Auditing Employee Benefit Plans. Josie Hammond
Note: A defined benefit pension plan may only terminate following certain rules and procedures, as set forth in Title 29 CFR part 4041 of ERISA. Therefore, these rules may affect assessment of whether the liquidation of a plan is imminent under this standard.
Changing to liquidation basis generally causes little or no change in asset values as most assets are already carried at fair values. Certain assets, such as insurance contracts carried at contract value, operating assets, or other assets that cannot be easily disposed of, should be adjusted to net realizable value. Adjustments should be made to reduce investments for penalties or charges as a result of termination.
Upon termination, participants become fully vested in all benefits. Therefore, accumulated plan benefits and benefit obligations should be determined on the liquidation basis by taking into consideration the fully vested rights. Beginning of year benefit information is no longer relevant once a plan is terminating, as it would have been based on assumptions for an ongoing plan. If the beginning of year benefit information is presented, and the plan terminated during the year presented in the financial statements (after the benefit information date), this would not eliminate the requirement to disclose the estimated effect of the amendment to terminate the plan, which was not reflected in the accumulated benefits presented.
Among the requirements for financial statements prepared on a liquidation basis is that the plan
present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation;
include in its presentation of assets any items not previously recognized under GAAP but that it expects to either sell in liquidation or use in settling liabilities;
recognize and measure an entity’s liabilities in accordance with GAAP that otherwise applies to those liabilities;
accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with sale or settlement of those assets and liabilities; and
disclose an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process.
Help desk. The AICPA issued Technical Question and Answer (Q&A) sections 6931.18–.30 (AICPA, Technical Questions and Answers) to provide nonauthoritative guidance related to the implementation of liquidation basis of accounting. Although the information in these Q&As is specific to single employer defined benefit and defined contribution plans, it may be useful when considering liquidation basis for other types of plans.
Going concern
When the plan sponsor encounters financial adversities, plan management may also need to evaluate whether such adversities raise substantial doubt about the plan’s ability to continue as a going concern.
FASB ASC 205-40 requires management to assess an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). If it is determined that there is substantial doubt about the plan’s ability to continue as a going concern, the mitigating effect of management’s plans should be considered only to the extent it is probable the plans will be effectively implemented and mitigate the conditions or events giving rise to substantial doubt. Certain disclosures are required when substantial doubt is alleviated as a result of consideration of management’s plans. An explicit statement in the notes to the financial statements is required that there is substantial doubt, as well as other disclosures when substantial doubt is not alleviated.
Subsequent events
FASB ASC 855, Subsequent Events, established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. There are two types of subsequent events to be evaluated under this Statement: (a) recognized subsequent events and (b) nonrecognized subsequent events.
An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. An entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but that arose after the balance sheet date but before financial statements are issued or are available to be issued. Some nonrecognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. For such events, an entity must disclose the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.
Financial statements are considered issued when they are widely distributed to shareholders and other financial statement users for “general use and reliance” in a form and format that complies with generally accepted accounting principles. Further, financial statements are considered available to be issued when they are complete, which means that they are in a form and format that complies with generally accepted accounting principles, and all approvals necessary for issuance have been obtained.
Entities [except SEC filers and conduit debt obligors (CDOs)] should evaluate subsequent events through the date that the financial statements are available to be issued. SEC filers and CDOs should evaluate subsequent events through the date the financial statements are issued. Entities other than SEC filers should disclose both the date through which subsequent events have been evaluated and whether that date is the “issued” date or “available to be issued” date.
Knowledge check
1 FASB ASC 855 requires disclosure in the financial statements of the date through which an entity has evaluated subsequent events and the basis for that date. Which of the following is not considered “issued” or “available to be issued”?When a significant portion of the audit work is complete.Widely distributed to shareholders and other financial statement users for “general use and reliance.”All approvals necessary for issuance have been obtained.When financial statements are complete.
Recent developments
Readers are encouraged to consult the full text of the ASU on FASB’s website at www.fasb.org.
Financial instruments
FASB ASU No. 2016-01
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
These amendments in this Update provide guidance for measuring and recording fair value of equity investments, eliminate some disclosure requirements for financial instruments measured at amortized cost, simplify impairment assessment of equity investments, and clarify some disclosure requirements.
ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of FASB ASC 960, 962, and 965, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2017, including