United States: FASB Proposal Affects Employee Benefit Plans

Last Updated: August 22 2013
Article by Hal Hunt

In response to concerns expressed by leading organizations that specialize in employee stock ownership plans (ESOPs), the FASB has proposed an indefinite deferral of certain Level 3 fair value measurement disclosure requirements for nonpublic employee benefit plans holding private company employer equity securities. Without the deferral, these disclosure requirements would take effect in financial statements of nonpublic employee benefit plans for periods beginning on or after December 15, 2011 (calendar year 2012), and these disclosures would be included in Form 5500 filings that are generally due within seven months after the plan's year-end.

This Messenger highlights the proposed changes and suggests topics that plan sponsors should discuss with their ESOP plan independent auditor at this time.

Highlights of Proposed Changes

The reasons for the proposed changes and the nature of the disclosures are as follows:

  • Reasons for changes. The concerns were expressed in a joint letter from the National Center for Employee Ownership, the ESOP Association, and the Employee-Owned S Corporations of America. The key points include the following:
    • Cost-benefits. The costs would outweigh the benefits for certain disclosures about valuations of Level 3 fair value measurements that were introduced in Accounting Standards Update (ASU) 2011-04. (See MHM Messenger 3-13 for more details.) Examples include quantitative information regarding unobservable inputs, including the weighted average cost of capital used in the discounted cash flow method, pricing multiples applied, operating margins, long-term revenue growth rates, and other sensitive information.
    • Access to regulatory databases. The disclosure of proprietary, sensitve information would be especially problematic for plans that cover 100 or more participants and are subject to audit under the Employee Retirement Security Act of 1974 because the audited financial statements for these plans are filed in the Department of Labor's EFAST2 database which is readily accessible by the public via the Internet.
    • Risks of releasing proprietary information. The easy public access to these disclosures, combined with the nature of the information that is required to be disclosed, would open the door for both plan participants and the general public to obtain information that would not otherwise be available about the valuations of the ESOP sponsor entities. Although there are risks related to release of the proprietary information to competitors, customers and suppliers, arguably the most damaging effects could come from release of the information to corporate raiders because it could help them launch takeovers that would work to the detriment of the employee-owners.
  • Nature of changes. The disclosures at issue generally relate to the quantitative information about the unobservable inputs used in the fair value measurement of Level 3 financial instruments. Although these disclosures can be aggregated by class of assets, the investment in the ESOP sponsor's equity securities is often the only Level 3 measurement in the plan's financial statements with the result that there is only one asset within the class. In these cases, the information disclosed would be specific to the entity, and the disclosure of a range of values like those shown in the appendix to Messenger 3-13 would not be a viable option. Instead, the FASB is proposing the following:
    • New definition. The FASB's exposure draft includes a new definition of a nonpublic employee benefit plan. If adopted as proposed, this term would be defined as an employee benefit plan other than a plan that is subject to the SEC's Form 11-K filing requirements.
    • Indefinite deferral. The exposure draft proposes to defer indefinitely the requirement in ASC 820-10-50-2(bbb) for investments held by a nonpublic employee benefit plan in its plan sponsor's own nonpublic equity securities. Paragraph 820-10-50-2(bbb) requires quantitative information about the significant unobservable inputs used in a Level 3 fair value measurement.

Open questions

The purpose of the proposed deferral is to allow more time for discussions among regulators, nonpublic employee benefit plan sponsors, and others about possible ways to deal with the concerns about the release of proprietary information. To expedite the deferral, the proposed ASU is on a fast track, with a comment period ending May 31, 2013. The expectation is that a final ASU will be issued before the deadline for the first set of Form 5500 filings that would be subject to the expanded Level 3 fair value disclosures. Without an extension, the filing deadline for calendar-year 2012 financial statements for nonpublic employee benefit plans is July 31, 2013.

Specific questions on which the FASB is seeking comment include the following:

  1. Should the deferral apply to certain qualitative information (in addition to the quantitative information described above)?
  2. Should the deferral apply to additional investments (other than the plan sponsor's own nonpublic entity equity securities)?
  3. Should other employee benefit plans be included in the scope of the deferral?
  4. Is the definition of nonpublic employee benefit plan appropriate, understandable, and operational?

Steps to take now

In view of the proposal and timetable, nonpublic employee benefit plan sponsors may wish to consult now with their ESOP plan independent auditor about the nature of the information to be disclosed.

The deferral is expected to eliminate many of the qualified opinions that might otherwise result from plans that elect not to disclose such information. However, plan sponsors should be aware that, if an independent auditor concludes that there is a departure from generally accepted accounting principles, this conclusion will be apparent in the Form 5500 filing. This notation may lead to an increased risk of review by the Department of Labor, and there is a risk of a fine for failure to file a complete and accurate Form 5500.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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