files clients’ forms 5500. Connect with Gosia on LinkedIn or follow her on Twitter @KandaGosia.
Nadia Cruz, CPA, is a senior auditor within the firm’s ERISA Assurance and Compliance Services Team. For the past three years, she has supervised audit engagements for employee benefit plans of various types and sizes. In addition to preparing reports and other documentation to support audit opinions, Nadia also drafts the financial reports and prepares clients’ forms 5500. Connect with Nadia on LinkedIn.
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