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CCH® PENSION — 3/26/08

FASB Proposes To Expand Disclosure Of Asset Categories And Asset Valuation Techniques

From Spencer's Benefits Reports: The Financial Accounting Standards Board (FASB) has issued a proposal that it says would “improve a public and nonpublic employer’s disclosures about postretirement benefit plan assets.” The proposed FASB Staff Position (FSP FAS 132(R)-a) follows discussion of the issue at an FASB meeting and would be applied prospectivly for fiscal years ending after Dec. 15, 2008.

The proposal would expand the list of asset categories that must be disclosed separately by sponsors of defined benefit plans and defined benefit postretirement plans. The fair value of the following major categories, if significant, would have to be disclosed:

1. cash and cash equivalents;
2. equity securities;
3. debt securities issued by national, state, and local governments;
4. corporate debt securities;
5. asset-backed securities;
6. structured debt;
7. derivatives (segregated by type of contract, for example, interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts, and other contracts);
8. hedge funds;
9. private equity funds;
10. venture capital funds; and
11. real estate.

Additional categories would have to be added when appropriate. Any derivative or other contract whose fair value is negative, i.e. in a liability position, would have to be disclosed separately by type.

The nature and amount of concentrations of risk arising within or across categories of plan assets would have to be disclosed by the plan sponsor. Such concentrations of risk arise, according to the FASB proposal, “because an employer is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification.” Examples of concentrations of risk given by the FASB include investments in a single entity, industry, country, commodity, or investment fund.

Not only would the fair value of each category have to be disclosed, but the FASB proposal would require plan sponsors to disclose the valuation techniques and inputs used to develop the fair value measurements of the plan assets, including a discussion of changes in valuation techniques and inputs, if any, during the period. Recurring fair value measurements that use significant unobservable inputs also would have to show the effect of the measurements on changes in plan assets for the period. To do this, the fair value measurements would have to be segregated into one of three “levels:”

• Level 1 represents fair value measurements using quoted prices in active markets for identical assets of liabilities.
• Level 2 represents fair value measurements that have significant other observable inputs.
• Level 3 represents fair value measurements that have significant unobservable inputs.

If significant unobservable inputs (level 3) are used, there would have to be a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following:

1. actual return on plan assets, separately identifying the amount related to assets still held at the reporting date and the amount related to assets sold during the period;
2. purchases, sales, and settlements (net); and
3. transfers in and/or out of level 3 (for example, transfers due to changes in the observability of significant inputs).

Finally, FSP FAS 132(R)-a would make a technical amendment to FAS 132(R) that would require a nonpublic entity to disclose the net periodic benefit cost recognized for each annual period for which an annual statement of income is presented.

Written comments on the proposal must be submitted by May 2 via email to director@fasb.org, File Reference: Proposed FSP FAS 132(R)-a, or by sending comments by regular mail to Russell G. Golden, director of technical application and implementation activities, FASB, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116, File Reference: Proposed FSP FAS 132(R)-a. Comments will not be accepted via fax.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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