13.3 Defined benefit plans

This section covers the presentation of defined benefit plans in a reporting entity's financial statements and the disclosures in the accompanying notes.

A defined benefit plan is any retirement plan that is not a defined contribution plan, as described in FSP 13.4. Generally, a defined benefit plan is one that defines an amount of benefit to be provided, usually as a function of one or more factors, such as age, years of service, or compensation.

13.3.1 Balance sheet presentation

Balance sheet presentation of defined benefit plans involves two factors: recognition of the plan's funded status, and classification of the funded status as current and noncurrent. The funded status is the difference between the fair value of plan assets and the benefit obligation. The benefit obligation refers to the projected benefit obligation (PBO) for pension plans and the accumulated postretirement benefit obligation (APBO) for OPEB plans. As discussed in ASC 715-20-50-1(c), the funded status and its classification as current and noncurrent are required to be determined on a plan-by-plan basis.

13.3.1.1 Funded status presentation

As discussed in ASC 715-20-45-2, a reporting entity is required to recognize the funded status of its defined benefit plans on the balance sheet. As discussed in ASC 715-20-45-3, an overfunded benefit plan has plan assets that are greater than the benefit obligation (which would be presented as a net benefit asset). An underfunded benefit plan has plan assets that are less than the benefit obligation, and an unfunded benefit plan has no plan assets (both are presented as a net benefit liability).

A reporting entity is not permitted to offset one plan's net benefit asset with another plan's net benefit liability. Further, all overfunded plans should be aggregated and recorded as a net benefit asset, and all unfunded or underfunded plans should be aggregated and recorded as a net benefit liability. Therefore, a reporting entity that has more than one plan may report both a net benefit asset and a net benefit liability on its balance sheet.

As defined in ASC 715-30-20 and ASC 715-60-20, for assets to be considered plan assets, the assets must be segregated in a trust or otherwise restricted for the sole use of paying benefits. The reporting entity is generally not permitted to access the funds for other uses. Only assets that meet the definition of plan assets can offset the liability on the balance sheet. Assets that do not meet the definition of plan assets are presented gross on the balance sheet and accounted for and classified depending on the nature of the asset.

Plan assets should be measured on the balance sheet date. However, ASC 715-30-35-63A provides a practical expedient as a policy election that allows employers with fiscal year-end dates that do not fall on a calendar month-end (e.g., companies with a 52/53 week fiscal year) to measure plan assets and obligations as of the calendar month-end closest to the fiscal year-end.

13.3.1.2 Balance sheet classification

As discussed in ASC 715-20-45-3, a reporting entity that presents a classified balance sheet is required to consider whether a portion of its net benefit liability should be presented as a current liability, on a plan-by-plan basis. The current liability is the amount of the benefit obligation that is payable over the next 12 months (or the operating cycle, if longer) that exceeds the fair value of plan assets. Payments include expected benefit payments, expected settlements (e.g., lump sum payments), and payments of other items reflected in the benefit obligation (e.g., administrative or claims costs). All expected payments for an unfunded plan to be made over the next 12 months (or operating cycle, if longer) from the balance sheet date are classified as a current liability.

In determining the current liability, a reporting entity should consider expected payments for the 12-month period from the balance sheet date. For example, in its 20X1 financial statements, a calendar year-end reporting entity should consider the expected payments for the period January 1, 20X2 to December 31, 20X2 in determining whether a portion of the liability should be classified as current. For its March 31, 20X2 balance sheet, the reporting entity should consider the expected payments for the period April 1, 20X2 to March 31, 20X3 (not just expected payments for the remainder of the year). A reporting entity is not required to remeasure plan assets and obligations in order to estimate expected payments for interim reporting purposes.

For plans that are overfunded (in a net asset position), the net benefit asset should be classified as a noncurrent asset. If a reporting entity expects a refund from the plan within the next 12 months—a rare occurrence in practice—the amount and timing of the refund should be disclosed, but not recorded as a current asset.

13.3.2 Income statement presentation

In the income statement, pension and OPEB costs are included in net periodic pension cost. Under ASC 715, net periodic benefit cost comprises:

• Service cost
• Interest cost
• Expected return on plan assets
• Amortization of prior service cost/credit
• Gains and losses
• Amortization of transition amount (this would have arisen upon the initial adoption of the guidance that is now in ASC 715)

Under ASC 715-20-45-3A, a reporting entity that sponsors one or more defined benefit plans will present net benefit cost as follows:

• Service cost will be included with other employee compensation costs within operations, if such a subtotal is presented.
• The other components of net benefit cost will be presented separately (in one or more line items) and outside of income from operations, if such a subtotal is presented.

If a separate line item is used to present the other components of net benefit cost, it should have an appropriate description. If a separate line item is not used, the reporting entity must disclose the line items in the income statement where the other components of net benefit cost are included.

Gains and losses from curtailments and settlements, and the cost of certain termination benefits accounted for under ASC 715, should be reported in the same fashion as the other components of net benefit cost.

Net periodic benefit cost is estimated at the beginning of the year, based on beginning-of-the-year (or end-of-prior-year) plan balances and assumptions.

When the plan is remeasured, typically at the end of the year, if the net benefit asset or liability changes by more than the net periodic benefit cost recorded, the difference is referred to as an actuarial gain or loss. How an actuarial gain or loss is recognized will depend on the reporting entity’s accounting policy for gain and loss recognition. Some reporting entities first recognize such gains and losses in OCI and subsequently recognize these amounts in net periodic benefit cost in future periods. A reporting entity that has adopted an immediate recognition policy for gains and losses would recognize the gain or loss in net periodic benefit cost in the period in which it occurs.

Similar to other employee costs, net periodic benefit costs should be capitalized in connection with the construction or production of an asset (e.g., inventories, self-constructed assets, internal use software). The amount capitalized will be limited to only the service cost component of the total net periodic pension and other postretirement benefit cost attributable to specific employees.

Excerpt from ASC 330-10-55-6A

The service cost component of net periodic pension cost and net periodic postretirement benefit cost is the only component directly arising from employees’ services provided in the current period. Therefore, when it is appropriate to capitalize employee compensation in connection with the construction or production of an asset, the service cost component applicable to the pertinent employees for the period is the relevant amount to be considered for capitalization

The guidance does not prescribe how to determine the amount of net periodic benefit cost to allocate to the employees associated with the production or construction of an asset, or how to allocate the costs across the period the assets are being produced or constructed. This determination requires considerable judgment based on the relevant facts and circumstances.

13.3.3 Statement of stockholders' equity presentation

Reporting entities are permitted to recognize gains and losses in OCI and subsequently amortize those amounts as a component of net periodic benefit cost. Prior service cost (credit) generated from plan amendments is generally required to be treated in a similar manner (i.e., such amounts are first recognized in OCI and subsequently recognized in net periodic benefit cost through amortization). As amounts are amortized, a reclassification adjustment is recognized in AOCI.

13.3.3.1 Gains and losses

• The value of plan assets due to experience, both realized and unrealized, being different from that assumed (i.e., the expected return on plan assets)
• The benefit obligation resulting from experience different from that assumed
• Actuarial assumptions, including changes in discount rates

The amount of the net gain or loss recognized in AOCI, as well as the amount to amortize in the subsequent period, is recalculated at each measurement date. At a minimum, an amount should be amortized as a component of net periodic benefit cost for the year if the beginning-of-the-year net gain or loss in AOCI exceeds the "corridor" amount, i.e., 10% of the greater of the benefit obligation or the market-related value of plan assets.

A reporting entity may adopt an accounting policy for recognizing the net gain or loss that differs from the corridor approach, as long as it is a systematic method and the amount recognized each period is no less than the amount that would have been recognized under the corridor method. As discussed in ASC 715-20-50-1(o), a reporting entity should also disclose any alternative recognition policy.

13.3.3.2 Prior service cost (credit)

Prior service cost (credit) arises from plan amendments that increase (decrease) benefits for services rendered in prior periods. It is measured by the change in the benefit obligation at the date the amendment is adopted. The amount to be amortized as a component of net periodic benefit cost each period is established at the date of the amendment. This amount should not be subsequently changed or recalculated, unless there is a significant event such as a curtailment. Prior service cost arising from each plan amendment should generally be amortized separately.

13.3.3.3 Foreign pension and OPEB plans

A reporting entity with foreign plans in which the functional currency for the entity with the foreign plan is different from the overall parent reporting currency needs to determine at what foreign currency rate to translate amounts in AOCI that are subsequently reclassified to net income. We believe that there are two acceptable approaches to account for the translation under ASC 830, Foreign Currency Matters, as described in Figure FSP 13-1 below. Selection of an approach represents an accounting policy decision that should be applied consistently.

Figure FSP 13-1
Acceptable approaches to account for the reclassification of foreign pension and OPEB items from AOCI to net income

The amount of AOCI reclassified to net income each period is translated at the historical exchange rate in effect at the time the prior service costs (credits), net gain (loss), or transition asset (obligation) were initially recognized in OCI.

The amount of AOCI reclassified to net income each period is translated at the current exchange rate in effect for the period in which the reclassification adjustment is reflected in net income.

The rate used typically represents the average exchange rate for the period, since pension and OPEB expense is recognized ratably over the period.

13.3.4 Subsidiaries participating in parent company plans

When a reporting entity participates in a pension or OPEB plan sponsored by an affiliated entity (e.g., parent company, sister entity), the accounting in the standalone financial statements of the reporting entity should generally follow the "multiemployer" guidance in ASC 715-80 (discussed in FSP 13.5). The multiemployer guidance differs significantly from the traditional "single employer" accounting guidance. Under multiemployer accounting, a reporting entity typically recognizes expense based on the required contribution to the plan for the period. The reporting entity only recognizes a liability if the required contribution had not been paid at the end of the period.

A subsidiary that participates in its parent's benefit plan is not required to provide the multiemployer disclosures described in FSP 13.5.1 and FSP 13.5.2. Rather, it should disclose the name of the plan and the amount of contributions to the plan.

13.3.5 Reporting entities with two or more plans

Reporting entities may aggregate the disclosures provided for all pension plans, and for all OPEB plans, unless disaggregating in groups provides more useful information or if a disclosure is specifically required, as discussed in this section.

13.3.5.1 Aggregate benefit obligation in excess of plan assets

Reporting entities may aggregate disclosures for plans whose plan assets exceed the benefit obligation, with separate disclosures for those plans whose benefit obligations exceed plan assets. However, ASC 715-20-50-3 requires that if a reporting entity choses to aggregate the disclosures required by ASC 715-20-50-1 for these plans, it also needs to include the disaggregated disclosure.

• For pension plans:
  • The projected benefit obligation and fair value of plan assets in the aggregate for plans with PBOs in excess of plan assets, and
  • The accumulated benefit obligation and fair value of plan assets in the aggregate for plans with ABOs in excess of plan assets.

  13.3.5.1A Aggregate benefit obligation in excess of plan assets

  Reporting entities may aggregate disclosures for plans whose plan assets exceed the benefit obligation, with separate disclosures for those plans whose benefit obligations exceed plan assets. However, ASC 715-20-50-3 requires that if a reporting entity choses to aggregate the disclosures required by ASC 715-20-50-1 for these plans, it also needs to include the disaggregated disclosure.

  In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits (Topic 715), Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The guidance is effective for fiscal years ending after December 15, 2020 for public business entities and for fiscal years ending after December 15, 2021 for all other entities. Early adoption is permitted for all entities. ASU 2018-14 only amends annual reporting requirements (i.e., it does not amend interim reporting requirements). A reporting entity should apply the amendments on a retrospective basis to all periods presented.

  Pre-adoption of ASU 2018-14

  Reporting entities may aggregate disclosures for plans whose plan assets exceed the benefit obligation, with separate disclosures for those plans whose benefit obligations exceed plan assets. However, ASC 715-20-50-3 requires that if a reporting entity choses to aggregate the disclosures required by ASC 715-20-50-1 for these plans, it also needs to include the disaggregated disclosure.

  • For plans with benefit obligations in excess of plan assets as of the measurement date of each balance sheet presented, disclose the aggregate benefit obligation and aggregate fair value of plan assets
  • For pension plans with an ABO in excess of plan assets, disclose the aggregate ABO and the aggregate fair value of plan assets

  13.3.5.2 US and international plans

  A reporting entity may aggregate its disclosure for US and non-US plans, unless the benefit obligations for the non-US plans are significant relative to the total benefit obligation and their assumptions are significantly different.

  13.3.6 Disclosure

  Information related to a reporting entity's net periodic benefit cost should be disclosed for each period that an income statement is presented. Similarly, information related to amounts presented in a reporting entity's balance sheet should be disclosed as of the date of each balance sheet presented. Information for pension plans should be provided separate from information about OPEB plans (see FSP 13.3.5 for discussion of disclosure requirements when a reporting entity has more than one pension or OPEB plan). Disclosure requirements differ depending on if the reporting entity is a public entity or a nonpublic entity.

  ASC 715-20-20 defines both a nonpublic entity and a public entity.

  Definition from ASC 715-20-20

  Nonpublic entity: Any entity other than one with any of the following characteristics:
  1. Whose debt or equity securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market, including securities quoted only locally or regionally
  2. That is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets)
  3. That makes a filing with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market
  4. It is required to file or furnish financial statements with the Securities and Exchange Commission.
  5. That is controlled by an entity covered by (a) through (d).

  Publicly traded entity (or public entity): Any entity that does not meet the definition of a nonpublic entity.

  Public reporting entities should provide the required disclosures from ASC 715-20-50-1 as further discussed in the remainder of this section. ASC 715-20-55-16 through ASC 715-20-55-17 include an illustrative example of the disclosure requirements.

  A nonpublic company should refer to the disclosures required in ASC 715-20-50-5, and to the considerations for nonpublic companies (see FSP 13.7).

  13.3.6.1 Description of the plans

  Although not specifically required, a reporting entity should consider providing a general description of the defined benefit plans it sponsors to help financial statement users understand the current and future impact the benefits have on the financial statements. The following is information that a reporting entity may consider providing:

  • Nature of the plans
  • Benefits provided
  • Employee groups entitled to benefits
  • Description of the regulatory environment (e.g., ERISA) in which the plans operate
  • Description of the risks to which the plans may expose the reporting entity
  • Other information that would be useful to understand the plans

  13.3.6.2 Amounts recognized on the balance sheet and funded status

  ASC 715-20-50-1 requires a reporting entity to disclose the pension-related amounts recognized on the balance sheet, showing separately the net assets and net liabilities. A reporting entity should separately disclose the current and noncurrent liabilities recognized if it presents a classified balance sheet. A reporting entity should also disclose the funded status of the plans. These amounts should be consistent with the ending balances in the reconciliation of the benefit obligation and the fair value of plan assets, as discussed in FSP 13.3.6.3.

  As discussed in ASC 715-20-50-1(e), for defined benefit pension plans, a reporting entity should disclose the accumulated benefit obligation (ABO). The ABO is a benefit obligation measure that incorporates past and current compensation levels, but unlike the projected benefit obligation, does not reflect expected benefit increases from future salary levels. The PBO is the benefit obligation that is used to calculate the net asset or liability included on the balance sheet, while the ABO is disclosed.

  Reporting entities with two or more plans have additional disclosure requirements (see FSP 13.3.5 for discussion of disclosure requirements when a reporting entity has more than one pension or OPEB plan).

  13.3.6.3 Reconciliation of the benefit obligation and plan assets

  As discussed in ASC 715-20-50-1(a) through ASC 715-20-50-1(b), a reporting entity should disclose a reconciliation of the beginning and ending balances of the benefit obligation and the fair value of plan assets, showing separately the items that impact the balance. Figure FSP 13-2 identifies items that typically affect the benefit obligation, fair value of plan assets, or both.

  Figure FSP 13-2
  Items that typically affect the benefit obligation, fair value of plan assets, or both

  Benefit obligation Fair value of plan assets • Service cost • Actual return on plan assets • Contributions by plan participants • Interest cost • Contributions by reporting entity • Benefits paid • Actuarial gains and loses • Foreign currency exchange rate changes • Plan amendments • Business combinations • Curtailments • Divestitures • Termination benefits • Settlements

  13.3.6.4 Plan assets

  ASC 715-20-50-1(d) provides disclosure objectives for plan assets, indicating that the disclosures are intended to provide users of the financial statements with an understanding of:

  • The plan's investment policies, strategies, and allocation decisions
  • The classes of plan assets
  • The inputs and valuation techniques used to measure the fair value of plan assets
  • The effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period
  • Significant concentrations of risk within plan assets

  The plan asset disclosures are intended to address users' desires for transparency about the types of assets and associated risks in a reporting entity's defined benefit pension and OPEB plans, and how economic events could have a significant effect on the value of plan assets.

  Disclosure about investment policies and strategies

  ASC 715-20-50-1(d)(5) requires a reporting entity to disclose information regarding how investment allocation decisions are made, including factors pertinent to understanding investment policies and strategies. Disclosures should include:

  • A narrative description of investment policies and strategies
  • Target allocation percentages or a range of percentages considering the classes of plan assets as of the latest balance sheet presented (on a weighted-average basis for reporting entities with more than one plan)
  • Other factors pertinent to an understanding of the plan's policies and strategies, such as:
    • Investment goals
    • Risk management practices
    • Permitted and prohibited investments, including whether the use of derivatives is permitted
    • Diversification
    • The relationship between plan assets and benefit obligations
    Disclosure about classes of plan assets

    As discussed in ASC 715-20-50-1(d)(5)(ii), a reporting entity should disclose the fair value of each class of plan assets as of each annual reporting date for which a balance sheet is presented. Asset classes should be disclosed based on the nature and risks of the assets.

    Examples of classes of plan assets include:
    • Cash and cash equivalents
    • Equity securities (segregated by industry type, reporting entity size, or investment objective)
    • Debt securities issued by national, state, and local governments
    • Corporate debt securities
    • Asset-backed securities
    • Structured debt
    • Derivatives on a gross basis (segregated by type of underlying risk in the contract, e.g., interest rate risk, foreign exchange risk, credit risk)
    • Investment funds (segregated by type of fund)
    • Real estate

    Plan assets may be invested indirectly in many different asset categories (e.g., a mutual fund may invest in several different types of assets). A reporting entity is not required to allocate such indirect investments into respective asset categories. However, a reporting entity should consider the objectives of the disclosure in determining under which asset class such an investment should be disclosed. Specifically, disclosure of additional asset classes and/or further disaggregation of major categories would be appropriate if that information is expected to be useful in understanding the risks associated with each asset class or the overall expected long-term rate of return on assets.

    As discussed in ASC 715-20-50-1(d)(5)(iii), a reporting entity is also required to provide a narrative description of the basis used to determine the overall expected long-term rate of return on assets. Such narrative should consider the classes of assets described above and include:

    • The general approach used
    • The extent to which the overall rate of return on assets assumption was based on historical returns
    • The extent to which adjustments were made to those historical returns in order to reflect expectations of future returns and how those adjustments were determined.

    Question FSP 13-1
    Is a reporting entity required to separately disclose its investment strategy for each class of assets in the fair value hierarchy disclosure?

    PwC response

    The guidance does not explicitly require a reporting entity to disclose its investment strategy for each class of assets included in the fair value disclosure. Accordingly, investment strategies may be disclosed at the level provided to the portfolio managers provided it is clear how the strategy relates to the classes of plan assets. For example, if a plan's strategy is to invest 50% to 60% in equities, the reporting entity would not be required to break this target allocation into further subclasses (even where the fair value hierarchy disclosure presents several such subclasses of equities).

    A reporting entity that applies the practical expedient related to the measurement date of defined benefit plan assets and obligations at the calendar month-end closest to the fiscal year-end date is subject to an additional disclosure requirement (if applicable), as described in ASC 715-20-50-1(d)(5)(ii).

    Excerpt from ASC 715-20-50-1(d)(5)(ii)

    If an employer determines the measurement date of plan assets in accordance with paragraph 715-30-35-63A or 715-60-35-123A and the employer contributes assets to the plan between the measurement date and its fiscal year-end, the employer shall not adjust the fair value of each class of plan assets for the effects of the contribution. Instead, the employer shall disclose the amount of the contribution to permit reconciliation of the total fair value of all the classes of plan assets to the ending balance of the fair value of plan assets.

    Disclosure of fair value measurements of plan assets

    Disclosures are required to enable users of the reporting entity's financial statements to assess the inputs and valuation techniques used to develop fair value measurements of plan assets. As discussed in ASC 715-20-50-1(d)(5)(iv), a reporting entity should disclose the following for each class of plan assets as of each annual reporting date for which a balance sheet is presented:

    • The level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using Level 1, Level 2, and Level 3 inputs. However, if the fair value is measured at net asset value (NAV) using the practical expedient, it should not be reflected in this table, but rather should be included as a reconciling item to the total fair value of plan assets. Investments for which NAV is fair value, and not a practical expedient, must still be included in the fair value table in the appropriate level.
    • For Level 3 fair value measurements of plan assets, a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to:
      • Actual return on plan assets, separately identifying the amounts related to assets still held at the reporting date and assets sold during the period
      • Purchases, sales, and settlements, net
      • Transfers in or out of Level 3

      See FV 4.5 for further discussion of inputs to fair value measurement and the fair value hierarchy, including presentation when the inputs used to measure fair value fall within different levels of the fair value hierarchy.

      ASC 715-20-50-1(d)(5)(iv)(02) requires the Level 3 asset reconciliation to include the 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. Questions have arisen in practice about how to define and measure realized and unrealized gains and losses on plan assets, as well as the appropriate format for presenting this information. The guidance does not specify a particular way to calculate realized and unrealized gains and losses, or the format of the Level 3 reconciliation disclosure. A reporting entity can exercise judgment in determining the manner and format of the disclosure, so long as it satisfies the disclosure objectives of the standard and is applied consistently each period.

      In considering the guidance, we believe, for example, that it would be acceptable to separately present the actual return (realized and unrealized) on plan assets still held at the reporting date, and on assets sold during the period within the reconciliation. Alternatively, the actual return (realized and unrealized) may be presented as a single line item in the reconciliation, and the amounts associated with assets still held at the reporting date disclosed in a footnote to the reconciliation.

      The disclosure requirements by level are similar to those required by ASC 820, Fair Value Measurement (see FSP 20). However, ASC 715 requires a reporting entity to segregate its Level 3 returns between those related to assets held and sold in lieu of the ASC 820 requirement to segregate gains and losses recognized in earnings from those recognized in other comprehensive income. That requirement does not apply to a reporting entity's disclosures about its pension and OPEB plan assets because the delayed recognition provisions for gains and losses makes it too difficult to determine whether gains or losses on plan assets were included in net income or OCI for the period.

      Many reporting entities and plans use information provided by third parties in developing their fair value estimates. While reporting entities may receive information from the plan custodian or trustee regarding asset valuations and the classification of investments in the fair value hierarchy (i.e., whether inputs used to measure fair value are Level 1, 2 or 3), management remains responsible for the accuracy of such determinations. As such, reporting entities should understand the valuation methodologies used by their third party information providers. The AICPA Employee Benefit Plans Audit Quality Center Advisory, Valuing and Reporting Plan Investments, may help management understand its responsibility regarding the valuation and reporting of investments.

      Question FSP 13-2
      How should a reporting entity determine the level of disaggregation (e.g., the appropriate unit of account) for the fair value hierarchy disclosure?

      PwC response

      The guidance indicates that for purposes of the fair value disclosures, the asset classes should be based on the nature, characteristics, and risks of the assets in a reporting entity's plan.

      Plan investments often involve complex structures with multiple layers. A reporting entity should determine the unit of account based on the legal structure, which will determine the level of disaggregation for the fair value hierarchy disclosure. In some cases, a plan may utilize a portfolio manager to manage a pool of investments (e.g., stocks and bonds) on its behalf, but the plan legally owns the underlying investments. In these situations, each individual stock and bond (i.e., CUSIP or trade lot) would be its own unit of account.

      A plan may invest in an insurance contract that will generate returns based on the performance of underlying or referenced assets (e.g., pooled accounts). In these situations, the reporting entity may determine that the appropriate unit of account is the insurance contract rather than the underlying investment. Alternatively, some insurance contracts require that the underlying assets be maintained in a "separate account" of the insurance reporting entity, and sometimes the plan sponsor has some involvement in investment decisions relating to the separate account. These assets are generally not comingled with assets of the insurer or other plan sponsors, and while the insurer legally owns the assets, they may not be available to its general creditors in bankruptcy. Accordingly, it may be appropriate to look through the separate account to determine the appropriate level of the underlying investment.

      Question FSP 13-3
      How should investments measured at NAV using the practical expedient, cash, insurance contracts, dividends receivable, and accrued interest be included in the reporting entity’s fair value hierarchy disclosure?

      PwC response

      The guidance requires disclosure of the fair value of each class of plan assets and the level within the fair value hierarchy based on the inputs used to develop the fair values. The following provides guidance on specific types of plan assets:

      Investments measured at NAV using the practical expedient — Investments whose fair values are measured at NAV using the practical expedient should not be included in the fair value hierarchy table. Such investments should be included as a reconciling item between the fair value hierarchy disclosure and total plan assets. Investments measured at NAV not using the practical expedient should be included in the fair value hierarchy table.

      Demand deposits and other cash — Cash on deposit held by a plan is recorded at the amount on deposit. Since no judgment is required to assess the fair value of cash, and the disclosure example in ASC 715-20-55-17 explicitly includes cash, it could be included in the fair value hierarchy disclosure. It is appropriate to classify the fair value measurement for cash as Level 1 when the amounts are available on demand. It would also be acceptable to exclude cash from the fair value hierarchy disclosure and include it as a reconciling item between the fair value hierarchy disclosure and total plan assets.

      Contracts with insurance companies — ASC 715-30-35-60 states that contracts with insurance companies (other than those that are in substance equivalent to the purchase of annuities) should be accounted for as investments and measured at fair value. The guidance further states that for some contracts, contract value may be the best evidence of fair value. If a contract has a determinable cash surrender value or conversion value, that amount is presumed to be its fair value.

      We believe that these alternative measures are practical expedients to the required fair value measurement. This practical expedient does not relieve a reporting entity from the requirement to present such contracts as a component of the applicable major category of plan assets in the fair value disclosure. Accordingly, contracts issued by insurance companies, including those for which cash surrender value or contract value is used to estimate fair value, should be included in the fair value hierarchy disclosure.

      Generally, contracts that are recorded at cash surrender value or contract value will be classified as Level 2 or Level 3, depending on the nature of the contract. For example, in some instances, the contract value or cash surrender value is based principally on a referenced pool of investment funds that actively redeems shares and for which prices may be observable, resulting in Level 2 classification. In other instances, the underlying investments may comprise less liquid funds or assets, resulting in Level 3 classification.

      Dividends and interest receivable — Dividends and interest receivable included in plan assets are also required to be recorded at fair value. Given the short-term nature of these assets, reporting entities generally assert that the carrying amounts of these items approximate their fair values. A reporting entity that includes these assets in the fair value hierarchy should not classify these assets as Level 1 as there are no quoted prices in active markets. A reporting entity would need to assess the observability of inputs to determine whether the assets should be reported as Level 2 or Level 3. Alternatively, some reporting entities present these items as adjustments to reconcile the fair value hierarchy to the fair value of plan assets.

      Question FSP 13-4
      What should the Level 3 asset reconciliation start with -- the fair value estimates reported in the prior year financial statements or the revised amounts based on any final valuations received after those financial statements were issued?

      PwC response

      Many reporting entities apply a roll forward technique to estimate the year-end fair values of alternative investments (e.g., hedge funds and private equity funds) because valuations are difficult to obtain in a timely manner for year-end reporting. In these instances, reporting entities typically develop a best estimate using asset values at a period earlier than the year-end measurement date and make adjustments to roll forward the asset values to year-end. The year-end estimates are subsequently "trued-up" when the plan receives the final valuations (e.g., in the second quarter), which are used to measure current year benefit cost and disclosed in the plan financial statements filed with Form 5500.

      Assuming the reporting entity has concluded that any subsequent changes to the prior year fair value estimates were "changes in estimates" rather than "corrections of errors" (as defined by ASC 250, Accounting Changes and Error Corrections), the change in estimate should be reflected as current period activity (e.g., unrealized gain or loss) in the Level 3 asset reconciliation. In that case, the reconciliation should start with the fair value estimates reported in the prior year financial statements.

      Question FSP 13-5
      How should the Level 3 asset reconciliation present foreign exchange translation and transaction gains and losses?

      PwC response

      The effect of foreign currency translation and transaction gains and losses, to the extent they affect the change in the fair value of the Level 3 assets, may be presented as a component of actual return on plan assets for the period, or as a separate line item. If a reporting entity elects to present the foreign exchange amounts as a separate line item in the reconciliation, it is not necessary to disclose the amounts associated with assets sold and assets held at year-end.

      Question FSP 13-6
      If a pension plan is party to securities lending transactions (i.e., borrower of cash and lender of securities), should the obligation to buy back the securities on loan be included in the fair value disclosures, including the fair value hierarchy disclosure?

      PwC response

      Yes. The liability recognized in connection with a securities lending transaction (i.e., to repurchase the securities on loan) is included in the net assets of the plan at fair value. Accordingly, it is appropriate to include the securities lending liability in the fair value disclosures, including the fair value hierarchy disclosure.

      Disclosure about significant concentrations of risk

      Reporting entities are required to disclose significant concentrations of risk in plan assets. The guidance does not prescribe how a significant concentration should be determined. Each reporting entity should perform a risk assessment of its plan assets to determine whether it has any significant concentrations of risk that require disclosure. Reporting entities should consider concentrations of risk related to asset type, industry, or market.

      Other asset disclosures The guidance requires the following additional asset disclosures:
      • If plan assets include securities of the reporting entity or a related party, the amounts and types of securities included in plan assets
      • The approximate amount of future annual benefits covered by insurance contracts, including annuity contracts issued by the reporting entity or a related party (upon adoption of ASU 2018-14, this disclosure will no longer be required)
      • Any significant transactions between the reporting entity or a related party and the plan during the year (upon adoption of ASU 2018-14, this disclosure will no longer be required)
      • If plan assets are expected to be returned to the reporting entity during the next year (or operating cycle, if longer), the amount and timing of any such plan assets (upon adoption of ASU 2018-14, this disclosure will no longer be required)