Changes to Fair Value Reporting
posted Feb 13, 2013 by Anthony Mangiarelli, CPA
There are more changes to fair value measurement disclosures for investments held by employee benefit plans with year ends of December 31, 2012 or later and it is important for you to plan now for these expected changes.
It is anticipated that service providers holding these assets will need to provide most of this information as part of their year-end reporting. However, it is ultimately the responsibility of the plan sponsor to ensure all necessary disclosures are made within the plan’s financial statements, which are filed with Form 5500.
These new standards mainly effect the reporting of Level 3 investments (those that use unobservable inputs in their valuation). Level 3 investments in an employee benefit plan normally consist of insurance products backed by the insurance company’s general account, employer stock of a non-public entity, real estate, partnership interests and derivatives.
Below is a summary of the changes to the financial reporting standards affecting employee benefit plans:
- All transfers between Levels 1 and 2 investments are now required to be disclosed. Previously only significant transfers needed to be disclosed.
- Additional Level 3 investment disclosures are required. The additional disclosures are as follows:
A description of the valuation processes followed by the plan, such as:
- The methods used to develop the unobservable inputs used in valuing the investment
- How the plan determined that the pricing quotes or pricing services used in the valuation were appropriate.
- The process for analyzing changes in fair value and
- A description of the group within the plan (generally the investment committee).
- Quantitative information about the significant unobservable inputs in a tabular format, such as ranges of interest rates used, revenue multiples, and discounts or premiums, as applicable.
- Additional narratives to assist in evaluating quantitative disclosures such as collateral, guarantees, concentrations and credit ratings.
- A narrative of the sensitivity of the fair value measurement due to changes in the unobservable inputs, as well as disclosure of interrelationships of the unobservable inputs (Sensitivity Analysis).
It is important to note that the transfers between Level 1 and Level 2 and the sensitivity analysis are not required to be disclosed for non-public entities. However, the definition of non-public entities as it relates to employee benefit plans is still unclear at this time.
Although the reporting deadlines for plans with December 31 year ends does not occur until the summer months, it is important to start planning for and gathering data related to these significant changes in fair value reporting. For help completing any preparations please contact Anthony Mangiarelli, CPA or any member of our Employee Benefit Plan Services Team.
Additional Related Posts:
“Retirement Plan Limitations for 2013” 12/18/12
“Does Your Benefit Plan Have an Investment Committee?” 12/11/12
“Does Your Benefit Plan Have an Investment Policy Statement?” 12/10/12
“How to Plan for Your Year-End Audit” 12/2/12