ASU 2015-12: Applying the New Reporting Standard for Employee Benefit Plans Ready for "Simplification?" FBRIC Measurement, Plan Investment Disclosures, Measurement Dates and More TUESDAY, FEBRUARY 23, 2016, 1:00-2:50 pm Eastern

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ASU 2015-12 February 23, 2016

Sharon A. Bradley, Partner

Henry Martin, CPA, Senior Manager

Daszkal Bolton

Daszkal Bolton

[email protected]

[email protected]

Susan J. Peirce, Principal Apple Growth Partners [email protected]

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ASU 2015-12 Applying the NewD Reporting Standards for Employee Benefit Plans February 23, 2016 Sharon A. Bradley & Henry Martin Daszkal Bolton

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ASU 2015-12         

Reason for issuing update Previous reporting Changes to current Standard Part I – Fully- Benefit Responsive Investment Contracts Part II – Plan Investment Disclosures Part III - Measurement Date Practical Expedient. Practical considerations for implementation Communication to Plan Sponsor’s Questions ??

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Why ASU 2015-12  Reduce

complexity in EB plan accounting.  Reduce cost and complexity and maintain or improve the usefulness of the information provided.  Who is affected? Essentially all EB plans will describe in each Part I, II and III.

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ASU 2015-12 

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On July 31, 2015, the FASB issued ASU 2015-12, a three-part standard that provides guidance on certain aspects of the accounting by employee benefit plans. (DB, DC and H&W Plans). The ASU, was in response to consensuses reached by the EITF, (1) requires an employee benefit plan to use contract value as the only measurement amount for fully benefit-responsive investment contracts (FBRICs), (2) simplifies and increases the effectiveness of plan investment disclosure requirements for employee benefit plans, and (3) provides employee benefit plans with a measurement-date practical expedient similar to the practical expedient provided to employers in ASU 2015-04. Plans were allowed to early adopt this ASU for all years not issued even if prior to issuance of ASU 2015-12.

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Previous Fair Value Reporting Standard 

Fully-benefit-responsive investment contracts (FBRICs) 

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Previous guidance required plans to:  Measure FBRICs at both fair value (ASC 820) for presentation and disclosure while acknowledging contract value as the relevant measure.  Present an adjustment on the face of the financial statements from fair value and contract value.  The average yield earned by the FBRIC for each period for which the statement of net assets available for benefits is presented  Disclosures about FBRICs that are required by ASC 820, ASC 962 and ASC 965.  Footnotes must describe the nature of the investment contract and how it operates, including information on the credit rating and average yield for the investment contracts.

See slides 8, 9 and 10 for sample disclosure.

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Previous Fair Value Reporting Standard

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Previous Fair Value Reporting Standard

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Previous Fair Value Reporting Standard

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Part I: Fully-Benefit-Responsive Investment Contracts

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Simplification Changes to ASU 2015-12 to FBRICs 

The definition of an FBRIC has not changed, however Part 1 of ASU 2015-12 amends the guidance to FBRICs as follows: No adjustment from fair value to contract value is required for FBRICs on the face of the financial statements.  Plans must now report FBRICs at contract value, which is the value that trustees report on the certified trust statements. (typically)  No reconciliation to the Form 5500 needed. 

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Plans are still required to include the following disclosures for FBRICs:

Total contract value of each type of FBRIC (traditional and synthetic investment contracts) on either the face of the Plan’s financial statements or the footnotes.  Description of the nature of each investment contract and how each operates.  Description of the events that would cause the Plan to transact at amount different from contract value.  Description of events that would allow the issuer to terminate the contracts or settle at an amount different from contract value. 

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Simplification Changes to ASU 2015-12 to FBRICs, continued 

Other disclosures related to FBRICs are eliminated.

Average-yield disclosure and the methodology used to calculate the interest credit rate.  ASC 820 hierarchy leveling, valuation techniques and inputs, and the level 3 rollforward. 

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FBRICs are not included in the ASC hierarchy table. FBRICs held in a master trust are subject to the same presentation and disclosure requirements as FBRICs held by the Plan. Indirect investments in FBRICs (Ex: investments in stable value common or collective trusts (CCTs)) are not in the scope of the FBRIC guidance. 

When a plan invests in a stable value CCT, those holdings are generally in an investment company that calculates NAV per share (or its equivalent). The relevant measure for a FBRIC held by the CCT is contract value. Therefore, the amount previously presented as a contract value in a plan’s financial statements is now presented at fair value. Which is consistent with other CCTs and reported at fair value under the new guidance. 15

Simplification Changes to ASU 2015-12 to FBRICs, continued Indirect investments in FBRICs (Ex: investments in stable value common or collective trusts (CCTs)) are not in the scope of the FBRIC guidance. 

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Total net assets available for benefits does not change, and the adjustment from fair value to contract value that was previously reported is eliminated.

See slides 6 and 7 for sample financial statements. 16

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Simplification Changes to ASU 2015-12 to FBRICs, continued

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Simplification Changes to ASU 2015-12 to FBRICs, continued

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Part II: Plan Investment Disclosures Susan J. Peirce Apple Growth Partners

Plan Investment Disclosures • Affects all types of plans • Simplifies the level of disaggregation for investments measured using fair value • ASU is to be applied retrospectively

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Disaggregation • Provides consistency with the level of disaggregation provided by most trustees, custodians and insurance companies and with the information required in Form 5500 • Applies to investments held in a master trust • Plans are exempt from the requirements of ASC 820-10-50-2B to disaggregate assets by class (e.g., nature, characteristics, risks) 21

Disaggregation • Disaggregate by general type of investment (e.g., common stocks, corporate bonds, mutual funds) • Disclosure of fair value information required by ASC 820 shall be provided by general type rather than class (e.g., valuation techniques, inputs, level 3 reconciliation) • Self-directed brokerage accounts are one general type 22

Disclosure Simplification • No longer required: the significant investment strategies for an investment in a fund that files an annual report on Form 5500 as a direct filing entity when the plan measures that investment using the NAV practical expedient • Eliminates the requirement to disclose the net appreciation or depreciation in fair value of investments by general type – Instead, plans only need to disclose this amount in the aggregate

• Plans are no longer required to disclose individual investments with a value equal or greater than 5% of net assets available for benefits 23

Audit Considerations • DOL still requires each investment to be listed in the supplemental schedule of investments held – Plan owns the underlying investments – Included in supplemental schedule at fair value • Wrapper value adjusts total back to contract value

Watch certification (limited scope)/audit strategy (full scope) for the fair value of the underlying investments. 24

Audit Considerations • Self-directed brokerage accounts – In full-scope audit, must consider the detail of the underlying securities when developing the audit strategy

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Audit Considerations • CCTs or similar investment funds that invest in FBRICs – Limited scope - expect the certification to be the fair value as presented in the trust statement – Full scope – if the plan is using the NAV practical expedient to measure fair value, perform procedures to test the NAV units used by management to determine the fair value of the CCT as of the plan’s measurement date (NAV x units held = fair value) • Typically this will be the same value presented in the trust statement

– Fund issuer no longer needs to provide a calculation of the fair value and contract value 26

Plan Administrator Responsibilities • Accounting for adoption of ASU 2015-12 • Preparing documentation supporting the accounting for the adoption of ASU 2015-12 – Description of ASU 2015-12 • Include date and effect

– Method used to adopt • Retrospective • Prospective

– Consistency with ASU 2015-12 – Assessment of adequacy of disclosures 27

ASC 250 – Accounting Changes and Error Corrections: Disclosures • ASC 250-10-50-1 states: An entity shall disclose all of the following in the fiscal period in which a change in accounting principle was made: A. The nature of and reason for the change in accounting principle, including an explanation of why the newly adopted accounting principle is preferable

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ASC 250 – Accounting Changes and Error Corrections: Disclosures B. The method of applying the change, including all of the following: 1. A description of the prior-period information that has been retrospectively adjusted, if any 2. The effect of the change on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), any other affected financial statement line item, and any affect per-share amounts for the current period and any prior periods retrospectively adjusted. Presentation of the effect on financial statement subtotals and totals other than income from continuing operations and net income (or other appropriate captions of changes in the applicable net assets or performance indicator) is not required. 29

ASC 250 – Accounting Changes and Error Corrections: Disclosures B. The method of applying the change, including all of the following: 3. The cumulative effect…… 4. If retrospective application……

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ASC 250 – Accounting Changes and Error Corrections: Example Disclosure •

In July 2015, the FASB issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit –Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient. Part I eliminates the requirements to measure the fair value of fully benefit-responsive investment contracts and provide certain disclosures. Contract value is the only required measure for fully benefit-responsive investment contracts. Part II eliminates the requirements to disclose individual investments that represent 5% or more of net assets available for benefits and the net appreciation or depreciation in fair value of investments by general type. Part II also simplifies the level of disaggregation of investments that are measured using fair value. Plans will continue to disaggregate investments that are measured using fair value by general type; however, plans are no longer required to also disaggregate investments by nature, characteristics and risks. Further, the disclosure of information about fair value measurements shall be provided by general type of plan asset. Part III is not applicable to the Plan. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. Parts I and II are to be applied retrospectively. Management has elected to adopt Parts I and II early.

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AU-C 708 Consistency of Financial Statements • Change in accounting principle – .07 The auditor should evaluate a change in accounting principle to determine whether: • The newly adopted accounting principle is in accordance with the applicable financial reporting framework • The method of accounting for the effect of the change is in accordance with the applicable financial reporting framework • The disclosures related to the accounting change are appropriate and adequate • The entity has justified that the alternative accounting principle is preferable 32

AU-C 708 Consistency of Financial Statements • Change in accounting principle – .08 If the auditor concludes that the criteria in paragraph .07 have been met, and the change in accounting principle has a material effect on the financial statements, the auditor should include an emphasisof-matter paragraph in the auditor’s report that describes the change in accounting principle and provides a reference to the entity’s disclosures. – If the criteria in paragraph .07 are not met, the auditor should evaluate whether the accounting change results in a material misstatement and whether the auditor should modify the opinion accordingly. Emphasis of Matter: As discussed in Note X to the financial statements, in [insert year(s) of financial statements that reflect the accounting method change], the entity adopted new accounting guidance [insert description of new accounting guidance]. Our opinion is not modified with respect to this matter. 33

Communications With Those Charged With Governance • AU-C 706.09 – If the auditor expects to include an emphasis-of-matter or other-matter paragraph in the auditor’s report, the auditor should communicate with those charged with governance regarding this expectation and the proposed wording of this paragraph • AU-C 260.12 – The auditor should communicate with those charged with governance their views about qualitative aspects of the entity’s significant accounting practices, including accounting policies, accounting estimates, and financial statement disclosures 34

Part III: Measurement Date Practical Expedient

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Measurement Date Practical Expedient 

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This guidance applies to reporting entities that follow the requirements of Topic 960, 962 and 965 and have a fiscal year-end that does not coincide with a month-end. A plan with a fiscal year end that doesn’t coincide with the end of a calendar month to measure its investments and investment-related accounts using the month end closest to its fiscal year end (an alternative measurement date).

If applicable, a plan will be required to disclose the alternative measurement date and the financial effects of contributions, distributions and/or significant events that occur between the alternative measurement date and its fiscal year end.  Measuring investments and investment-related accounts using month-end information is consistent with how trustees provide information used to prepare EBP financial statements. 

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Measurement Date Practical Expedient, continued 

A plan with a fiscal year end that doesn’t coincide with the end of a calendar month to measure its investments and investment-related accounts using the month end closest to its fiscal year end (an alternative measurement date). 

This practical expedient is similar to one the FASB recently issued for employers with fiscal year ends that don’t end at the end of a calendar month (ASU 2015-04, Compensation — Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets).

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Effective Dates and Applications 

Effective dates:

Fiscal years beginning after December 15, 2015.  Early adoption is permitted for all 3 parts individually or in the aggregate. 

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Transition

Part I and II should be applied retrospectively.  Part III should be applied prospectively. 

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Disclosure is required in the first annual period that the entity adopts the updated guidance.

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PRACTICAL CONSIDERATIONS FOR IMPLEMENTATION 

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While this new guidance is certainly welcomed for the potential time savings gained through eliminated and/or simplified disclosures, there are certain practical considerations to address when implementing. Some of these considerations include:  Continue to understand the nature of the plan’s investment contracts (e.g., are the contracts fully benefit-responsive and if so, are the contracts held directly or indirectly by the plan?).  Watch for potentially counter-intuitive guidance (for instance, indirect investments in FBRICs may potentially be excluded from the fair value hierarchy, but the path to arrive at that conclusion is circuitous).  Consider how the fair value of the investments in the hierarchy will be reconciled to the corresponding line items in the statements of net assets available for benefits (e.g., how will investments no longer required to be included in the fair value hierarchy be addressed?). 39

PRACTICAL CONSIDERATIONS FOR IMPLEMENTATION

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Be aware of unintentional consequences of adopting this ASU and ensure minimum required disclosures are met. Elimination of disclosures discussed above may result in additional disclosures under other applicable reporting guidance. For example, disaggregation of investments by general type may result in additional disclosures needed regarding investment strategies, which may have been considered adequately disclosed when disaggregated by investment class. Also, if two or more disclosures were previously combined, portions of the original disclosure may still be required.

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