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By Jessica M. Dunlap, CPA | Catanese Group

Lengthy fair value disclosures have been simplified for employee benefit plans thanks to two recent Accounting Standard Updates (ASU 2015-07 and ASU 2015-12). This is good news to employee benefit plan administrators. Administrators may wonder, “Why do I need to understand this? Isn’t it really my auditor that needs to know about this?” Not exactly. The auditor’s job is to form an opinion on management’s financial statements. Many times organizations forget this. An auditor often assists with disclosures, but ultimately it is management’s job to make sure they understand what is required.

So, how do the new ASUs simplify financial statement disclosures? The new ASUs are intended to simplify the reporting required within the footnotes of the financial statements. Investment disclosures have been lengthy and difficult to understand in the past. Plus, diversity in the practice of categorizing certain investments created potential inconsistencies within the disclosures. Below are some of the key changes.   

Under Generally Accepted Accounting Principles (GAAP), investments must be recorded at fair value, and appropriate disclosures must be made in the footnotes. Entities may have investments that do not have a quoted market price. These investments may have a calculated net asset value per share (NAV). Entities are generally allowed to use NAV as a measurement of the fair value of the investment when two conditions are met:  

• The investment does not have a readily determinable fair value (such as a quoted market price)
• The investment is in an investment company within the scope of the Financial Accounting Standards Board (FASB)

Until the recent new standards, investments measured at NAV also had to be categorized in the disclosures as a Level 1, 2, or 3 asset. Categorizing assets can be time consuming and inconsistent. The new standards no longer require investments measured at NAV to be categorized as a Level 1, 2, or 3 asset, but it is important to note that under the ASUs the presentation must still allow financial statement users to reconcile total investments in the fair value hierarchy footnote to total investments measured at fair value in the statement of financial position.

Another change with the implementation of the ASUs is the simplification of the Level 3 roll-forward required in the disclosures. The requirement remains for entities that are not private, but for private entities the Level 3 roll-forward requirement is modified. Disclosure of a roll-forward would only be required if there is a transfer into or out of Level 3, or if there is a purchase or sale of a Level 3 investment.    

In addition to the changes mentioned above, employee benefit plans are no longer required to disclose a listing of investments held by the plan equal to or greater than 5 percent of the net assets available for benefits. The ASUs also eliminate the requirement to disclose net appreciation or depreciation by general type; the plan is only required to disclose the aggregate amount.

Both ASUs can be implemented early if management elects to do so. Many have found that early implementation can save time and make the statements more readable, but, remember, all decisions pertaining to financial statements fall to management, not your auditor.

In addition to the key changes noted above, there are a few other changes the new ASUs bring about. To gain a full understanding, talk to your CPA or visit FASB’s website.

Jessica M. Dunlap, CPA, is an audit manager with the Catanese Group. She specializes in audits of not for profit organizations, employee benefit plans, and health care companies, as well as providing accounting and consulting services for a variety of small businesses. She is past president of the PICPA Central Chapter.