ERISA Accounting and Other Emerging Issues

Caron & Bletzer spends considerable time ensuring that our managers and staff are not only familiar with, but knowledgeable about recent accounting pronouncements and emerging auditing issues. We will work with you to make sure you are fully informed about all employee benefit plan audit related emerging accounting and auditing issues, as well as other issues that may affect reporting compliance for your plan.

Change in Presentation of Participant Loans

The Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2010-25 has provided new guidance on the presentation and classification of participant loans in a defined contribution plan's financial statements. ASU 2010-25 requires that participant loans be classified as notes receivable from participants, which are segregated from plan investments. Prior to this ASU, participant loans were treated as a plan investment. This effectively eliminates fair value disclosures for participant loans. The ASU is effective for plan years ending after December 15, 2010, however plans may elect to adopt this change early. Regardless of when the ASU is adopted, it is important to note that it must be applied retroactively to all prior periods presented in the financial statements. In general, this change will make reporting easier for plans with participant loans, since they will no longer have to worry about the fair value of the loans, or assigning a level to them under (old) FAS 157.

EFAST2 Electronic Filing Requirements for Form 5500

Effective Date

Effective for plan years beginning on or after January 1, 2009, employee benefit plans with Form 5500 filing requirements must file their Form 5500 electronically through the Department of Labor's (DOL's) new EFAST2 system. Paper Form 5500s will no longer be accepted by the DOL and will be rejected if filed after January 1, 2010.

Delinquent and amended Form 5500s from years prior to 2009 must now be filed electronically through EFAST2 as well. The transition rules have now expired, and no more paper filings may be made.

Electronic Signing Credentials

In order to electronically sign the Form 5500 each plan sponsor must obtain electronic signature credentials from the DOL's IREG website. Upon registration, the plan sponsor will receive an email with a link to a website where the credentials (signer ID and PIN) will be provided. The credentials are personal to the individual who registered for them. The Form 5500 must be signed by an authorized signer of the plan sponsor. TPAs or financial institutions are not permitted to sign on behalf of their clients.

There are several categories of credentials available, but in general, plan sponsors signing their own 5500s will want to obtain credentials as a "Filing Signer." The other categories, such as "Filing Author" or "Schedule Author" will be used by your professionals who are preparing the 5500 or various schedules.

Alternative Signing Method

In order to address concerns raised about the signing process, which often requires coordination between preparer and plan sponsor in a signing ceremony, the DOL announced on an alternative signing method beginning May 13, 2010. Under this method, a plan sponsor may sign a hard copy of the Form 5500 and provide that, along with a letter authorizing the preparer to sign the electronic 5500 on their behalf, to the preparer. The preparer must attach a pdf copy of the signed return to the electronically filed return. The disadvantage to this method is that the signer's original signature becomes publicly available, and that, at this point, the preparers name appears on the signer line of the electronic 5500. We hope that these issues may be resolved for next filing season.

For more detailed information on EFAST2 please visit the DOL's website or contact us for further clarification.

Adoption by FASB of the Accounting Standards Codification

In June 2009, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 is effective for financial statements for annual periods ending after September 15, 2009 and establishes the FASB Accounting Standards Codification (ASC). Under SFAS No.168, now referred to as ASC 105-10, the ASC became the only source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) to be applied by non-governmental entities and superseded all existing non-SEC accounting and reporting standards. The ASC does not create new accounting rules, but only provides a comprehensive system to reorganize previously existing U.S. GAAP in a single authoritative source. In general, this new pronouncement will only change how accounting standards are referenced in the financial statements.

Fair Value Accounting and Presentation Requirements

ASC 820-10 Fair Value Measurement and Disclosures (formerly SFAS No. 157) defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This pronouncement, now effective for all audits, does not require any new fair value measurements of a plan's investments, it merely increases audited financial statement disclosure requirements.

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value as described below.

Level 1: Investments:
Valued using quoted prices in active markets for identical assets that the plan has the ability to access at the measurement date.
Example: Prices derived from a stock exchange.

Level 2: Investments:
Valued using inputs other than quoted prices included with level 1 that are observable for the asset, either directly or indirectly.
Example: Yield curves, indices, matrix pricing.

Level 3: Investments:
Valued using significant unobservable inputs that reflect the plan's own assumptions about the assumptions that market participants would use in pricing the asset, based on the best information available.
Example: Investment manager pricing, hedge funds, private equities.

Plans were required to implement this standard in their 2008 financial statements, so it should now be applied in your plan's financials statements. In 2009, further guidance again became applicable when FASB issued an amendment to ASC 820-10. The amendment provides additional guidance on how to determine the fair value of an investment when the volume and level of activity for the asset or liability have significantly decreased and in identifying transactions that are not orderly. It also expands disclosure requirements for investments by requiring detail by major security type.

In 2010 FASB yet again issued guidance on ASC 820-10, with ASU No. 2010-06. ASU 2010-06 requires increased disclosures for transfer of level 3 investments in and out of level 1 and 2 investments, effective for plan years beginning after December 15, 2009. For plan years beginning after December 15, 2010 additional disclosure is required for activity related to level 3 investments.

C&B is well aware of the confusion the ASC 820-10 hierarchy can cause plan sponsors. In some instances, leveling guidance published by asset custodians may not appear appropriate for your situation. The decision between level two and level three for more complex assets is not always clear. We encourage thorough discussion of the nature of assets and how valuations are arrived at between plan sponsors and their advisors, and we are happy to discuss any questions you may have. The positive result of this new guidance has been the closer look taken at asset characteristics and valuations.