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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The Financial Accounting Standards Board (FASB) on December 30, 2008, finalized revisions to FASB Statement # 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits. The revisions are effective for fiscal years ending after December 15, 2009, and are found in FAS #132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets.
There are seven parts to the revision:
(1) “An employer shall disclose information about how investment allocation decisions are made, including factors that are pertinent to an understanding of investment policies and strategies.” The disclosure should be in a narrative format and include such items as target allocation percentages (or a range of percentages) for the major categories of plan assets that are disclosed, investment goals, risk management practices, permitted and prohibited investments including the use of derivatives, diversification, and the relationship between plan assets and benefit obligations.
(2) “An employer shall disclose separately for pension plans and other postretirement benefit plans the fair value of each major category of plan assets as of the annual reporting date for which a statement of financial position is presented. Asset categories shall be based on the nature and risks of assets in an employer’s plans.” FAS #132(R)-1 gave the following examples of major categories, but noted that it is up to the employer to decide if additional categories should be disclosed: cash and cash equivalents, equities, government debt, corporate debt, asset-backed securities, structured debt, derivatives on a gross basis, investment funds and real estate. It is the employer’s discretion whether or not to disclose the underlying assets of mutual funds.
(3) “A narrative description shall be provided showing the basis used for determining the overall expected long-term rate-of-return-on-assets-assumptions.” Part of the description should discuss historical returns that are used and what adjustments were made to those returns to reflect expectations of future returns.
(4) “An employer shall disclose information that enables users of financial statements to assess the inputs and valuation techniques used to develop fair value measurements of plan assets at the annual reporting date.” In doing this, the disclosure must assign for each major category of plan assets one of three levels within the fair value hierarchy in which the fair value measurements in their entirety fall, as described in FAS # 157. Level #1 segregates fair value measurements by using quoted prices in active markets for identical assets of liabilities. Level #2 segregates fair value measurements by using significant other observable inputs. Level #3 uses significant unobservable inputs to segregate fair value measurements.
(5) Additional disclosure is required for Level # 3 assets that are valued using significant unobservable inputs. A reconciliation of the beginning and ending balances must be done separately for each major category in Level #3 that is based on the actual return on plan assets, plus any purchases, sales, and settlements; the result is the net of transfers in and/or out of Level #3. In addition, the disclosure must provide information about the valuation technique(s) and inputs used to measure fair value, including a discussion of changes to valuation techniques and inputs that occurred during the measurement period.
(6) “An employer shall provide users of financial statements with an understanding of significant concentrations of risk in plan assets.” Examples of concentrations of risk include, but are not limited to, significant investments in a single entity, industry, country, commodity, or investment fund. The FASB notes that it is not prescribing how a significant concentration of risk in plan assets should be identified.
(7) “A nonpublic entity that sponsors one or more defined benefit pension plans or one or more other defined benefit postretirement plans shall disclose the net periodic benefit cost recognized for each annual period for which an annual statement of income is presented.” Such a disclosure was originally included in FAS # 87 and 132(R), but FAS # 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, had deleted the disclosure of such information. The disclosure of net periodic benefit cost has been restored because FASB had not intended such a deletion.
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