GAAP for Financial Statements of Employee Benefit Plans: Understanding ASC 960

Posted In | Finance | Accounting Software | Compliance

Employee benefit plans play a crucial role in attracting, retaining, and rewarding employees, as they provide a range of benefits, such as pension, healthcare, and other post-retirement benefits. Under Generally Accepted Accounting Principles (GAAP), Accounting Standards Codification (ASC) Topic 960, Plan Accounting – Defined Benefit Pension Plans,  provides guidance on the financial reporting of employee benefit plans. This article discusses the key principles of ASC 960 and offers insights on how companies can navigate the accounting for employee benefit plans under GAAP.

 

Key Principles of ASC 960
 

  1. Scope: ASC 960 applies to the financial statements of defined benefit pension plans, which are plans that promise a specific benefit amount to employees upon retirement. The guidance in ASC 960 focuses on the plan's financial position, changes in its net assets available for benefits, and its actuarial present value of accumulated plan benefits.
     

  2. Plan Assets: Plan assets include investments held by the plan and contributions receivable from the employer and employees. Investments should be reported at fair value, and any unrealized gains or losses should be recognized in the plan's financial statements.
     

  3. Actuarial Present Value of Accumulated Plan Benefits: The actuarial present value of accumulated plan benefits represents the present value of the benefits that employees have earned under the plan as of the financial statement date. This amount should be determined using actuarial assumptions, such as discount rates, mortality rates, and rates of employee turnover, and should be disclosed in the plan's financial statements.
     

  4. Net Assets Available for Benefits: The net assets available for benefits represent the plan's assets, less any liabilities, that are available to pay the accumulated plan benefits. This amount should be reported in the plan's statement of net assets available for benefits.
     

  5. Changes in Net Assets Available for Benefits: The plan's statement of changes in net assets available for benefits should report the additions to and deductions from the net assets during the reporting period, including investment income, contributions, benefit payments, and administrative expenses.
     

  6. Disclosure Requirements: ASC 960 requires plans to disclose the following information in their financial statements:

    a. The plan's funding policy, including the basis for determining the employer's and employees' contributions.

    b. A description of the plan's investments, including the types and fair values of investments held.

    c. The actuarial assumptions and methods used to determine the actuarial present value of accumulated plan benefits.
     

Challenges and Considerations
 

  1. Determining Actuarial Assumptions: Selecting appropriate actuarial assumptions can be complex, as it requires the use of professional judgment and expertise. Companies should engage qualified actuaries to assist in the determination of these assumptions.
     

  2. Valuing Plan Assets: Valuing plan investments, particularly those that are not publicly traded, can be challenging. Companies must use appropriate valuation techniques and inputs to ensure that the fair values reported in the plan's financial statements are accurate and reliable.
     

  3. Managing Plan Funding: Companies must carefully monitor and manage the funding of their employee benefit plans to ensure that they have sufficient assets to meet their obligations to employees. This may involve regular contributions, adjustments to plan benefits, or changes in investment strategies.
     

ASC 960 establishes the GAAP guidance for the financial reporting of defined benefit pension plans, promoting consistent and transparent reporting of employee benefit plan assets, liabilities, and expenses. By understanding and applying the principles of ASC 960, companies can accurately prepare and present the financial statements of their employee benefit plans, providing stakeholders with a clear understanding of the plan's financial position and performance. As companies navigate the complexities of employee benefit plan accounting, staying informed of the latest accounting standards and best practices is essential for maintaining compliance and fostering trust in the financial markets.