EITF observer A meeting synopsis March 19, 2015 meeting highlights Final consensuses

EITF observer
A meeting synopsis
March 19, 2015 meeting highlights
Final consensuses
The Emerging Issues Task
Force (EITF or Task Force)
discussed five Issues,
reaching a final consensus
on two Issues and a
consensus-for-exposure on
the other three Issues.
If the final consensuses are
ratified by the Financial
Accounting Standards
Board (FASB) at its April 7,
2015 meeting, the related
Accounting Standards
Updates (ASUs) will
become final authoritative
accounting guidance.
The next Task Force
meeting is scheduled for
June 18, 2015. The Task
Force may hold an
educational session on May
14, 2015 to discuss the new
agenda items that will be
covered in the June 18 Task
Force meeting.
Issue 14-A—Effects on Historical Earnings per Unit (EPU) of Master Limited
Partnership Dropdown Transactions

The ownership structure of a typical publicly traded Master Limited Partnership
(MLP) consists of publicly traded common units held by limited partners (LPs), a
general partner (GP) interest, and incentive distribution rights (IDRs). MLPs are
often formed through dropdown transactions, in which a sponsor conveys assets or
businesses to the MLP in exchange for a GP interest and cash. Dropdown transactions
can also occur subsequent to the formation of an MLP when a GP transfers its
ownership in a business to the MLP in exchange for cash or additional ownership
interests.

When the dropdown transaction involves the transfer of a business, the MLP presents
its financial statements as if the transfer occurred at the beginning of the earliest
period in which the entities were under common control. The MLP recognizes the
assets and liabilities of the business transferred at the parent’s carrying amounts,
similar to a pooling of interests.

ASC 260, Earnings Per Share, does not specifically address the calculation of
earnings per unit (EPU) in an MLP’s retroactively adjusted financial statements for
periods prior to the dropdown transaction.

The Task Force reached a final consensus requiring an MLP to allocate net income
(loss) of a transferred business entirely to the GP when computing EPU in periods
prior to the dropdown transaction. Therefore, an MLP will not adjust prior period
EPU for its publicly traded LP units (i.e., no income or loss associated with the
transferred business will be allocated to the LP units in the periods prior to the
dropdown transaction).

Entities will be required to apply the guidance on a retrospective basis.

The effective date will be for fiscal years beginning after December 15, 2015, and
interim periods within those fiscal years. Early adoption will be permitted.
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Issue 14-B—Disclosures for Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent)

ASC 820, Fair Value Measurement, provides a practical expedient to estimate the fair
value for certain investments measured at net asset value (NAV) without further
adjustment if the NAV is calculated consistent with the guidance in ASC 946,
Financial Services−Investment Companies. Investments measured at NAV often
allow for the investor to redeem the investment – at all times or at specified intervals
in the future.

Currently, investments that are redeemable at the measurement date at NAV are
categorized in Level 2 of the fair value hierarchy, and investments that will never be
redeemable at the NAV are categorized in Level 3. However, there is diversity in how
entities categorize investments that are not redeemable at NAV at the measurement
date but become redeemable at a future date (e.g., redeemable at quarterly intervals).

The Task Force reached a final consensus that investments measured at NAV under
the practical expedient should be excluded from the fair value hierarchy. The amount
of such investments instead would be disclosed as a reconciling item between the fair
value hierarchy table and the investment amount reported on the balance sheet.

The Task Force also decided to amend ASC 230, Statement of Cash Flows, to preserve
an exemption that is currently available to certain investment companies from
preparing a statement of cash flows. Additionally, the Task Force decided to amend
ASC 715, Compensation−Retirement Benefits, to clarify that a company’s pension
plan investments are eligible for measurement at NAV using the practical expedient
and those investments would not be categorized within the fair value hierarchy.

Entities will be required to apply the guidance on a retrospective basis.

The effective date will be for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015 for public business entities. For all other entities,
the effective date will be for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. Early adoption will be permitted.
Consensuses-for-exposure
Issue 15-A—Application of the Normal Purchases and Normal Sales Scope Exception to
Certain Electricity Contracts within Nodal Energy Markets

ASC 815, Derivatives and Hedging, contains a scope exception to derivative
accounting for certain contracts that are considered part of an entity’s normal
purchases and normal sales (NPNS scope exception). To meet the NPNS scope
exception, one of the criteria requires that settlement of the contract must require or
result in physical delivery of the underlying nonfinancial asset.

The purpose of this Issue is to determine whether certain contracts for physical
delivery of electricity on a forward basis meet the “physical delivery” criterion within
the NPNS scope exception when transmitted through an electricity grid managed by
an Independent System Operator (ISO).

Because the transmission of the electricity through the grid is accomplished through
purchase and sale transactions with the ISO based on the difference in locational
marginal pricing at the delivery and withdrawal locations, a question arises as to
whether the “physical delivery” criterion has been met, or whether instead, there has
been a net settlement that precludes the use of the NPNS scope exception.
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
The Task Force reached a consensus-for-exposure that a forward contract for the
physical delivery of electricity within a nodal market (transmitted through a specific
ISO) should meet the physical delivery criterion under the NPNS scope exception.

Entities will be required to apply the proposed guidance on a prospective basis.
Issue 15-B—Recognition of Breakage for Prepaid Stored-Value Cards

Prepaid stored-value cards are prepaid cards (e.g., gift cards) with monetary values
that can be redeemed for goods or services at designated vendors (e.g., merchants in a
shopping mall). Prepaid cards may be sold to the consumer directly by a vendor who
stands ready to provide goods or services to the consumer upon redemption of the
card (i.e., a two-party arrangement). Alternatively, a prepaid card can also be sold to
the consumer by an intermediary (e.g., a financial institution) that stands ready to
provide payments to a third-party vendor when the consumer redeems the prepaid
card for goods or services (i.e., a three-party arrangement).

Consumers do not always redeem the entire balance on prepaid stored-value cards.
These unredeemed balances are commonly referred to as “breakage.” Prepaid cards
typically do not have expiration dates and there may not be laws requiring the
unredeemed balances to be remitted to the government.

When a prepaid card is issued by an intermediary, questions arise about whether the
intermediary’s obligation to stand ready to provide payments to a third-party vendor
should be considered a financial liability or a nonfinancial liability. That distinction
can affect whether and how the intermediary can account for breakage by
derecognizing the related portion of the liability. This Issue attempts to address those
questions.

At its March meeting, the Task Force reached a consensus-for-exposure that the
obligation of an intermediary who issues prepaid stored-value cards redeemable for
goods or services from a third-party vendor is a financial liability, but the guidance in
ASC 405-20, Extinguishment of Liabilities, should be amended to allow the use of a
breakage model similar to the one provided in ASC 606, Revenue from Contracts
with Customers. The Task Force decided to also extend the application of this
breakage model to prepaid stored-value cards that are redeemable for cash.

An entity would provide additional disclosures related to the recognition of breakage
similar to those provided under ASC 606.

Entities will be required to apply the proposed guidance on a modified retrospective
basis.
Issue 15-C—Employee Benefit Plan Simplifications

Employee benefit plans are subject to the measurement and disclosure guidance of
employee benefit plan accounting topics including ASC 960, Plan Accounting–
Defined Benefit Pension Plans; ASC 962, Plan Accounting–Defined Contribution
Pension Plans; and ASC 965, Plan Accounting–Health and Welfare Benefit Plans
(collectively Plan Accounting Topics) and ASC 820, Fair Value Measurement, for
their investments.

The differences between ASC 820 and the Plan Accounting Topics can result in
multiple levels of presentation and disclosures of investments in a plan’s financial
statements. The objective of this Issue is to simplify the presentation and disclosure
requirements within an employee benefit plan’s financial statements.
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
At its March meeting, the Task Force reached a consensus-for-exposure on three main
issues and proposed to: (1) eliminate the requirement to disclose the fair value of
Fully Benefit-Responsive Investment Contracts (FBRICs) that are measured at
contract value, (2) simplify the presentation and disclosure requirements for an
employee benefit plan’s investments, and (3) provide a measurement date practical
expedient for the measurement of plan assets.

Entities will be required to apply the proposed amendments to presentation and
disclosure requirements retrospectively. The measurement date practical expedient
will be applied prospectively.
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Detailed discussion
Issue 14-A—Effects on Historical Earnings per Unit of Master Limited
Partnership Dropdown Transactions
Status
Final consensus
Scope
Publicly traded Master Limited Partnerships (MLP)
EITF
discussion
MLPs are common structures utilized in the energy industry,
particularly among mid-stream companies, and in other industries,
such as real estate, coal, and shipping. The ownership structure of a
typical publicly traded MLP consists of publicly traded common units
held by limited partners (LPs), a general partner (GP) interest, and
incentive distribution rights (IDRs). Partnership agreements typically
obligate the GP to distribute 100 percent of the partnership’s available
cash (as defined in the partnership agreement) at the end of each
reporting period to the GP and LPs via the distribution waterfall. When
certain thresholds are met, the distribution waterfall further provides
for distributions to holders of the IDRs.
MLPs are often formed through a dropdown transaction, in which a
sponsor conveys assets or businesses to the MLP in exchange for a GP
interest and cash. Dropdown transactions can also occur subsequent to
the formation of an MLP when the GP transfers its ownership in
certain assets or businesses to the MLP in exchange for cash or
additional ownership interests in the MLP.
Dropdown transactions are often accounted for as reorganizations of
entities under common control, because the GP retains control of the
MLP before and after the transaction. When the dropdown transaction
involves the transfer of a business (as defined under ASC 805, Business
Combinations), the MLP presents its financial statements as if the
transfer occurred at the beginning of the earliest period in which the
entities were under common control. The MLP recognizes the assets
and liabilities transferred at the parent’s carrying amounts, similar to a
pooling of interests.
MLPs apply the two-class method of calculating earnings per unit
(EPU), because the GP, LPs, and IDR holders all have participation
rights in the distribution of available cash in accordance with the
contractual rights contained in the partnership agreement. However,
ASC 260, Earnings Per Share, does not specifically address how to
calculate EPU for the periods prior to the date of a dropdown
transaction when the dropdown transaction occurs subsequent to the
formation of an MLP.
Some entities calculate EPU by allocating the earnings (losses) of the
transferred business prior to the dropdown transaction to the GP, LPs,
and IDR holders as if their rights to the earnings (losses) were
consistent before and after the dropdown transaction. Other reporting
entities calculate EPU by allocating the earnings (losses) of the
transferred business before the dropdown transaction entirely to the
GP as if only the GP has rights to those earnings (losses). The objective
of this Issue is to address the diversity in practice with respect to how
MLPs calculate EPU in periods prior to a dropdown transaction.
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Issue 14-A—Effects on Historical Earnings per Unit of Master Limited
Partnership Dropdown Transactions
At its March 2015 meeting, the Task Force reached a final consensus
requiring an MLP to allocate any earnings (losses) of a transferred
business in the periods prior to the dropdown transaction entirely to
the GP when computing EPU. Therefore, an MLP will not adjust prior
period EPU for its publicly traded LP units (i.e., no income or loss
associated with the transferred business will be allocated to the LP
units in the periods prior to the dropdown transaction).
The final consensus requires entities to disclose how rights to the
earnings (losses) of the transferred business differ before and after the
dropdown transaction for the purpose of calculating EPU.
Transition &
effective date
Entities will be required to apply the guidance on a retrospective basis.
Entities will follow the disclosure requirements in ASC 250,
Accounting Changes and Error Corrections, upon transition.
The effective date will be for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. Early adoption
will be permitted.
Other
observations
We believe the final consensus reached by the Task Force is consistent
with how most entities presently calculate historical EPU for periods
prior to a dropdown transaction. Therefore, we do not expect the final
consensus to have a significant impact on current practice.
One of the comments received during the exposure process questioned
whether the scope of the proposed guidance should be expanded to
cover “YieldCos” that are structured similar to MLPs and produce
stable cash flows that are distributed to their owners. The assets of the
YieldCo are sometimes transferred from a sponsor and accounted for
similar to MLP dropdown transactions (i.e., as transactions between
entities under common control). The Task Force decided not to expand
the scope of the final consensus, but directed the staff to perform
additional research on whether YieldCos should be addressed in a
future project.
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Issue 14-B—Disclosures for Investments in Certain Entities That Calculate
Net Asset Value per Share (or Its Equivalent)
Status
Final consensus
Scope
Investments in certain entities that are measured at net asset value
(NAV) using the practical expedient
EITF
discussion
ASC 820, Fair Value Measurement, provides a practical expedient to
estimate the fair value for certain investments measured at NAV
without further adjustment if the NAV is calculated consistent with the
guidance in ASC 946, Financial Services−Investment Companies.
It is common for investments measured at NAV to have periodic
redemption dates. Such investments may be redeemable at all times or
at frequent intervals (such as monthly), or they may be redeemable less
frequently, such as quarterly or yearly. Other investments measured at
NAV may not be redeemable at all.
Currently, investments that are redeemable at the measurement date at
NAV are categorized in Level 2 of the fair value hierarchy, and
investments that will never be redeemable at NAV are categorized in
Level 3. However, for investments that are not redeemable at NAV at
the measurement date but become redeemable at a future date,
judgment is required in determining whether the investment should be
categorized as Level 2 or Level 3.
In determining the fair value hierarchy for investments measured at
NAV, ASC 820 indicates that reporting entities should take into
account the length of time until those investments become redeemable.
If the redemption dates are unknown or not in the near term, the
investment should be categorized in Level 3. Near term is not defined
within ASC 820, and there is diversity in practice with respect to how
reporting entities categorize investments at NAV in the fair value
hierarchy.
Stakeholders have raised concerns that some reporting entities recategorize such investments between Level 2 and Level 3 at different
dates during the year depending on whether or not the next
redemption date is considered to be near term. In contrast, other
reporting entities interpret near term to mean within the next year,
resulting in investments measured at NAV with at least annual
redemption dates to always be categorized as Level 2. Moreover,
reporting entities that have different fiscal years may categorize
identical investments differently depending on how their fiscal years
align with their investments’ redemption dates.
This Issue intends to address the diversity in practice with respect to
how investments that are redeemable at NAV at a future date are
categorized within the fair value hierarchy.
At its March 2015 meeting, the Task Force reached a final consensus
requiring investments measured at NAV under the practical expedient
to be excluded from the fair value hierarchy. Entities will be required to
disclose the amount of the investments measured at NAV under the
practical expedient as a reconciling item between the fair value
hierarchy table and the amounts reported on the balance sheet.
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Issue 14-B—Disclosures for Investments in Certain Entities That Calculate
Net Asset Value per Share (or Its Equivalent)
The Task Force agreed to limit certain qualitative disclosures under
ASC 820 to only the investments measured at NAV using the practical
expedient. In other words, if an investment is eligible but is not
measured under the NAV practical expedient, the qualitative
disclosures will no longer be required. Instead, if an investment is
measured at fair value, such investment will be subject to the general
disclosure requirements in ASC 820 related to the fair value hierarchy.
The Task Force also addressed an issue raised by certain stakeholders
concerning ASC 230, Statement of Cash Flows, and ASC 715,
Compensation−Retirement Benefits. ASC 230 exempts certain
investment companies from having to prepare a statement of cash
flows if certain criteria are met. One of the criteria is having
substantially all of an entity’s investments carried at fair value and
classified as Level 1 or Level 2 measurements in accordance with ASC
820. The Task Force’s decision to exclude investments measured at
NAV under the practical expedient from the fair value hierarchy would
have had the unintended consequence of requiring some entities to
prepare statement of cash flows when they were previously exempt.
The Task Force, therefore, decided that the criterion in ASC 230
requiring investments to be categorized as Level 1 or Level 2 should be
amended to also include investments measured at NAV under the
practical expedient that are redeemable in the near term at all times.
Additionally, the Task Force decided that its consensus on categorizing
investments measured at NAV should also apply to disclosures about
pension plan investments held by an entity. Accordingly, the Task
Force decided to amend ASC 715 to clarify that (a) pension plan
investments can also be measured at NAV using the practical expedient
and (b) pension plan investments measured at NAV would similarly
not be categorized within the fair value hierarchy.
Transition &
effective date
Entities will be required to apply the guidance on a retrospective basis
and to disclose the nature and reason for the change in accounting
principle under ASC 250, Accounting Changes and Error Corrections.
The effective date will be for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015 for public
business entities. For all other entities, the effective date will be for
fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2016. Early adoption will be permitted.
Other
observations
The final consensus will not change how an entity measures
investments under the NAV practical expedient. It will, however,
remove investments measured at NAV under the practical expedient
from the fair value hierarchy table and place them as a reconciling
item. Investments for which the practical expedient is not applied will
continue to be included in the fair value hierarchy table, even when
NAV approximates fair value. Additionally, certain qualitative
disclosures currently required for all investments eligible for the NAV
practical expedient (whether or not the expedient is elected) will no
longer be required if a company does not elect the NAV practical
expedient.
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Issue 14-B—Disclosures for Investments in Certain Entities That Calculate
Net Asset Value per Share (or Its Equivalent)
The amendment made to ASC 230 was intended to preserve the
original intent of exempting certain investment companies from
preparing a statement of cash flows. However, judgment will be
required in interpreting “near term” for this purpose.
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EITF observer
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Issue 15-A—Application of the Normal Purchases and Normal Sales Scope
Exception to Certain Electricity Contracts within Nodal Energy Markets
Status
Consensus-for-exposure
Scope
Contracts for the purchase or sale of electricity on a forward basis to a
location within an electricity grid operated by an independent system
operator, and executed by the market participants within the nodal
energy markets, such as utilities and independent power producers
EITF
discussion
A contract for the physical delivery of electricity on a forward basis
often meets the definition of a derivative under ASC 815, Derivatives
and Hedging. However, when certain criteria are met, ASC 815
contains a scope exception to derivative accounting for contracts that
are considered part of an entity’s normal purchases and normal sales
(NPNS). One of the criteria is that settlement of the contract will
require or result in physical delivery of the underlying nonfinancial
asset (e.g., electricity).
The purpose of this Issue is to determine whether contracts for
physical delivery of electricity on a forward basis meet the “physical
delivery” criterion when transmitted through an electricity grid
managed by an Independent System Operator (ISO).
Utilities and independent power producers may enter into forward
contracts to purchase or sell electricity that is delivered through an
electricity grid managed by an ISO. To effect the transmission of the
electricity between the parties, the ISO will typically “purchase” the
electricity at the location where the power producer delivers it to the
grid and “sell” the electricity to the utility at the location where it is
withdrawn from the grid.
When transacting with an ISO, title transfers to/from the ISO to reduce
credit risk amongst the participants. The “purchase” and “sale” of the
electricity is also the means by which the ISO charges the participants
for use the electricity grid. The price is based on the difference between
locational marginal pricing (LMP) at the delivery and withdrawal
locations at the time of delivery for the quantity of power transmitted.
LMP is essentially the spot price at the respective delivery locations
(i.e., node), which is impacted by physical supply, demand and
transmission capacity (including congestion). The difference in the
LMP at the delivery and withdrawal location can result in charges or
credits depending on the LMP price at each location at the time of
delivery.
Because the transmission of the electricity through the grid is
accomplished through a purchase and sale transaction with the ISO
based on the difference in the LMP at the delivery and withdrawal
locations, a question arises as to whether the “physical delivery”
criterion have been met, or whether instead, there has been a net
settlement that precludes the use of the NPNS scope exception under
ASC 815.
At its March 2015 meeting, the Task Force reached a consensus-forexposure that a forward contract to purchase or sell electricity that is
transmitted through a grid operated by an ISO should meet the
“physical delivery” criterion under the NPNS scope exception.
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Issue 15-A—Application of the Normal Purchases and Normal Sales Scope
Exception to Certain Electricity Contracts within Nodal Energy Markets
Transition &
effective date
The proposed guidance will be applied prospectively.
The effective date is expected to be discussed at a future meeting.
Other
observations
The consensus-for-exposure reached by the Task Force appears to be
consistent with how a majority of entities in practice have been
interpreting the guidance in ASC 815 for forward contracts transmitted
through an electricity grid operated by an ISO. Accordingly, we do not
expect practice to be significantly altered by the decisions reached by
the Task Force. For those entities that did not believe the “physical
delivery” criterion was met, they would be able to elect the NPNS scope
exception prospectively upon adoption of the proposed new guidance
or continue to account for these contracts as derivatives.
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Issue 15-B—Recognition of Breakage for Prepaid Stored-Value Cards
Status
Consensus-for-exposure
Scope
Certain prepaid stored-value cards issued to a consumer by a card
issuer or a prepaid network provider when the card is redeemable for
goods or services from third-party vendors or cash
EITF
discussion
Prepaid stored-value cards are essentially prepaid cards with monetary
values that can be redeemed for goods or services at designated
vendors (e.g., merchants in a shopping mall or merchants in a credit
card network). Common examples include gift cards and prepaid
phone cards. Prepaid cards may be sold to the consumer directly by a
vendor who stands ready to provide goods or services to the consumer
upon redemption of the card (i.e., a two-party arrangement).
Alternatively, a prepaid card can also be sold to the consumer by an
intermediary (e.g., a financial institution or a prepaid network
provider) that stands ready to provide payments to a third-party
vendor only when the consumer redeems the prepaid card for goods or
services (i.e., a three party arrangement).
Consumers do not always redeem the entire balance on prepaid storedvalue cards, for instance, when they lose the card or do not redeem the
remaining balances on the card. These unredeemed balances are
commonly referred to as “breakage.” Prepaid cards typically do not
have expiration dates and there may or may not be laws requiring the
unredeemed balances to be remitted to the government (i.e.,
escheatment laws). Balances on the cards generally are not redeemable
for cash.
When a prepaid card is sold to the consumer by a vendor who will
fulfill the goods or services upon the card’s redemption, deferred
revenue (i.e., a nonfinancial liability) is recognized by the vendor. As
the prepaid cards are subsequently redeemed in exchange for goods or
services, the deferred revenue is recognized in earnings. In addition,
the vendor may also recognize in earnings a portion of the deferred
revenue for the breakage it expects to be entitled to keep. The
recognition of breakage in earnings in practice today is consistent with
the new revenue recognition standard — ASC 606, Revenue from
Contracts with Customers, although the specific manner of recognition
may be somewhat different. ASC 606 becomes effective in 2017 for
calendar year-end public companies.
When a prepaid card is sold to the consumer by an intermediary, the
intermediary recognizes an obligation to provide the consumer with
the ability to purchase goods or services from third-party vendors.
When the consumer redeems the card, the intermediary remits the
funds to the vendors, derecognizes the applicable portion of the
liability, and recognizes revenue for any transaction fees it may charge
the vendor.
If the obligation is considered a nonfinancial liability, the intermediary
may also recognize in earnings a portion of the obligation for the
breakage it is entitled to keep similar to the revenue recognition
practices for the prepaid cards sold by vendors.
In contrast, if the obligation is considered a financial liability, the
revenue recognition model for breakage would not apply. The
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Issue 15-B—Recognition of Breakage for Prepaid Stored-Value Cards
obligation would then typically be derecognized upon redemption
pursuant to ASC 405-20, Extinguishments of Liabilities. However, if
the consumer never redeems the remaining prepaid card balance and
there is no expiration date or applicable escheatment laws, such a
financial liability may remain in perpetuity, unless there is some basis
to conclude the liability should be derecognized (e.g., if the card is
destroyed and there is no longer an obligation to the consumer).
This Issue attempts to address whether the intermediary’s obligation to
stand ready to provide payments to third-party vendors should be
considered a nonfinancial liability or a financial liability, and
accordingly, whether and how the intermediary should account for
breakage.
At its March 2015 meeting, the Task Force reached a consensus-forexposure that when an entity issues to a consumer a prepaid storedvalue card that is redeemable for goods or services from third-party
vendors, the entity’s obligation meets the definition of a financial
liability. The Task Force noted that the intermediary’s obligation is
ultimately settled in cash or not at all if there is breakage. The Task
Force also decided to expand the scope of the Issue to prepaid cards
that can also be redeemed for cash. However, to permit derecognition
of unredeemed balances, a narrow scope exception was provided under
ASC 405-20 to derecognize the financial liability using a breakage
model similar to the one prescribed under the new revenue standard
(ASC 606).
In addition to the disclosures required for a financial liability, an entity
would be required to provide additional disclosures related to the
recognition of breakage similar to those required under the new
revenue standard.
Transition &
effective date
The proposed guidance will be applied on a modified retrospective
basis.
The effective date is expected to be discussed at a future meeting.
Other
observations
Although the consensus-for-exposure reached by the Task Force to
allow derecognition of the liability for breakage is consistent with the
current practice by some entities, the proposed guidance may change
the manner in which many entities recognize breakage. ASC 606’s
breakage model provides for a proportionate recognition of breakage if
an entity is entitled to a breakage amount. Some entities that currently
recognize breakage do so when redemption of the remaining balance is
deemed to be remote. Accordingly, the new guidance could lead to a
different recognition pattern for breakage.
The Task Force also discussed, but did not decide on whether the
proposed guidance should also extend to other similar transactions, for
example, customer loyalty programs whereby points may be redeemed
with the sponsor of the program or with other third-parties. The Task
Force agreed to limit the scope of the consensus-for-exposure to
certain prepaid stored-value cards as discussed under this Issue and to
ask respondents whether the scope should be expanded.
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Issue 15-C—Employee Benefit Plan Simplifications
Status
Consensus-for-exposure
Scope
Employee benefit plans
EITF
discussion
Employee benefit plans are subject to the measurement and disclosure
requirements of ASC 820, Fair Value Measurement, in addition to the
employee benefit plan accounting guidance (Plan Accounting Topics)
under ASC 960, Plan Accounting–Defined Benefit Pension Plans; ASC
962, Plan Accounting–Defined Contribution Pension Plans; and ASC
965, Plan Accounting–Health and Welfare Benefit Plans. The different
standards lead to plans having to present and disclose similar
investment information in multiple ways in their financial statements,
in addition to including similar information for the plan’s regulatory
reporting.
This Issue addresses several presentation and disclosure simplification
topics for plan financial statements. The first topic relates to
investments in Fully Benefit-Responsive Investment Contracts
(FBRICs). FBRICs are currently measured at contract value, but that
amount must also be reconciled to fair value on the face of a plan’s
financial statements. FBRICs are typically fixed-income investments
with stable returns. Because they are generally transacted at contract
value, some stakeholders believe contract value is the most relevant
measurement for FBRICs. Given this and that the contract value often
approximates the fair value of FBRICs, they question the usefulness of
the reconciliation to fair value.
The second topic relates to the presentation and disclosure
requirements under ASC 820 in contrast with the requirements under
the Plan Accounting Topics. Plans are currently subject to two different
disaggregation requirements for presenting and disclosing
investments, and presenting different levels of details about the plan
assets and changes in the plan assets. Some stakeholders believe
presenting and disclosing similar investment information in multiple
ways is too costly and makes financial statements cumbersome.
The third topic relates to the measurement date of plan assets and
obligations in light of the Board’s recent practical expedient provided
to plan sponsors for their plan-related measurements under ASC 715,
Compensation–Retirement Benefits. The Task Force was asked to
consider whether a similar practical expedient should be granted for
the financial statements of employee benefit plans. The practical
expedient would allow the employee benefit plan financial statements
to measure the plan assets on a date that is nearest to the employer’s
fiscal year end (alternative measurement date) when their fiscal year
ends do not coincide with a month end.
At its March 2015 meeting, the Task Force reached a consensus-forexposure on all three simplification topics. On the first topic, the Task
Force agreed that FBRICs should only be measured and presented at
contract value and eliminated the requirement to reconcile that
amount to fair value.
On the second topic, the Task Force agreed to simplify certain
presentation and disclosure requirements under ASC 820 and the Plan
Accounting Topics. Under the proposed guidance, employee benefit
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EITF observer 14
Issue 15-C—Employee Benefit Plan Simplifications
plans will only be required to disaggregate plan assets by general type
instead of disaggregation by nature, characteristics, and risks. No
separate reporting will be required for participant-directed vs. nonparticipant-directed investments, and the self-directed brokerage
accounts will be considered a single type of asset. The disaggregation of
plan assets by general type may either be presented on the face of the
financial statements or in the footnotes.
Plan assets will continue to follow the fair value hierarchy disclosures
required under ASC 820, including a roll-forward of all investments
categorized as Level 3. However, the requirement to separately disclose
individual investments over 5% of total net assets and the net
appreciation or depreciation by asset type will be eliminated.
Additionally, plans that invest in funds that file Form 5500 under
ERISA will be exempt from the investment strategy disclosures for
those funds.
On the third topic, the Task Force agreed that employee benefit plans
should be eligible for the same measurement date practical expedient
available to plan sponsors. This will enable the employee benefit plans
to measure their plan assets on the nearest month-end date to the
fiscal year-end. If the measurement date practical expedient is elected,
the Task Force also agreed to require disclosure for significant events
between the fiscal year end and measurement date, including
contributions and distributions.
Transition &
effective date
The proposed guidance on the simplification for measurement and
disclosure will be applied retrospectively. The measurement date
practical expedient will be applied prospectively.
The effective date is expected to be discussed at a future meeting.
Other
observations
The presentation and disclosure requirement for investments in an
employee benefit plan’s financial statements will be significantly
simplified under the Task Force’s consensus-for-exposure.
Additionally, employee benefit plans will also benefit from the final
consensus with respect to the investments measured at NAV under the
practical expedient (refer to Issue 15-B). The staff is expected to also
ask respondents for additional simplification suggestions for
consideration in a possible future project.
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EITF observer 15
Questions regarding the EITF meeting
PwC clients that have questions relating to the meeting should contact their engagement
partners. All others should contact John Althoff, Daghan Or, Brian Staniszewski or Emily
Liu in the National Professional Services Group.
Authored by:
John Althoff
Partner
Phone: 1-973-236-7021
Email: [email protected]
Daghan Or
Partner
Phone: 1-973-236-4966
Email: [email protected]
Brian Staniszewski
Director
Phone: 1-973-236-5122
Email: [email protected]
Emily Liu
Director
Phone: 1-408-817-5033
Email: [email protected]
EITF observer is prepared by the National Professional Service Group of PwC to provide a synopsis of each EITF meeting. This content is for general
information purposes only, and should not be used as a substitute for consultation with professional advisors. To access additional content on
accounting and reporting issues, register for CFOdirect Network (www.cfodirect.pwc.com), PwC’s online resource for financial executives.
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