EBP ACCOUNTING, AUDITING AND REGULATORY

UPDATE Michelle Brumfield, CPA

Director

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Objective

At the end of this session, participants will:

Receive a debrief of the new accounting and auditing standards affecting employee benefit plans and be able to recognize accounting and auditing considerations for the 2016 audits and possible challenges plans will face in implementing the new standards.

Get an update of the latest programs and priorities within the DOL & IRS and other regulators.

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Outline

What’s new and effective this year

Reminders for the EBP season

What’s on the horizon from the regulators

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WHAT’S NEW OR EFFECTIVE THIS YEAR

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What’s New or Effective This Year

New or effective this year

− ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

− ASU 2015-10, Technical Corrections and Improvements

− ASU 2015-12, Plan Accounting

− PCAOB AS No. 18, Related Parties

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ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

Issued May 2015

Effective for fiscal years beginning after December 15, 2015 (public entities) and 2016 (other entities); early adoption permitted

Retrospective application

Eliminates the requirement to categorize investments for which fair values are measured using the net asset value per share as a practical expedient

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ASU 2015-07 (continued)

Sufficient information must be provided to permit reconciliation of the fair value of the assets categorized within the FV hierarchy table to amounts presented in the statement of net assets

Continue to disclose investment strategy*, future investment commitments and redemption requirements * ASU 2015-12 removes the disclosure of investment strategy for funds that file Form 5500 as a Direct

Filing Entity (DFE).

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Sample ASU 2015-07 Presentation

Before ASU 2015-07 After ASU 2015-07

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ASU 2015-10, Technical Corrections and Improvements Changes the FASB definition of “readily determinable fair value” (paragraph 30 of ASU 2015-10):

An equity security has a readily determinable fair value if it meets any of the following conditions:

a. ……

b.……

c. The fair value of an equity security that is an investment in a mutual fund or in a structure similar to a mutual fund (that is, a limited partnership or a venture capital entity) is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions.

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Applies only to an investment that meets both of the following criteria:

a. The investment does NOT have a readily determinable fair value

b. The investment is in an investment company within the scope of Topic 946, Financial Services—Investment Companies

Just to be clear…. NAV as a Practical Expedient

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ASU 2015-12, Plan Accounting

FASB issued a three-part ASU to simplify financial reporting for benefit plans

− Part I: Fully Benefit-Responsive Investment Contracts

− Part II: Plan Investment Disclosures

− Part III: Measurement Date Practical Expedient

Developed by FASB Emerging Issues Task Force (EITF)

− Responded to advocacy efforts by the AICPA’s Employee Benefit Plans Expert Panel

− Identified the issues affecting a large number of plans with the goal of completing a project within a short period of time

Effective: fiscal years beginning after December 15, 2015

− Early application is permitted

− Plans can early adopt any of the ASU’s three parts without early adopting the other parts

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PART I: Fully Benefit-Responsive Investment Contracts (FBRIC) The criteria for benefit responsiveness has been established by FASB, and all five of the following requirements must be met for an investment to be considered benefit responsive: The contract is between the plan and the issuer and cannot be sold or

assigned without consent of the issuer.

The contract issuer must be obligated to either repay principal and interest or provide prospective crediting rate adjustments with an assurance that the crediting rate will not be less than zero.

The contract requires all participant-initiated transactions to occur at contract value (without any conditions, limits, or restrictions).

An event that limits the plan’s ability to transact with the issuer and with participants at contract value must be unlikely to occur.

The plan must allow participants reasonable access to their funds.

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PART I: FBRIC (continued)

Affects defined contribution pension and health and welfare plans

Definition of a fully benefit-responsive investment contract (FBRIC) in master glossary did not change

Clarifies that contract value is the relevant measure for FBRICs because that is the amount participants would receive in a transaction

Eliminates requirements to measure fair value and present related fair value measurement disclosures (no more SOP 94-4-1)

− Responds to concerns about the cost and effort required to measure the fair value of FBRICs when fair value is not the relevant measure

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Instead, plans will present FBRICs at contract value in the statement of net assets available for benefits, either as − Investments at contract value

− Fully benefit-responsive investment contracts at contract value

No longer need to categorize in the fair value hierarchy

Reduces disclosures related to interest crediting rate and average yield disclosures

PART I: FBRIC (continued)

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Investment contracts that do not meet the definition of a FBRIC continue to be presented at fair value

Apply new guidance retrospectively

PART I: FBRIC (continued)

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Are Stable Value Fund Investments FBRICs?

A Reminder: “Stable Value” Type Investments in Defined Contribution (DC) Plans − Most 401(k) plans have as an investment option

(rather than offering a money market fund)

− Often comprises a significant proportion of the investment portfolio

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“Stable Value” Investments – 3 Types

Traditional Guaranteed Investment Contracts (GICs) − Contract with bank or insurance company

− Guarantees a specified rate of return

Synthetic GICs − Plan owns underlying assets

− Insurance company or bank issues a wrapper contract to simulate performance of GIC

Stable Value Funds: common/collective trust funds − Plan invests in a pooled account with other plans

− Each plan is credited with its proportional earnings

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Prior to Adoption of ASU 2015-12 (Part I)

Statements of Net Assets Available for Benefits

December 31, 20X1 and 20X0 (in thousands)

20X1 20X0

Assets:

Investments at fair value $ 740,450 612,020

Notes receivable from participants 9,810 7,230

Net assets reflecting investments at fair value 750,260 619,250

Adjustment from fair value to contract value for fully benefit-

responsive investment contracts (2,861) (5,210)

Net assets available for benefits $ 747,399 614,040

Illustrative Statements of Net Assets Available for Benefits: FBRICs

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Marked-up for Adoption of ASU 2015-12 (Part I)

Statements of Net Assets Available for Benefits

December 31, 20X1 and 20X0 (in thousands)

20X1 20X0

Assets:

Investments at fair value $

721,098740,450

589,208612,020

Fully benefit-responsive investment contracts at contract value 16,491 17,602

Notes receivable from participants 9,810 7,230

Net assets reflecting investments at fair value 750,260 619,250

Adjustment from fair value to contract value for fully benefit-

responsive investment contracts (2,861) (5,210)

Net assets available for benefits $ 747,399 614,040

Illustrative Statements of Net Assets Available for Benefits: Traditional Investment Contract

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Traditional Guaranteed Investment Contracts (GICs) − Contract with bank or insurance

company

− Guarantees a specified rate of return

Synthetic GICs − Plan owns underlying assets − Insurance company or bank issues a

wrapper contract to simulate performance of GIC

Stable Value Funds: Common / Collective Trust Funds

FBRICs

Technically

not a FBRIC

“Stable Value” Investments – 3 Types

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Stable Value Common or Collective Trusts (CCTs) or Similar Investment Funds

Guidance clarifies that indirect investments in FBRICs through investment companies (e.g., stable value CCTs) are not in the scope of the FBRIC guidance

− Plans should report these investments at fair value

− These funds typically qualify for measuring fair value using the net asset value (NAV) practical expedient

− These funds calculate NAV per share (or its equivalent) in a manner consistent with the measurement principles of ASC 946

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Mark-up for Adoption of ASU 2015-12 (Part I) Statements of Net Assets Available for Benefits

December 31, 20X1 and 20X0 (in thousands)

20X1 20X0

Assets:

Investments at fair value $

737,589740,450

606,810612,020

Notes receivable from participants 9,810 7,230

Net assets reflecting investments at fair value 750,260 619,250

Adjustment from fair value to contract value for fully benefit-

responsive investment contracts (2,861) (5,210)

Net assets available for benefits $ 747,399 614,040

Illustrative Statements of Net Assets Available for Benefits: CCT – Stable Value Fund

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To table or not to table…

Hierarchy Table Considerations − Investments presented at contract value (FBRICs) are not

included in the hierarchy table − Underlying securities of a synthetic investment contract are

not included in the hierarchy table

Indirect Investment in FBRICs: A. Readily determinable fair value are included in the hierarchy

table B. NAV as practical expedient are not included in the

hierarchy table with adoption ASU 2015-07

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Sample SVF Presentation

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Assets at Fair Value as of December 31, 20X0 Level 1 Level 2 Level 3 Total

Mutual funds $3,650,000 — — $3,650,000

Common stocks 870,000 — — 870,000

— —

Corporate bonds --- 255,000 — 255,000

Stable Value Fund I 120,000 — 120,000

GIC — — —

—

Total assets at fair value 4,520,000 345,000 $4,895,000

SVF II measured at NAV — — — 2,100,000

Investments at fair value $4,520,000 $345,000 — $6,995,000

PART II: Plan Investment Disclosures

Affects all types of plans

Simplifies the level of disaggregation for investments measured using fair value − Disaggregate by general type of investment (e.g., common stocks,

corporate bonds, mutual funds)

− Plans are exempt from the requirements of ASC 820-10-50-2B to disaggregate assets by class (e.g., nature, characteristics, risks)

− 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)

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PART II: Plan Investment Disclosures

Simplifies the level of disaggregation for investments measured using fair value

− Self-directed brokerage accounts are one general type

− Applies to investments held in a master trust

− Provides consistency with the level of disaggregation provided by most trustees, custodians and insurance

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PART II: Plan Investment Disclosures

Disclosure simplifications − 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 (DFE) 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 to or greater than 5% of net assets available for benefits

− Applies to investments held in a master trust

ASU is to be applied retrospectively

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Simplifies accounting for a plan with a fiscal year end (FYE) that doesn’t coincide with a calendar month end

Added to the project as a result of a similar practical expedient that the FASB recently issued for employers with FYEs that don’t end at the end of a calendar month (ASU 2015-04)

Allows a plan to measure its investments and investment-related accounts using the month end closest to its FYE (i.e., an alternative measurement date) − Disclose as an accounting policy

− Disclose financial effects of contributions, distributions and/or significant events that occur between the alternative measurement date and the plan’s fiscal year end

− Apply consistently year to year

ASU to be applied prospectively

PART III: Measurement Date Practical Expedient

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ASU 2015-12, Plan Accounting: Resources AICPA Accounting and Auditing Guide for Employee Benefit Plans

Archived August 26, 2015 webinar, Applying FASB's New Employee Benefit Plans Reporting Simplification Rules (ASU 2015-12), is on the Center website under Past Events − http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality/CPEAndE

vents/Pages/CPEEvents.aspx

December 2015 AICPA conference: EBP Accounting, Auditing, Regulatory & Reporting Update (session #3) on ASU 2015-12 has expanded examples − http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality/CPEAndE

vents/Pages/AICPAEBPConference-December2015.aspx

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PCAOB AS No. 18, Related Parties

Effective for audits of financial statements for fiscal years beginning on or after December 15, 2014

Primary changes include requirements that auditors:

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What does this mean for our clients?

− Puts the responsibility on the client to prepare the list of related parties, and document their processes and controls over identifying, accounting for, and disclosing these transactions.

− Auditors will evaluate and test the accuracy and completeness of management's identification through inquiries and inspection

− Auditors will communicate the auditor's evaluation to the audit committee

PCAOB AS No. 18, Related Parties

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Changes to the Determination Letter Program IRS Notice 2016-37

Effective 1/1/17, the IRS will eliminate the staggered 5-year remedial amendment cycle (Cycle A filers have until 1/31/17 to file a final submission) for individually designed plans (IDP)

IRS will no longer accept determination letter applications other than for: − Initial plan qualification − Plan termination (Form 5310) − IRS makes a special exception

IRS will publish a Required Amendment List annually (1 October of each year) − An IDP must be amended to retain its qualified plan status for each item on the list by the

end of the 2nd calendar year following the year the list is published

Discretionary amendments are required by the end of the plan year in which the amendment is operationally put into effect

Eliminating the expiration dates on determination letters

Extended the adoption period for certain pre-approved defined contribution plans (April 30, 2017, instead of April 30, 2016)

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The Society of Actuaries released new mortality tables in October 2014 called the RP-2014 tables

MP-2015 improvement scale released October 8, 2015

MP-2016 improvement scale released October 20, 2016

Plan funding assumptions use different mortality tables but IRS is now conforming them, beg. 2018

AICPA Technical Q&A (TIS 3700.01) Effect of New Mortality Tables on Nongovernmental Employee Benefit Plans (EBPs) and Nongovernmental Entities That Sponsor EBPs (February 2015)

Mortality Improvement Scales

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REMINDERS FOR THE EBP SEASON

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Do not file PCAOB auditor’s report with the Form 5500

Preparing the financial statements may violate auditor’s independence − Auditors should not provide typing and word processing services nor

financial statement templates that are not publicly available

− Remarks were made at the PCAOB Forum on Auditing Smaller Broker-Dealers (May 28, 2014)

SEC DOL PCAOB standards Generally accepted auditing standards

Due 180 days after year end if using ERISA format

Due 7 months after year end; with additional 2-1/2 months if filing an extension

Reminders for 2017 (2016 Plan Year Filings)

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WHAT’S ON THE HORIZON FROM THE REGULATORS

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On the horizon − PCAOB transparency rules

− New Master Trust Reporting Requirements

− Cyber Security

− Increasing Transparency of the EBP Audit Report

Accounting and Auditing Update (Relevant to 11-Ks)

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New PCAOB Transparency Rules

Subject to approval by the SEC, on Dec 15, 2015, the PCAOB approved new rules that require audit firms to disclose the name of the engagement partner and information about certain other audit participants on a new PCAOB Form AP, Auditor Reporting of Certain Audit Participants (PCAOB Release No. 2015-008).

Will affect SEC filings (including 11-K) for auditor’s reports issued on or after Jan 31, 2017 (or 3 months after SEC approval, whichever is later).

Form AP filing deadline – 35 days after the audit report release date

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New Master Trust Reporting Requirements

ASU 2017-06, Plan Accounting—Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (A Consensus of the Emerging Issues Task Force) – issued February 2017

Highlights: 1. Single line reporting of plan’s interest in MT on face of plan’s financial statements 2. Disclose MT investments by general type and other assets/other liabilities 3. Disclose plan’s proportionate interest in MT investments by general type and other

assets/other liabilities 4. No requirement will be added to US GAAP for look through disclosures of the

underlying investments held by a MT 5. Present 401(h) disclosures in DB plan only (reference name of DB plan in H&W plan

financial statements) 6. Effective for fiscal years beginning after December 15, 2018 (early adoption

permitted) 7. Retrospective application required

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AICPA Auditing Standards Board (ASB) developed the EBP Reporting Task Force in January 2015

− DOL audit quality study report issued May 2015

− Improve quality of EBP audits by strengthening the EBP auditor’s report

− Address forming an opinion and reporting on ERISA plan financial statements

− DOL provided specific suggestions

Increasing Transparency of the EBP Audit Report

Auditor’s report project − Key Audit Matters (KAMs) as determined by the auditor in a new section of

the report

− New elements added related to auditor independence, auditor tenure, and the auditor’s responsibility for and results of auditor’s evaluation of other information outside the financial statements

− Enhanced language re: auditor’s responsibility for fraud and the notes to the financial statements

− Provide information on compliance and internal control material weaknesses and significant deficiencies

− Identify audit engagement partner and peer reviewer firm

− New report on specific plan provisions relating to the financial statements

Increasing Transparency of the EBP Audit Report (continued)

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DOL, IRS and PBGC released copies of the 2016 Form 5500 Series is now available at: https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500

The new maximum penalty for a plan administrator who fails or refuses to file a complete or accurate Form 5500 report has been increased to $2,063 a day.

Schedules H and I. Line 5c asks if a plan is a defined benefit plan, is it covered by the PBGC insurance program? The new question asks filers that checked the box “Yes,” to enter the My PAA generated confirmation number for the PBGC premium filing for the plan year.

Schedule SB. The instructions for CSEC plans, reported in Line 27, Code 1, have been updated to reflect guidance on certain issues relating to the application the CSEC Act.

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2016 Form 5500 Changes

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2016 Form 5500 Changes (continued)

IRS Compliance Questions (optional for the 2016 plan year): − Not required – “Preparer’s information” at the bottom of the first

page of Form 5500 for the 2016 plan year. Plan sponsors should skip these questions when completing the form.

− Skip Questions on Schedules H and I, Lines 4o, and 6a through 6d, for the 2016 plan year.

− Skip Schedules R, Part VII – IRS Compliance Questions for 2016 plan year.

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21st Century Form 5500 Project

Modernize and improve Form 5500

Make investment and other information more data mineable

Enhance agencies’ (DOL, IRS and PBGC) ability to collect plan data

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DOL Resources

www.dol.gov/ebsa − For DOL publications, FAQs, copies of the Form 5500,

instructions, and related schedules

EBSA Office of the Chief Accountant 202-693-8360

EBSA Office of Regulations and Interpretations 202-693-8500 − For questions about ERISA reporting, filing or other regulatory

requirements

DOL EFAST Help Center 1-866-463-3278 − For questions regarding the Form 5500 or related schedules

Questions?

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Speaker Contact Information

THANK YOU for PARTICIPATING!

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