EBPAQC Alert No. 54 

    Published February 03, 2006

    Changes in Investment Contract Reporting and General Update

    DEAR CENTER MEMBERS

    As we welcome you in 2006, we would like to thank you for your continued commitment to employee benefit plan audit quality. We have compiled the following information to assist you in your efforts in maintaining the highest audit quality.

    FASB FSP Amends Investment Contract Reporting by Plans

    On December 29, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) AAG INV-a, "Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA's Audit and Accounting Guide, Audits of Investment Companies".  The FSP affects health and welfare plans and defined contribution pension plans that hold fully benefit-responsive investment contracts by amending AICPA Statement of Position (SOP) 94-4, Reporting of Investment Contracts Held by Health and Welfare Benefit Plans and Defined Contribution Pension Plans. The FSP changes the way fully benefit-responsive investment contracts are presented on the face of the Statement of Net Assets Available for Benefits, changes the definition of a fully benefit-responsive investment contract, and requires additional note disclosures for such contracts.

    The Center has prepared the "Topix Primer," Stable Value Funds and Investment Contracts - An Overview, to assist you in better understanding these investments. We have assembled general and background information on stable value funds and investment contracts, along with information about the relevant auditing and accounting standards, in an easy-to-understand format.

    New Definition of Fully Benefit-Responsive Investment Contracts. The FSP changes the definition of a fully benefit-responsive investment contract in SOP 94-4. Among other things, the definition itself incorporates a consideration of events that have occurred that may affect the realization of full contract value for a particular investment contract. Currently, the evaluation of whether contract value is realizable is made separately, pursuant to FASB Statement No. 5, Accounting for Contingencies, from the determination of whether the contract is fully benefit-responsive.

    New Financial Statement Presentation and Disclosure Requirements. The FSP requires significant changes to the way fully benefit-responsive investment contracts are presented on the face of the statement of net assets available for benefits. Currently, SOP 94-4 requires that fully benefit-responsive investment contracts be presented at contract value in the statement of net assets available for benefits.

    Under the FSP, all investments—including fully benefit-responsive investment contracts—are presented at fair value, in a single line item, on the face of the statement of net assets available for benefits, to arrive at net assets at fair value. A separate line item, calculated as the sum of the amounts necessary to adjust the portion of net assets attributable to each fully benefit-responsive investment contract from fair value to contract value, is then presented to arrive at net assets available for benefits. The statement of changes in net assets available for benefits is prepared on a basis which reflects income credited to participants in the plan and net appreciation or depreciation in the fair value of only those investments which are not deemed to be fully benefit-responsive.

    In addition, the FSP requires significant additional financial statement disclosures related to fully benefit-responsive investment contracts, including a description of the nature of those investment contracts, and how they operate. The plan would also be required to provide a description of the events and circumstances that would allow issuers to terminate fully benefit-responsive investment contracts with the plan, and expanded disclosures about crediting interest rates.

    Effective Date and Transition. The financial statement and disclosure guidance in paragraphs 8-11 of the FSP is effective for financial statements for annual periods ending after December 15, 2006. The revised definition of fully benefit responsive in paragraph 7 of the FSP is effective as of the last day of the annual period ending after December 15, 2006. Earlier application to interim or annual periods is permitted. If comparative financial statements are presented, retroactive application is required for all prior periods presented, except with respect to the definition of fully benefit-responsive.

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    Membership Requirements Compliance Questionnaire

    Thank you to all of you who have completed the annual Membership Requirements Compliance Questionnaire. Your voluntary compliance with Center membership requirements demonstrates your ongoing commitment to ERISA audit quality and we commend you for your efforts in this important area.

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    Update on DOL EBSA's ERISA Audit Quality Enforcement Initiative

    The DOL's Employee Benefits Security Administration (EBSA) recently began a new enforcement initiative to monitor the quality of ERISA audits (see EBPAQC Alert #51 - DOL's New Audit Quality Enforcement Initiative for a description of the new initiative, how it differs from past initiatives and what focus and process the new approach is taking). As this initiative may affect many of our member firms, we are closely monitoring its progress. To date, EBSA has opened 516 desk review cases, and 329 of those reviews have been completed. Overall, the results are disappointing; however, EBPAQC member firms have fared better than their non-member counterparts. Audit failures were noted in 27% of the audits performed by non-member firms. The failure rate for EBPAQC members was about half that rate. In addition, EBSA has found that the audits performed by non-member firms had more multiple failures than those audits performed by EBPAQC members.

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    AICPA Committee Application Process Underway Until May 1, 2006

    If you are a partner in your firm and are interested in contributing to the profession and networking with your peers, then consider applying to serve on the EBPAQC Executive Committee or the Employee Benefit Plan Expert Panel. Applications are now being accepted for the next volunteer year (October 2006 – October 2007) and will be accepted until May 1st.

    The EBPAQC Executive Committee establishes general policies of the Center and oversees its activities. Members of the Executive Committee are appointed by the chairman of the AICPA Board of Directors with the approval of the Board and subject to the concurrence of the Executive Committee.

    The Employee Benefit Plan Expert Panel monitors employee benefit plan industry developments, trends and opportunities to identify and advise on reporting, attest and assurance issues unique to employee benefit plans.

    Positions also are available for many of the AICPA's other nearly 90 volunteer groups (committees, boards, panels and centers). Further information and applications can be accessed via http://volunteers.aicpa.org. If you have any questions regarding the applications process, or volunteerism in general at the AICPA, address inquiries to David Ray at 212-596–6030 or to committee@aicpa.org.

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    AICPA Employee Benefit Plan Conference Audio Sessions are Available

    The EBPAQC is please to offer members an exclusive discount program with Conference Copy, Inc. on a multimedia CD that combines audio recordings and the speaker materials of the December 12-13, 2005 AICPA Annual Benefit Plans and DOL Update Conference held in Washington, DC. Listen to all or any of the individual sessions from the conference. This CD can be a valuable tool in updating your firm's staff on the topics covered at the conference, or for developing in-house training courses. (No CPE is offered for purchasing the multimedia CD.)

    Special EBPAQC Member Discount Price: Multimedia CD - $149

    To order the conference multimedia CD, please call Conference Copy, Inc. at 1-800-575-0580. (Be sure to mention that you are an AICPA Employee Benefit Plans Audit Quality Center member.)

    Conference sessions included:

    • Accounting, auditing and professional update
    • SAS  70 reports
    • Complex and hard to value investments
    • Actuarial overview
    • Auditing best practices forum
    • Form 11 – K filings
    • Health and welfare/multi-employer issues
    • Unique audit circumstances
    • EBSA update
    • Form 5500 and other developments
    • Pre– engagement activities and audit planning
    • Expert panel questions and answers

    Sincerely,

    AICPAEmployeeBenefitPlanAuditQualityCenter

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    STAY INFORMED

    As a member of the Center, your firm will receive periodic updates on important developments related to employee benefit plan auditing as well as the activities of the Center. To stay abreast of these and other relevant events, please visit the Center Web site at www.aicpa.org/EBPAQC. Also, we welcome any suggestions or questions—please send them by e-mail at EBPAQC@aicpa.org.

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