What Does ASU 2011-04 Mean For Your Pension Audit?

Darlene Finzer | February 7th, 2013

How to Prepare For Changes to Your Retirement Plan

While the basics of double entry accounting haven’t changed in hundreds of years, the devil, as they say, is in the details. And, when it comes to accounting, the details are always changing. A new accounting standard update has been announced – and it could have a big impact on your pension plan’s 2012 audit.

For the last decade, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working toward accounting convergence; bringing U.S. accounting standards into harmony with international requirements. Through the Accounting Standard Updates (ASUs), FASB has been nudging U.S. standards closer to their international counterparts. Think of it as the accounting equivalent of finally getting America to convert to the metric measuring system. It’ll be great once we’re all on the same page, but the process of getting there… well, it’s a little complicated.

Here’s what you need to know about ASU 2011-04 and what you can do to prepare for its impact on your retirement plan.

Understanding New Fair Value Measurement Disclosure Requirements

ASU 2011-04 enhances the current fair value measurement disclosure requirements as they apply to financial statements. The update has the potential to impact the financial statements of a large variety of public and private entities – including retirement plans.

The fair value hierarchy divides the fair value measurements and disclosure requirements into three broad levels based on valuation techniques used to measure the fair value of the asset or liability: Levels 1, 2 and 3. The higher level the asset or liability, the more complicated the valuation process.  The more complicated the process, the greater the need for disclosure about the process. In an attempt to provide greater disclosure and transparency in the process, ASU 2011-04 requires entities to provide descriptions of the valuation techniques and the inputs used in fair value measurements. This applies to those classified as Levels 2 or 3.

ASU 2011-04 may also require disclosure of additional information including:

  • Sensitivity analysis of changes to Level 3 items.
  • Transfers and narrative regarding those transfers between Levels 1 and 2.
  • Categorization in the fair value hierarchy of items not measured at fair value on the financial statements but which require fair value disclosure.

Determining if Your Plan is Public or Private

This update has different guidelines for public and non-public entities. If your company is a private company, you’d probably assume that your retirement plan counts as private also, and take your cue from the non-public entity guidelines. But, not so fast!

Recently, FASB decided that “an employee benefit plan would NOT be deemed a private company for financial reporting purposes,” regardless of the plan sponsor’s designation. The Board minutes did not explain the reasoning on the matter, but it is most likely an effort to provide retirement plans with the greater perceived protection that comes with the increased transparency standards to which public entities are held.

The details of the decision’s implementation are still being worked out. However, it is certain that ASU 2011-04 will mean additional disclosures on retirement plans financial statements. In order to ensure a smooth plan audit, the newly required disclosures will need to be included in your plan’s financial statements.

Getting Ready for the Disclosures

However the decision shakes out, there are some steps that you can take now to make sure your financial statements are up to snuff and lessen the ASU’s impact on your plan’s 2012 audit:

  • Determine which levels of assets are in your plan. Grab a copy of last year’s plan financial statements and flip to the note titled “Fair Value Measurements.” Within that section, you should find references to Levels 1, 2 and/or 3.
  • Conclude which new fair value disclosure standards will apply to your plan. Review ASU 2011-04 to find out which information you’ll need to get a hold of to meet these disclosure requirements. Remember to look at both the non-public and the heftier public entity requirements.
  • Communicate with your plan’s record keepers, trustees and investment advisors. You want to ascertain what data will be provided to assist you in meeting the new disclosure requirements. Make sure that you’ll be getting sufficient information to meet the new reporting requirements.
  • Review and assess the accuracy of the information provided to you. It is important to document this process/review, as your plan auditors will be asking for this data during their annual independent audit.

Successfully complying with the new standards will require advanced planning, but it will save you from leaving crucial information out of your financial statements. It will also help you avoid delays in your plan’s audit process. Determining and gathering the necessary information could take time, so pull out those financial statements and start working with your service providers soon.

With the push to harmonize US and international accounting standards still on-going, you should expect more changes to your plan’s financial statements in the years to come. Be sure to keep abreast of the new regulations as part of your fiduciary responsibility and to keep your plan’s audit process running smoothly.

ASU 2011-04 Pension Plan Help

Confused about how ASU 2011-04 will impact your pension plan?  Need help determining the required level of disclosure to ensure a smooth pension audit?  Contact Rea & Associates.  With both pension administration and pension audit professionals, Rea’s employee benefits services team will help your plan get and stay compliant.  Bringing both accounting and auditing perspectives to your plan, Rea’s pension services team will help you do your fiduciary duty and be ready to meet the requirements any new ASUs that FASB and IASB release.

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