In this video, we walk through 5 BAR practice questions teaching about required financials and disclosures for employee benefit plans. These questions are from BAR content area 2 on the AICPA CPA exam blueprints: Technical Accounting and Reporting
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Required Financials and Disclosures for Employee Benefit Plans
Pension plan financial statements are subject to specialized reporting standards under U.S. GAAP. Both defined benefit (DB) and defined contribution (DC) plans share certain core reporting elements, but each has unique requirements as well. Understanding what must be presented in the statements themselves, and what belongs in the notes, is central to accurate financial reporting and compliance.
Required Financial Statements for Pension Plans
Every pension plan—whether DB or DC—must provide a clear picture of its net assets and how those assets change over time. Two financial statements are required for both plan types:
- Statement of Net Assets Available for Benefits
This statement functions like a balance sheet. It lists the plan’s assets, subtracts liabilities, and shows the net assets available to participants at the reporting date.
Example: A DC plan might report investments in mutual funds, receivables from employer contributions, and participant loans, netted against any payables due. - Statement of Changes in Net Assets Available for Benefits
This statement resembles an income statement, showing additions (such as contributions and investment income) and deductions (such as benefits paid and administrative expenses) during the year.
Example: A DB plan would present employer contributions, investment earnings, and then subtract benefits paid to retirees and professional fees.
Additional Presentation for Defined Benefit Plans
DB plans also need to show information about accumulated plan benefits—the actuarial present value of benefits owed to participants—and the changes in those benefits. GAAP allows flexibility: this information can appear in a separate statement, on the face of another statement, or within the notes, as long as the full picture is presented in one place.
Example: A DB plan might disclose that at year-end, the actuarial present value of accumulated benefits is $95 million, compared with $90 million in the prior year, with changes driven by service cost, interest cost, and benefits paid.
Disclosure Requirements in the Notes
Notes to the financial statements provide essential context, especially for DB plans where actuarial assumptions and funding strategies drive long-term sustainability.
Defined Benefit Plan Note Disclosures
DB plan notes typically include:
- Actuarial assumptions used to calculate accumulated benefits, such as the discount rate, salary increase assumptions, and mortality tables.
Example: A plan might disclose that it uses a 5.5% discount rate and assumes 3% annual salary increases. - Description of plan benefits, such as whether benefits are based on final average salary or years of service.
- Funding policy, explaining how contributions are determined (e.g., actuarially based employer contributions).
- Investment policies, describing diversification strategies or restrictions.
These disclosures help users assess the adequacy of the plan’s resources relative to its obligations.
Defined Contribution Plan Note Disclosures
DC plans have simpler note requirements, since benefits are based solely on contributions and investment returns in participant accounts. Key disclosures include:
- Description of the plan and its eligibility requirements (for example, employees become eligible after one year of service).
- Types of contributions allowed, such as employee salary deferrals and employer matching.
- Investment options and policies, especially if participants direct their own investments.
- Participant loans, if permitted, with details on interest rates and repayment terms.
Example: A DC plan note might disclose that participants can allocate contributions among 15 mutual funds and may borrow up to 50% of their vested account balance.
Pulling It Together: Why These Requirements Matter
The dual structure—financial statements plus detailed notes—ensures that users of pension plan financial reports can see both the current financial position and the context behind it. For DB plans, the combination of statements and notes allows users to evaluate whether contributions and investment returns are sufficient to cover long-term benefit obligations. For DC plans, disclosures highlight the mechanics of how participant accounts function and how contributions flow in and out.
Illustration:
- A DC plan statement might show net assets of $250 million, with $20 million in contributions and $15 million in benefits paid for the year. Notes would then explain that participants can invest in index funds, target-date funds, and employer stock, and that employer matching is set at 50% up to 6% of pay.
- A DB plan statement might show net assets of $500 million, but the notes reveal that the actuarial present value of accumulated benefits is $600 million, indicating an underfunded status. Actuarial assumptions and funding policy disclosures then help stakeholders assess how the shortfall may be addressed.
