Auditing Employee Benefit Plans. Josie Hammond

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      GAAP requires operating assets, such as buildings, furniture, fixtures, and leasehold improvements, to be reported at cost, less accumulated depreciation and amortization. However, Form 5500 requires assets to be reported at current (or fair) value. Therefore, a note disclosure may be required to reconcile the difference. In addition, operating assets should be reviewed for potential impairment.

      Help desk. FASB ASC 360, Property, Plant, and Equipment, addresses accounting standards for the impairment of long-lived assets for assets to be held and used and assets to be disposed of. FASB ASC 360-10-35-21 requires that long-lived assets to be held and used by the plan, such as real estate owned by the plan for plan operations, be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets to be abandoned or exchanged for a similar productive asset should be considered held and used until disposed of. FASB ASC 360-10-35-43 states that long-lived assets classified as held for sale should be measured at the lower of its carrying amount or fair value, less cost to sell. A long-lived asset should not be depreciated while it is held for sale.

Accrued liabilities

      An employee benefit plan may have liabilities for amounts owed for securities purchased, refunds of excess contributions, income taxes payable, or other expenses and fees to be paid by the plan. Liabilities should be deducted to arrive at net assets available for benefits. The notes to the financial statements should disclose whether, or which, expenses are paid by the plan or plan sponsor.

      Benefits are deducted from net assets when paid. Amounts related to participants who have elected to withdraw from the plan but have not yet been paid (for example, benefit claims payable) should not be reflected as liabilities on the financial statements. Instead, benefits payable should be disclosed in the notes to the financial statements, if significant. In addition, a reconciliation to Form 5500 may be required for accrued liabilities or benefit claims payable because Form 5500 should include the amount of plan obligations incurred but not yet paid and benefit claims payable which have been approved for payment but not yet processed, for noncash basis plans.

Accounting for uncertainty in income taxes

      Qualified benefit plans are generally exempt from income taxes. Correction programs are available to retirement plans for most issues to retain the plan’s tax-exempt status. There are no relief programs for welfare plans. Plans may become subject to taxation under certain situations (for example, where there is unrelated business income tax due to its investment income).

      FASB ASC 740-10, Income Taxes, requires management to assess the implications of any uncertain tax positions. A Plan’s tax exempt status is considered a tax position. Even though a retirement plan is typically exempt from income taxes, the existence of an operational defect could put its tax-exempt status at risk. However, because of the existence of the Employee Plans Compliance Resolution System (Revenue Procedure 2016-51), most operational defects are eligible for correction without risking disqualification. Revenue Procedure 2016-51 supersedes Revenue Procedure 2013-12 and incorporates certain modifications set forth in Revenue Procedures 2015-27, 2015-28, and 2016-8, and provides updated guidance for correcting operational defects.

      FASB ASC 740-10 provides guidance on how to address uncertainty in accounting for income tax positions reflected as income tax assets or liabilities. The recognition and measurement of each position must be evaluated in accordance with the provisions. Management will need to determine whether it is more likely than not (likelihood of more than 50 percent) that a tax position will be sustained upon examination. FASB ASC 740-10 requires expanded disclosures related to uncertainty in income taxes for the end of each annual reporting period presented.

      Assessment of uncertainty of income tax positions would be required for all open tax years, upon application of the provisions.

      Help desk. A sample disclosure may be as follows:

      Accounting principles generally accepted in the United States of America require plan management to evaluate tax positions taken by the Plan and recognize a tax liability if the plan has taken an uncertain position that more likely than not would not be sustained upon examination by the [identify the taxing authority]. The plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.

      (Note: Typically, plan tax years will remain open for three years; however, this may differ, depending upon the tax situations of each individual plan. Plan sponsors may wish to consult with their tax specialist to determine the applicable open tax years for their plan.)

      Knowledge check

      1 Under FASB ASC 740, Income Taxes, a Plan should assess and disclose the uncertainty of income tax positions for how many years?Seven years.Not applicable – the Plan is tax exempt.All open tax years.Only those years for which there is less than a 50 percent likelihood that a tax position taken by the plan will not be sustained upon examination.

Plan mergers

      The effective date of a plan merger, on relevant plan merger agreements or documents, is often prior to the actual date of transfer of plan assets. Form 5500 instructions also indicate that “a final return or report should be filed for the plan year (12 months or less) that ends when all plan assets were legally transferred to the control of another plan.” As a result, confusion often exists in determining the last reporting date for the financial statements and Form 5500 when a plan merger occurs.

      For defined benefit plans, a merger is typically recorded on the effective date based on merger agreements or documents, as legal title and liabilities are transferred on the merger date. Therefore, if there is a difference between effective date and transfer date, it may be appropriate to record a liability for net assets to be transferred to the acquiring plan at year-end. Depending on the timing of the transfer, the receiving plan may record an asset or receivable.

      For defined contribution plans, if a significant difference in dates exists, it may be appropriate to perform an audit through the date of the actual transfer. However, all facts and circumstances should be considered in determining the proper date of merger. For instance, because a plan may hold assets in more than one trust, a surviving plan may report assets held in a predecessor plan’s trust account when they have legal control of those assets or trust before the assets are physically transferred to the trust of the surviving plan. The plan administrator may need to seek legal counsel for assistance in determining the last reporting date when assets were legally transferred to the control of a successor plan.

Terminating plans

      Once a decision to terminate a plan has been made, and liquidation is determined to be imminent, disclosure of the relevant circumstances is required in all subsequently issued financial statements. Once liquidation is imminent (for example, when the decision to terminate has been approved and is unlikely to be blocked by other parties or any regulatory entity), then the financial statements for the plan should be using liquidation basis of accounting under FASB ASC 205-30.

      Note: A defined benefit pension plan may only terminate following certain СКАЧАТЬ