MNCPA Employee Benefit Plan Task Force findings
Reporting investments and fair value disclosures prove to be ongoing challenge
Rachael Jungers, CPA, Eide Bailly | June/July 2022 Footnote
Editor's note: Updated May 25, 2022
The MNCPA Employee Benefit Plan Task Force meets annually to discuss any potential or necessary improvements to employee benefit plan audited financial statements identified as part of the task force’s review process and discussions. The task force met in January and received 21 reports that were submitted by MNCPA members’ firms. The reports received were comprised of defined contribution 401(k) and defined benefit plans.
This year’s volunteer task force was composed of 12 members, representing 10 accounting firms. The audited financial statements were allocated among the volunteers for individual review, including a first and secondary review. Recommended changes or suggestions for improvement were then shared and discussed at the task force’s review day. The results were then shared with the submitting firms.
Areas needing attention
The following areas were identified as part of the task force’s review process and discussion that members believe warrant more attention, consideration and effort to ensure adequate presentation and proper disclosures are updated to the most recent standards.
Reporting of investments and fair value disclosures continue to be an ongoing challenge. There were several instances noted where it appeared the type of investments held by the plan were not fully understood, which resulted in improper, inconsistent and incomplete footnote disclosures, including:
- Determination of investments to be reported at net asset value or net asset value as a practical expedient and related disclosures were incorrect or not complete. For example, noninterest bearing cash was improperly recorded at fair value, money market account improperly disclosed as net asset value as a practical expedient, and money market account not included in the fair value hierarchy table.
- Incomplete and missing disclosures of fully benefit responsive investment contracts. For example, the name of the insurance company was not disclosed, the floor for crediting interest rate was missed and it appears the footnote was not tailored to the contract. Further, current interest rates were disclosed, but are not required to be.
- Implementation of Accounting Standards Update (ASU) 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, were missed for plans that had level 3 investments. This ASU provides revisions and deletions to guidance regarding the disclosure requirements included in Topic 820, including eliminating and modifying existing disclosure requirements.
- Fair value hierarchy tables were completely missing for those investments stated at fair value.
- Improper and inconsistent disclosures noted for contract value versus fair value. For example, an investment valued at contract value was included under fair value heading on the statements of net assets available for benefits.
- Self-directed brokerage accounts were mislabeled as nonparticipant directed.
- Inconsistent disclosures relating to whether investments (and note receivables from participants) were certified or not.
The task force also identified the following areas relating to tax status footnote disclosures, forfeitures, changes in service providers and supplemental schedules, and provided feedback, including:
- Tax status was not appropriately disclosed; for example, determination letter versus prototype plan and related wording was unclear, as well as the uncertain tax position footnote disclosure was missing.
- Several instances of forfeiture disclosures that may indicate an operational error (unused or used incorrectly) were noted. Be sure to ensure the footnote is completed accurately and/or an operational error is communicated with those charged with governance of the plan.
- If there have been changes in the certifying entity, ensure the proper periods, and both the old and new service provider are accurately disclosed in the financial statements.
- Improper or missing disclosures relating to reconciliation of the Form 5500 to the financial statements were found.
- The supplemental schedule of assets held at end of year was missing maturity date ranges for notes receivable from participants, and there was also improper or missing column headings.
- The supplemental schedule of delinquent participant contributions did not disclose the correction or lack of correction in the correct column heading.
- The supplemental schedule of reportable transactions is not required for participant directed investments; however, it was included.
New auditing standard is here
After being delayed one year, the new auditing standard is here. Statement on Auditing Standards (SAS) No. 136,
Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, as amended (codified in AU-C section 703), prescribes certain performance requirements for ERISA Plan financial statement audits, as well as significant changes to the form and content of the auditor’s report for non-Section 103(a)(3)(C) audits (formerly referred to as “full-scope audits”) and ERISA Section 103(a)(3)(C) audits (formerly referred to as “limited-scope audits”). The new auditing standard also expands requirements of plan auditors in the engagement acceptance phase of the audit by obtaining additional representations from plan management and requires the auditor to communicate reportable findings with those charged with plan governance. It also requires the auditor to obtain and read a draft of the Form 5500 to ensure that it’s substantially complete.
This auditing standard is effective for audits of financial statements for periods ending on or after Dec. 15, 2021 (2021 calendar plan year-ends), unless earlier implementation was elected, as permitted by the standard. None of the financial statements reviewed by the task force early implemented this standard.
Contribution considerations
Financial Reporting Executive Committee (FinREC) recently issued ASC 606 Guidance related to employee benefit plans stating that employee and employer contributions are not considered transactions with customers based on guidance in FASB ASC 606 and, therefore, not considered revenue to a plan. Rather for a defined contribution and defined benefit plan, both are similar to deposits held for the benefit of the participant, and thus are outside the scope of ASC 606.
Resources
The AICPA 2021 edition of the Employee Benefit Plans Audit and Accounting Guide is available and has been updated to reflect the implementation of SAS Nos. 134–140 and should be used for 2021 calendar plan year-ends and after. In addition to the audit and accounting guide, additional resources are available on the AICPA Employee Benefit Plan Audit Quality Center website at www.tinyurl.com/aicpaEBPAQC.
Rachael Jungers, CPA is an audit senior manager at Eide Bailly LLP and has more than 12 years of experience auditing and reviewing employee benefit plans. Eide Bailly LLP serves more than 1,400 large and small employee benefit plans. You may reach Rachael at rjungers@eidebailly.com or 507-386-6297.
