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FASB to Simplify Employee Benefit Plan Rules

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Apr 28th 2015
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The Financial Accounting Standards Board (FASB) proposed three Accounting Standards Updates on April 23 that are intended to reduce complexity in employee benefit plan accounting.

The FASB also issued a fourth Accounting Standards Update that focuses on whether certain electricity contracts within nodal markets qualify for a normal purchases and normal sales scope exception under Topic 815, Derivatives and Hedging.

All four updates were the result of a consensus of the FASB Emerging Issues Task Force and are part of the board's simplification initiative to reduce the cost and complexity of US accounting rules.

The FASB last Thursday issued an exposure draft with three proposed updates to plan accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965)—(I) Fully Benefit-Responsive Investment Contracts, (II) Plan Investment Disclosures, and (III) Measurement Date Practical Expedient.

Fully benefit-responsive investment contracts. Under current US Generally Accepted Accounting Principles (GAAP), guidance for defined contribution pension plans and health and welfare benefit plans require fully benefit-responsive investment contracts to be measured at contract value. US GAAP also requires those contracts to be measured at fair value for purposes of presentation and disclosure, including – when these measures differ – a reconciliation of contract value to fair value on the face of the plan financial statements.

But according to the FASB, some stakeholders had mentioned that requiring fully benefit-responsive investment contracts to also be measured at fair value does not provide useful information for decisions when fair value differs from contract value.

Also, the American Institute of CPAs told the FASB that contract value is the most relevant measurement for those contracts because that is the amount participants normally would receive if they were to initiate permitted transactions, like withdrawals, under the terms of the underlying plan. Those contracts also are reported at contract value for regulatory reporting.

Under the proposal, fully benefit-responsive investment contracts would be measured, presented, and disclosed only at contract value. A plan would continue to provide disclosures that help users understand the nature and risks of fully benefit-responsive investment contracts, according to the FASB.

Plan investment disclosures. Under this proposal, investments (both participant-directed and nonparticipant-directed) of employee benefit plans would be grouped only by general type, eliminating the need to disaggregate the investments in multiple ways.

In addition, if an investment is measured using the net asset value per share (or its equivalent) practical expedient in Topic 820, Fair Value Measurement, and that investment is in a fund that files a US Department of Labor Form 5500, Annual Return/Report of Employee Benefit Plan, as a direct filing entity, disclosure of that investment's strategy would no longer be required. This guidance applies to defined benefit pension plans, defined contribution pension plans, and health and welfare benefit plans.

Measurement date practical expedient. This proposal would provide a practical expedient to permit plans to measure investments and investment-related accounts, like a liability for a pending trade with a broker, as of a month-end date that is closest to the plan's fiscal year-end, when the fiscal period does not coincide with month-end. This guidance would also apply to defined benefit pension plans, defined contribution pension plans, and health and welfare benefit plans.

Individuals and organizations have until May 18 to review the exposure draft and provide written comments to the FASB about the proposed changes to employee benefit plan accounting rules. Instructions on how to submit comments can be found in the exposure draft.

The effective date will be determined after the task force considers stakeholder feedback on the proposed updates.

Update on Electricity Contracts
The FASB last Thursday also issued an exposure draft on the Accounting Standards Update, Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets.

A nodal energy market is an interconnected electricity grid operated by an independent system operator with established price points at each node or hub location.

The update is intended to resolve diversity in practice resulting from two different views on whether certain contracts for the purchase or sale of electricity on a forward basis would be eligible for a scope exception.

It specifies that the use of locational marginal pricing by an independent system operator does not constitute net settlement of a contract for the purchase or sale of electricity on a forward basis for delivery to a location within a nodal energy market, even in scenarios in which legal title to the associated electricity is conveyed to the independent system operator during transmission, according to the FASB.

The use of locational marginal pricing by the independent system operator would not cause that contract to fail to meet the physical delivery criterion of the normal purchases and normal sales scope exception. If the physical delivery criterion is met, along with all of the other criteria of the normal purchases and normal sales scope exception, an entity may elect to designate that contract as a normal purchase or normal sale.

The comment deadline on this Accounting Standards Update is also May 18.

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FASB Launches New Initiative to Reduce GAAP Complexity

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