Auditing Employee Benefit Plans. Josie Hammond

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Financial statements

      An employee benefit plan’s financial statements are required to contain certain information about the plan, the plan’s activity and other events that affect net assets or benefits, as well as other factors necessary to understand the information provided. Financial statements intended to be presented in accordance with GAAP are to be prepared on the accrual basis and should include a statement of net assets available for benefits at the end of the plan year, as well as a statement of changes in net assets available for benefits for the year ended. However, ERISA requires comparative statements of net assets available for benefits to be presented. In addition, ERISA requires certain supplemental schedules.

      ERISA also requires the plan’s financial statements to include a note explaining differences, if any, between amounts reported in the financial statements and amounts reported in Form 5500. ERISA allows the financial statements to be reported using cash, modified cash, or accrual basis of accounting.

      For defined benefit pension plans, information regarding the actuarial present value of accumulated plan benefits and information regarding the effects of certain significant factors affecting the change in accumulated plan benefits are also required to be disclosed, in the financial statements or in the notes. Accumulated benefits represent future benefits attributable under the plan’s provisions based on service rendered through the measurement date. Plan amendments through the measurement date as well as automatic benefit increases should be used in determining accumulated benefits. The actuarial present value of accumulated benefits will be measured using assumptions such as rates of return, participants’ history of pay and service, and other factors.

      Defined benefit health and welfare plans should also present information regarding the plan’s benefit obligations as of the year-end and information regarding the effects of certain significant factors affecting the change in obligations. The measurement date for benefit obligations should be as of a plan’s year-end; otherwise a rollforward would be required from the interim date. Information regarding benefit obligations does not apply to defined contribution plans since the plans’ obligations to provide benefits are limited to the amount accumulated in an individual participant’s account.

      The financial statements should include the actuarial present value of postretirement benefits and each type of postretirement benefit should be separately disclosed. If a plan permits postemployment benefits (such as accumulated eligibility credits), an obligation for such benefits should be reflected in the financial statements and calculated using assumptions for mortality and probability of employee turnover. Claims payable and claims incurred but not reported should be included in the statement of benefit obligations for a self-funded plan, and excluded for an insured plan.

      Allocated contracts should be excluded from the plan’s financial statements and from determining accumulated plan benefits; whereas, unallocated contracts should be included. Disclosure is required for differences between the value of investments reported in the financial statements and Form 5500 annual report.

GAAP requires significant accounting policies to be disclosed. In addition, FASB ASC 275, Risks and Uncertainties, requires disclosures regarding certain risks and uncertainties faced by the plan, to assist financial statement users in understanding the risks that are particularly important to the plan that could significantly affect the amounts reported or disclosed in the financial statements in the near term. The plan is required to disclose information in the following four areas:

       Nature of operations

       Use of estimates in preparing the financial statements

       Significant estimates

       Current vulnerability due to concentrations of credit risk

      For the financial statements of a benefit plan, the nature of operations would include a brief description of the plan and its provisions. The use of estimates disclosure is often a standard paragraph, which may need to be modified for the use of significant estimates, if any. Significant estimates could materially affect the amounts currently reported in the financial statements. In a benefit plan, significant estimates are often prepared through the use of an outside specialist and depend on various assumptions. Current vulnerability due to concentrations of credit risk usually results from lack of diversification. If applicable, concentrations in a benefit plan may include disclosure of investments held with one institution or in primarily in one category of investments. Concentrations are more relevant in plans where there is no participant direction.

       Help desk. Disclosure example:

      Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and changes therein; disclosure of contingent assets and liabilities; and the actuarial present value of accumulated plan benefits at the date of the financial statements, and changes therein. Actual results could differ from those estimates.

      Knowledge check

      1 Which of the following statements does ERISA require to be comparative?Statement of changes in net assets available for benefits.Schedule of Assets Held at End of Year.Statement of net assets available for benefits.Schedule of reportable transactions.

Investment valuation and income recognition

      Employee benefit plan investments may consist of marketable securities (such as stocks, bonds, or shares of registered investment companies), investment or insurance contracts, individual or pooled separate accounts with insurance companies, common or collective trust funds maintained by banks or similar institutions, and other investments (such as limited partnerships, real estate, nonmarketable securities, or leases) or derivative instruments (such as options and futures).

      A defined benefit plan should report investments at fair value, except for contracts with insurance companies that incorporate mortality (that is, death) or morbidity risk (that is, disease or disability), which may be reported at either fair value or contract value in the same manner as in the plan’s annual report with certain governmental agencies pursuant to ERISA.

      Defined contribution (pension or welfare) plans should report all investments at fair value, except for direct investments in fully benefit responsive contracts, which are to be reported at contract value. Contract value is the amount participants normally would receive if they were to initiate permitted withdrawals under the terms of the underlying plan.

      FASB ASC 820 defines fair value, sets out a framework for measuring fair value, and requires certain disclosures about fair value measurements.

      Help desk. The area of fair value continues to evolve. Auditors should monitor FASB developments regarding fair value measurements at https://asc.fasb.org/home.

      Form 5500 also requires the current value of investments to be reported and indicates that current value represents fair market value where available or as determined in good faith under the terms of the plan by a trustee or a named fiduciary. Even though the current value of assets must be determined each year, there is no requirement that the assets be valued annually by an independent appraiser (except for certain nonpublicly traded securities held in employee stock ownership plans). However, Form 5500 requires disclosure of assets whose values were not readily determinable on an СКАЧАТЬ