Module 5 Flashcards
Overseeing and Managing Plan Audits
1.1 The Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Codification (ASC or Codification) as the single source of authoritative, nongovernmental, U.S. generally accepted accounting principles (GAAP). The Codification is updated through the issuances of FASB Accounting Standards Updates (ASUs). What are the purposes of these ASUs? (Text, p. 179)
FASB does not consider ASUs as authoritative in their own right. Instead, new ASUs serve only to update the Codification and provide background information about the guidance.
1.2 Explain how the Codification treats the accounting and reporting standards for employee benefit plans. (Text, pp. 179-180)
The Codification addresses employee benefit plans by locating their treatment in three separate topics. These topics are concerned with reporting standards.
(1) FASB ASC Topic 960, Plan Accounting - Defined Benefit Pension Plans
Establishes the accounting and financial reporting standards for defined benefit retirement plans
(2) FASB ASC Topic 962, Plan Accounting - Defined Contribution Plans
Includes the accounting and financial reporting standards for defined contribution retirement plans
(3) FASB ASC Topic 965, Plan Accounting - Health & Welfare Benefit Plans
Provides the accounting and financial reporting standards for health and welfare benefit plans.
1.3 Explain the purpose of ASC Topic 960. (Text, p. 181)
Establishes financial accounting and reporting standards for the annual financial statements of defined benefit pension plans.
FASB believes ASC Topic 960 is generally consistent with the views of the U.S. Department of Labor (DOL) and the American Academy of Actuaries. This means that most private pension plans will be able to prepare one set of financial statements in accordance with ASC Topic 960 for filings under the Employee Retirement Income Security Act (ERISA) and for distribution to other users.
1.4 ASC Topic 960 applies to which plans? (Text, pp. 180-181)
ASC Topic 960 applies to all ongoing plans, funded or unfunded, that provide pension benefits for the employees of one or more employers or for the members of a trade or other employee association, including the following:
(a) Plans subject to ERISA
(b) Plans not subject to ERISA
(c) Plans with no intermediary funding agency or plans that may be financed through (1) one or more trust funds, (2) one or more contracts with insurance entities or (3) a combination thereof.
Plans maintained outside the United States that are similar to plans maintained within the U.S. are also subject to these rules if the financial statements of such plans are intended to conform to GAAP.
ASC Topic 960 does not apply to government-sponsored social security plans.
All pension plans that issue financial statements in conformity with GAAP, including plans with fewer than 100 participants, are covered by ASC Topic 960.
1.5 Summarize the accounting and reporting requirements of ASC Topic 960. (Text, p. 181)
The accounting and reporting requirements of ASC Topic 960 can be summarized as follows.
(a) The plan financial statements should be prepared on the accrual basis of accounting and should include a statement of net assets available for benefits as of the end of the plan year and a statement of changes in net assets available for benefits for the plan year then ended.
(b) Plan investments should be presented at their fair value, except for insurance contracts, which should be presented in the same manner as required for filing under ERISA (i.e., fair value or contract value).
(c) Information should be included about:
The actuarial present value of accumulated plan benefits
Significant changes therein.
(d) Accumulated plan benefit information may be disclosed in one of three places: (1) on the face of the statements of net assets available for benefits and on changes in net assets available for benefits, (2) in separate statements or (3) in the notes to the financial statements.
(e) The actuarial present value of accumulated plan benefits should be based on employees’ earnings and service rendered before the measurement date. Plan actuaries should not consider future salary increases or benefit improvements unless they have been specified (e.g., automatic cost-of-living adjustments).
1.6 Although ASC Topic 960 does not identify any one group as the primary users of plan financial statements, the content of plan financial statements should focus on the needs of one group. Which group is this, and why are its needs paramount? (Text, pp. 181-182)
The content of plan financial statements should focus on the needs of plan participants because pension plans exist primarily for their benefit. However, plan financial statements should be useful to others who have any of the following characteristics:
(a) Advise or represent participants
(b) Are current or potential investors or creditors of the employer
(c) Are responsible for funding the plan, or
(d) For other reasons have a derived or indirect interest in the status of the plan.
1.7 Does ASC Topic 960 require financial statements that compare more than one year’s information? Explain. (Text, p. 182)
Even though the primary objective of pension plan financial statements is to provide financial information that will help users assess the plan’s present and future ability to pay benefits when they are due, ASC Topic 960 does not require comparative financial statements. It recommends, but does not require, supplementing the financial statements with voluntary disclosures of matters deemed important.
1.8 List supplemental information that FASB recommends be included in the annual financial statements of a plan. (Text, pp. 182-183)
FASB recommends, but does not require, supplementing the financial statements with voluntary disclosures of matters deemed important, including all of the following:
(a) A statement that includes information regarding the net assets available for benefits as of the end of the plan year
(b) A statement that includes information regarding the changes during the year in net assets available for benefits
(c) Information regarding the actuarial present value of accumulated plan benefits as of either the beginning or end of the plan year
(d) Information regarding the effects, if significant, of certain factors affecting the year-to-year change in the actuarial present value of accumulated plan benefits.
