BAR CPA Exam: How to Prepare a Statement of Changes in Net Assets Available for Benefits for a Defined Benefit and a Defined Contribution Plan

Introduction

Purpose of the Statement of Changes in Net Assets Available for Benefits

In this article, we’ll cover how to prepare a statement of changes in net assets available for benefits for a defined benefit and a defined contribution plan. The Statement of Changes in Net Assets Available for Benefits is a critical financial statement used in reporting for employee benefit plans. Its primary purpose is to provide a detailed summary of how the plan’s net assets have changed over a specific period, typically a fiscal year. This statement reports the additions (such as contributions and investment income) and deductions (such as benefits paid and administrative expenses) from the plan’s net assets, ultimately showing the plan’s net position at the beginning and end of the period.

Accurate preparation of this statement is essential for stakeholders, including plan participants, sponsors, auditors, and regulators, as it reflects the financial health and performance of the plan.

Key Differences Between a Defined Benefit Plan and a Defined Contribution Plan

Understanding the differences between a Defined Benefit (DB) plan and a Defined Contribution (DC) plan is crucial when preparing the statement of changes in net assets available for benefits.

• Defined Benefit Plans: These plans promise a specific retirement benefit to employees, typically based on a formula involving years of service and salary. The employer is responsible for ensuring that there are sufficient assets to meet future benefit obligations. Contributions to a DB plan are often determined by actuarial assessments to ensure the plan remains adequately funded.
• Defined Contribution Plans: These plans, on the other hand, provide no guaranteed retirement benefit. Instead, the employee and/or employer contribute a fixed amount or percentage to the employee’s individual account. The benefits ultimately received depend on the performance of the investments within the account. The risk and rewards of investment returns fall primarily on the employee.

The statement of changes in net assets available for benefits is important for both types of plans because it tracks the inflows and outflows of assets that impact the plan’s ability to meet its obligations (in the case of DB plans) or the participant’s retirement goals (in DC plans).

Importance of the Statement in Financial Reporting for Employee Benefit Plans

The statement of changes in net assets available for benefits is a vital component of the overall financial reporting for employee benefit plans. For defined benefit plans, it helps employers and regulators assess whether the plan is on track to meet its long-term obligations. For defined contribution plans, it provides a snapshot of the total contributions, investment performance, and distributions that impact participants’ individual accounts.

Additionally, this statement serves as a tool for transparency, offering plan participants insight into how the plan’s assets are being managed. It also plays a key role in audits, as external auditors review the accuracy and completeness of the information presented to ensure compliance with regulatory requirements. In summary, this statement is integral to both operational oversight and regulatory compliance for employee benefit plans.

Overview of Defined Benefit and Defined Contribution Plans

Defined Benefit Plans

Definition and Characteristics

A Defined Benefit (DB) plan is a type of retirement plan where the employer promises to pay a specific benefit amount to employees upon retirement. This amount is typically determined based on a predefined formula, making DB plans attractive to employees seeking predictable retirement income. Unlike Defined Contribution plans, the employer bears the investment risk, meaning the plan sponsor must ensure that enough funds are available to meet future benefit obligations.

DB plans are characterized by their promise to provide a set amount of retirement income, regardless of the performance of the underlying investments. As a result, the primary focus of these plans is maintaining sufficient assets and liabilities in balance.

How Benefits Are Determined

In a Defined Benefit plan, retirement benefits are determined based on factors such as:

• Employee’s salary: The benefit formula often incorporates the employee’s average salary over a specific number of years (e.g., the highest five years of salary).
• Years of service: The length of time an employee has worked for the company is a critical element, with benefits typically increasing based on years of service.
• Age at retirement: In some plans, the retirement benefit may also be influenced by the employee’s age at retirement, with incentives for staying longer in the workforce.

A common formula for DB plans is:
Annual Benefit = Final Average Salary × Years of Service × Benefit Multiplier.

For example, a plan may offer 2% of the final average salary for each year of service. An employee with 30 years of service earning an average of $80,000 would receive an annual retirement benefit of $48,000 (2% × 30 × $80,000).

Role of the Employer in Funding the Plan

In a Defined Benefit plan, the employer has a significant responsibility to fund the plan adequately. The employer makes regular contributions based on actuarial calculations, which consider factors such as employee demographics, projected retirement dates, and the expected return on plan investments.

The contributions must be sufficient to ensure the plan can meet its future obligations, and it is the employer’s responsibility to make additional contributions if the plan is underfunded. This requirement places the investment risk squarely on the employer, as they are responsible for covering any shortfalls that might arise from lower-than-expected returns on investments or changes in life expectancy of plan participants.

Defined Contribution Plans

Definition and Characteristics

A Defined Contribution (DC) plan is a type of retirement plan in which the employer, employee, or both make contributions to an individual account for the employee. Unlike DB plans, there is no guaranteed retirement benefit. The final value of the employee’s account depends on the contributions made and the performance of the investments chosen within the account. The most well-known example of a DC plan is the 401(k) plan.

Defined Contribution plans are characterized by their flexibility, allowing employees to select from a variety of investment options, such as mutual funds, stocks, or bonds. The plan’s performance directly impacts the retirement income, shifting the investment risk from the employer to the employee.

How Contributions Are Made

In a DC plan, contributions are typically made through:

• Employee contributions: Employees can choose to defer a portion of their salary into the plan. Contributions may be pre-tax, which reduces the employee’s taxable income, or after-tax, depending on the plan’s design.
• Employer contributions: Employers often contribute to the employee’s account, either through a matching contribution (e.g., matching 50% of employee contributions up to a certain percentage) or through profit-sharing arrangements.

The total contributions are capped each year according to IRS limits, and these contributions are invested in options chosen by the employee from the plan’s offerings.

The Individual’s Role in Managing the Plan

One of the defining characteristics of Defined Contribution plans is the level of control that employees have over their retirement savings. Unlike a Defined Benefit plan, where the employer manages the plan’s assets, DC plan participants are responsible for selecting how their contributions are invested.

Participants can typically choose from a range of investment options, each with varying levels of risk and return. The employee’s retirement income depends on the investment choices they make, and they bear the risk if the investments perform poorly. Conversely, if investments perform well, the participant stands to benefit from higher retirement savings.

While Defined Benefit plans emphasize guaranteed retirement income with employer-driven funding, Defined Contribution plans focus on individual responsibility for saving and managing retirement funds, with no guaranteed outcome at retirement.

Purpose and Components of the Statement of Changes in Net Assets Available for Benefits

Purpose

The Statement of Changes in Net Assets Available for Benefits serves as a crucial financial document that provides a comprehensive overview of how a plan’s assets have changed over a specified period, typically one fiscal year. The statement summarizes the plan’s financial activity by detailing the inflows and outflows of resources, helping stakeholders understand the overall financial performance of the employee benefit plan. It presents the contributions made to the plan, the investment income generated, and the benefits paid out, along with administrative expenses. This statement is vital for assessing the plan’s ability to meet its obligations to participants and beneficiaries, providing transparency and accountability to all parties involved, including regulators, participants, and plan sponsors.

Components

The Statement of Changes in Net Assets Available for Benefits is broken down into several key components:

Additions (Contributions, Investment Income)

1. Employer and Employee Contributions
   • Employer Contributions: These are the amounts paid by the employer into the plan during the period. For a Defined Benefit (DB) plan, employer contributions are determined based on actuarial assessments to ensure the plan is adequately funded for future benefit payments. For a Defined Contribution (DC) plan, the employer may match a percentage of employee contributions or provide a set contribution amount.
   • Employee Contributions: In DC plans, employees can defer a portion of their salaries into their individual accounts. This section records the total amount of employee contributions made during the reporting period.
2. Investment Income
   • Interest and Dividends: Any interest earned on fixed-income investments or dividends received from equities held by the plan are reported in this section. These returns help grow the plan’s assets.
   • Gains (or Losses) on Investments: This component also captures any realized gains or losses from the sale of plan investments. Additionally, unrealized gains or losses (the change in market value of investments held during the period) are often included, reflecting the appreciation or depreciation in asset values.

Deductions (Benefits Paid, Administrative Expenses)

1. Benefits Paid to Participants or Beneficiaries
   • This section reflects the total amount of benefits paid out during the reporting period. For DB plans, these are the retirement benefits or lump-sum payments made to participants based on the plan’s benefit formula. For DC plans, this includes distributions made to participants who may have reached retirement age or left the company and opted for a withdrawal of their account balance.
2. Administrative and Other Operating Expenses
   • Plans incur administrative costs such as record-keeping, legal fees, actuarial services, and compliance expenses. This section deducts these operating expenses from the plan’s assets. Keeping these costs in check is critical to ensuring more funds are available for participants’ benefits.

Net Increase (or Decrease) in Net Assets

The Net Increase (or Decrease) in net assets represents the difference between the total additions (contributions and investment income) and the total deductions (benefits paid and administrative expenses). If additions exceed deductions, there is a net increase in assets, reflecting growth in the plan’s resources. Conversely, if deductions exceed additions, there is a net decrease, indicating a potential depletion of the plan’s resources during the period.

Net Assets at Beginning and End of Period

The statement concludes by reporting the Net Assets Available for Benefits at the beginning of the period and the end of the period. This provides a snapshot of how the plan’s assets have changed over the course of the year and shows the current financial position of the plan. For Defined Benefit plans, this figure is particularly important as it must be compared with the plan’s obligations to assess its funded status. For Defined Contribution plans, it represents the total value of individual participant accounts at the end of the reporting period.

The Statement of Changes in Net Assets Available for Benefits is a critical tool for monitoring the financial health of both Defined Benefit and Defined Contribution plans. By carefully examining each component, plan sponsors, auditors, and participants can assess the adequacy of plan funding, the effectiveness of investment strategies, and the management of administrative costs.

Key Differences in the Statement for Defined Benefit vs. Defined Contribution Plans

Defined Benefit Plans

Focus on Changes in Plan Assets Relative to Actuarial Assumptions

In Defined Benefit (DB) plans, the Statement of Changes in Net Assets Available for Benefits primarily focuses on the changes in plan assets and their relationship to actuarial assumptions. DB plans are designed to provide a fixed retirement benefit based on factors such as an employee’s salary and years of service, which means that the plan must be adequately funded to meet future benefit obligations.

The statement reflects how well the plan’s assets align with the actuarial estimates that are used to predict future liabilities. Actuarial assumptions, such as life expectancy, discount rates, and expected returns on investments, play a critical role in determining how much the employer needs to contribute to ensure that the plan can meet its long-term obligations. The statement highlights whether the assets are growing in line with these assumptions, allowing stakeholders to assess whether the plan is adequately funded.

Highlighting How Employer Contributions Support Long-Term Benefit Obligations

For DB plans, the Statement of Changes in Net Assets Available for Benefits highlights the pivotal role of employer contributions in funding the plan. Unlike Defined Contribution plans, where employees bear some or all of the responsibility for contributing to the plan, Defined Benefit plans rely almost exclusively on employer contributions. These contributions are calculated based on actuarial evaluations and are designed to ensure that the plan has sufficient assets to cover its projected liabilities.

In the statement, employer contributions are listed under “Additions” and serve as a primary source of funding. The amount contributed by the employer must be sufficient to offset the benefits paid out during the period, as well as any increase in future liabilities caused by changes in actuarial assumptions or market conditions. If the employer’s contributions are insufficient, the plan may become underfunded, which could lead to financial challenges in meeting benefit obligations.

Defined Contribution Plans

Emphasis on Contributions Made by Both Employer and Employee

In contrast, the Statement of Changes in Net Assets Available for Benefits for a Defined Contribution (DC) plan places significant emphasis on the contributions made by both the employer and the employee. The value of a participant’s retirement benefits in a DC plan is directly tied to the amount contributed and the performance of the investments selected by the employee.

Both employer and employee contributions are typically recorded separately under the “Additions” section of the statement. The amount contributed by each party plays a critical role in determining the total assets available to the participant upon retirement. In DC plans, there is no guaranteed benefit, so the contributions made throughout the year, combined with investment returns, determine the overall financial standing of the plan.

Importance of Investment Income and Its Impact on Individual Plan Accounts

For Defined Contribution plans, investment income is another key focus area in the statement. Unlike DB plans, where the employer assumes the investment risk, in DC plans, employees bear the full risk and reward of how their investments perform. The statement reports the investment income (or losses) generated during the period, including interest, dividends, and gains or losses on investments.

Investment income is vital in determining the growth of the employee’s individual account. Positive investment returns can significantly increase the value of the account, while poor performance can reduce it. The statement thus provides transparency into the overall performance of the plan’s investments and allows employees and employers to assess how well the investment options offered are supporting retirement savings goals.

The key differences in the Statement of Changes in Net Assets Available for Benefits for Defined Benefit and Defined Contribution plans lie in the focus on how assets are managed and funded. DB plans emphasize the relationship between plan assets and long-term actuarial assumptions, while DC plans focus on the impact of contributions and investment income on individual account growth.

How to Prepare a Statement of Changes in Net Assets Available for Benefits for a Defined Benefit Plan

Preparing a Statement of Changes in Net Assets Available for Benefits for a Defined Benefit (DB) plan involves a systematic approach to tracking the inflows and outflows of assets during a specific reporting period. The following step-by-step guide outlines the key processes involved in accurately preparing the statement.

Step-by-Step Process

1. Record Contributions: Calculate Total Employer Contributions During the Period

The first step in preparing the statement is to record all employer contributions made during the reporting period. In a Defined Benefit plan, the employer bears the primary responsibility for contributing to the plan, with contributions typically determined by actuarial assessments.

• Employer Contributions: These contributions are based on actuarial assumptions regarding the plan’s future liabilities, such as anticipated benefits and plan longevity. Employers may make contributions periodically throughout the year, and the total amount should be calculated and recorded under the “Additions” section of the statement.
• Special Contributions: In some cases, employers may need to make additional contributions if the plan is underfunded. These special contributions should also be recorded separately.

2. Investment Income: Report All Investment Earnings and Related Gains or Losses

The next step is to report all investment income earned by the plan during the period. In Defined Benefit plans, the plan’s assets are typically invested in various securities to grow the assets and help fund future benefits.

• Interest and Dividends: This includes earnings from fixed-income securities (such as bonds) and dividends from equity investments. Interest and dividends earned should be recorded as part of the “Investment Income” category.
• Realized Gains or Losses: These are the gains or losses from the sale of plan investments during the period. Gains increase the net assets of the plan, while losses decrease them.
• Unrealized Gains or Losses: These reflect the change in the fair value of investments held at the end of the reporting period, even if they have not been sold. Any increase in the value of these assets should be recorded as an unrealized gain, while decreases should be recorded as unrealized losses.

3. Benefits Paid: Deduct Any Benefits Paid to Participants or Beneficiaries

The third step involves deducting any benefits paid to participants or beneficiaries during the reporting period. In Defined Benefit plans, participants receive benefits based on the plan’s formula, which typically accounts for salary, years of service, and age at retirement.

• Regular Retirement Benefits: Payments made to retired participants, either as lump sums or as periodic payments, should be recorded under “Deductions.”
• Early or Disability Benefits: If the plan includes provisions for early retirement or disability benefits, any payments related to these should also be deducted.
• Beneficiary Payments: In the event of the death of a participant, any benefits paid to their designated beneficiaries should be recorded here.

4. Administrative Expenses: Deduct Administrative and Operational Expenses

Defined Benefit plans often incur administrative and operational expenses necessary to maintain the plan. These expenses should be deducted from the plan’s net assets and include:

• Recordkeeping and Compliance Costs: Fees related to maintaining participant records, preparing reports, and ensuring compliance with regulatory requirements.
• Actuarial and Legal Fees: The plan will often require actuarial services to assess future obligations and legal services to handle compliance or disputes.
• Investment Management Fees: If the plan’s assets are managed by third-party investment firms, any fees associated with investment management should also be deducted.

5. Net Assets: Calculate the Change in Net Assets Available for Benefits

Finally, the net change in assets available for benefits must be calculated by subtracting the total deductions (benefits paid and administrative expenses) from the total additions (contributions and investment income). This calculation provides the net increase or decrease in the plan’s assets during the reporting period.

• Net Increase (or Decrease): If the total additions exceed the total deductions, there is a net increase in net assets. Conversely, if the deductions are greater, the plan will report a net decrease.
• Net Assets at the Beginning and End of the Period: The statement should reflect the total net assets available for benefits at the beginning of the period and at the end of the period, showing how the plan’s financial position has changed over time.

By following this step-by-step process, plan administrators can accurately prepare a Statement of Changes in Net Assets Available for Benefits, ensuring transparency and regulatory compliance while providing a clear picture of the plan’s financial health.

How to Prepare a Statement of Changes in Net Assets Available for Benefits for a Defined Contribution Plan

The Statement of Changes in Net Assets Available for Benefits for a Defined Contribution (DC) plan tracks the inflows (contributions and investment income) and outflows (distributions and expenses) associated with the plan during a specific reporting period. This step-by-step guide outlines the key elements of preparing this statement for a DC plan.

Step-by-Step Process

1. Record Employee Contributions: Report Both Employee and Employer Contributions

The first step in preparing the statement is to record all contributions made to the plan by both employees and employers. Contributions are the primary source of inflows into a Defined Contribution plan and determine the funds available for future distributions.

• Employee Contributions: Employees typically defer a portion of their salary into their individual retirement accounts. These deferrals may be pre-tax or after-tax (Roth contributions), and the total amount contributed by employees during the reporting period should be recorded.
• Employer Contributions: Employers may contribute to the employee’s retirement accounts through matching contributions or profit-sharing arrangements. The amount contributed by the employer is reported alongside employee contributions to show the total inflow into the plan.

Both types of contributions are listed under the “Additions” section of the statement, reflecting the total funds entering the plan from both employees and employers.

2. Investment Income: Report All Earnings and Changes in Fair Value of Plan Investments

Investment income is a critical component of Defined Contribution plans, as it directly affects the growth of the employees’ individual accounts. The statement should reflect all earnings generated from the plan’s investments, as well as any changes in the fair value of those investments.

• Interest and Dividends: Any interest earned from fixed-income securities (e.g., bonds) and dividends from equity investments should be reported as part of the plan’s investment income.
• Gains or Losses on Investments: Report realized gains or losses from the sale of plan investments. Additionally, record any unrealized gains or losses based on changes in the fair value of the investments held by the plan at the end of the reporting period. This provides a complete picture of the plan’s performance.

This investment income is crucial for participants, as it directly impacts the growth of their retirement savings over time. Positive returns increase the value of their accounts, while negative returns decrease it.

3. Benefits Paid: Deduct Distributions Made to Employees or Beneficiaries

The next step is to deduct any benefits paid to employees or beneficiaries during the reporting period. Distributions from a DC plan occur when an employee retires, leaves the company, or requests a withdrawal (if allowed by the plan’s terms).

• Retirement Distributions: Record the total amount paid to retired employees who are withdrawing their account balances, whether as a lump sum or through periodic distributions.
• Other Distributions: Include any early withdrawals, rollovers to another qualified plan, or distributions made due to hardship or termination of employment.

These distributions are deducted from the plan’s assets and reported under the “Deductions” section of the statement.

4. Administrative Expenses: Deduct Any Administrative Costs Related to the Plan

Like Defined Benefit plans, Defined Contribution plans incur administrative and operational expenses. These costs are necessary for the day-to-day management of the plan and should be deducted from the plan’s assets.

• Recordkeeping and Compliance Costs: Fees associated with maintaining participant records, preparing regulatory filings, and ensuring compliance with the Department of Labor and IRS requirements.
• Investment Management Fees: If the plan uses third-party investment managers or funds, any fees associated with managing the plan’s assets should be recorded as administrative expenses.
• Other Administrative Fees: Legal, actuarial, and auditing fees required to maintain the plan’s regulatory compliance and operational efficiency should also be included.

These expenses are reported under “Deductions” and reduce the plan’s overall assets.

5. Net Assets: Report the Net Change in Assets for the Period

The final step in preparing the statement is to calculate and report the net change in assets for the reporting period. This represents the difference between the total additions (contributions and investment income) and the total deductions (benefits paid and administrative expenses).

• Net Increase (or Decrease): If the total additions exceed the total deductions, the plan will report a net increase in assets, indicating positive growth. Conversely, if deductions exceed additions, the plan will show a net decrease, signaling a reduction in the plan’s assets.
• Net Assets at the Beginning and End of the Period: The statement should reflect the net assets available for benefits at the start and end of the reporting period. This provides a clear snapshot of how the plan’s financial position has evolved over time.

By following this step-by-step process, plan administrators can accurately prepare a Statement of Changes in Net Assets Available for Benefits for a Defined Contribution plan, ensuring a transparent and comprehensive record of the plan’s financial activity for participants, auditors, and regulators.

Common Issues and Considerations in Preparing the Statement

When preparing the Statement of Changes in Net Assets Available for Benefits, several common issues and considerations must be addressed to ensure accuracy and compliance. These factors can significantly impact the financial picture presented in the statement, so attention to detail is critical.

Timing of Contributions and Payments

One of the most common issues encountered in preparing the statement is the timing of contributions and benefit payments. Accurate recording of these transactions is essential to ensure the financial health of the plan is properly reflected.

• Contributions: Employer and employee contributions must be recorded in the correct reporting period. Contributions made just before or after the reporting cut-off date may lead to discrepancies if not recorded accurately. For example, contributions that are made late or early must be properly accrued or deferred.
• Benefits Paid: Similarly, benefits paid to participants or beneficiaries must be deducted from plan assets in the appropriate period. Failure to match benefits paid with the correct reporting period can distort the plan’s financial standing, either inflating or underreporting the assets available.

Ensuring proper cutoff procedures for contributions and benefits paid is key to presenting an accurate and complete statement.

Investment Income Valuation

Valuing investment income, especially for illiquid or complex assets, poses challenges in both Defined Benefit and Defined Contribution plans. Investment income typically includes dividends, interest, and gains or losses from the sale of investments, but accurately reflecting these can be difficult.

• Illiquid Assets: Investments in private equity, real estate, or other illiquid assets can be challenging to value, particularly when fair market value is difficult to determine. These assets may not be traded regularly, and their valuation may rely on estimates or appraisals, introducing the potential for error or subjectivity.
• Fair Value Measurement: For publicly traded assets, fair value is typically based on market prices, but for illiquid investments, fair value must be determined through complex valuation methods. It’s important to follow applicable accounting standards, such as ASC 820, to ensure fair value measurements are as accurate as possible.

Accurate valuation of investment income, particularly for illiquid assets, is critical for reflecting the true performance of the plan’s investments.

Actuarial Valuations

For Defined Benefit plans, actuarial valuations play a critical role in determining the plan’s funding status and the amount of contributions required from the employer. The accuracy of these actuarial assumptions is essential for maintaining a clear picture of the plan’s future obligations.

• Assumptions: Actuarial valuations rely on a variety of assumptions, including life expectancy, expected rates of return on investments, and discount rates. Even small changes in these assumptions can significantly impact the reported funding level and required contributions.
• Regular Updates: Actuarial valuations must be updated regularly to reflect changing conditions. Failure to update assumptions can lead to underfunding or overfunding, distorting the plan’s financial outlook.

Accurate and up-to-date actuarial valuations are crucial for ensuring the financial stability of Defined Benefit plans and for providing an accurate picture in the statement.

Administrative Fees

Both Defined Benefit and Defined Contribution plans incur administrative fees, which must be accurately accounted for in the statement. Properly tracking and reporting these fees ensures that the statement accurately reflects the costs of maintaining the plan.

• Recordkeeping and Compliance: Fees for recordkeeping, legal compliance, and regulatory filings can vary significantly depending on the size and complexity of the plan. These fees should be carefully tracked and recorded in the correct period.
• Investment Management Fees: If the plan’s assets are managed by external investment managers, their fees must be accurately deducted from the plan’s net assets. Investment management fees can have a significant impact on the plan’s net assets, particularly for Defined Contribution plans where participants bear the cost.

Failure to account for administrative fees properly can overstate the net assets available for benefits, leading to a misleading picture of the plan’s financial health.

By addressing these common issues and considerations, plan administrators can prepare an accurate and reliable Statement of Changes in Net Assets Available for Benefits that reflects the true financial status of the plan and provides valuable insights to stakeholders, participants, and regulators.

Example Statement of Changes in Net Assets for a Defined Benefit and Defined Contribution Plan

Providing detailed examples of completed Statements of Changes in Net Assets Available for Benefits for both a Defined Benefit (DB) plan and a Defined Contribution (DC) plan helps illustrate the key components and how they are interpreted in financial reporting.

Example 1: Statement of Changes in Net Assets for a Defined Benefit Plan

Sample Statement

Item	Amount
Additions
Employer Contributions	$5,000,000
Investment Income	$3,000,000
Interest and Dividends	$1,200,000
Realized and Unrealized Gains	$1,800,000
Total Additions	$8,000,000
Deductions
Benefits Paid to Participants	$3,500,000
Administrative Expenses	$500,000
Total Deductions	$4,000,000
Net Increase in Assets	$4,000,000
Net Assets, Beginning of Year	$50,000,000
Net Assets, End of Year	$54,000,000

Interpretation of Line Items

• Employer Contributions: In a Defined Benefit plan, employer contributions are the primary funding source and are typically calculated based on actuarial valuations. In this example, the employer contributed $5,000,000 during the year to meet the plan’s funding obligations.
• Investment Income: This section includes both interest and dividends earned on investments, as well as realized and unrealized gains from changes in the market value of the plan’s assets. The total investment income of $3,000,000 includes $1,200,000 from interest and dividends, and $1,800,000 from gains on investments.
• Benefits Paid to Participants: The $3,500,000 listed here represents the total benefits paid to retirees or beneficiaries during the year. These payments reduce the plan’s available assets.
• Administrative Expenses: Administrative costs, such as legal fees, actuarial services, and compliance costs, are deducted from the plan’s assets. In this example, $500,000 was spent on administrative expenses.
• Net Increase in Assets: The net increase of $4,000,000 is calculated by subtracting the total deductions ($4,000,000) from the total additions ($8,000,000). This represents the overall growth in the plan’s assets during the year.
• Net Assets, Beginning and End of Year: The net assets at the start of the year were $50,000,000, and after accounting for all additions and deductions, the assets at the end of the year increased to $54,000,000.

Example 2: Statement of Changes in Net Assets for a Defined Contribution Plan

Sample Statement

Item	Amount
Additions
Employee Contributions	$2,000,000
Employer Contributions	$1,500,000
Investment Income	$1,200,000
Interest and Dividends	$500,000
Realized and Unrealized Gains	$700,000
Total Additions	$4,700,000
Deductions
Distributions to Participants	$2,200,000
Administrative Expenses	$300,000
Total Deductions	$2,500,000
Net Increase in Assets	$2,200,000
Net Assets, Beginning of Year	$20,000,000
Net Assets, End of Year	$22,200,000

Interpretation of Line Items

• Employee and Employer Contributions: In Defined Contribution plans, both employee and employer contributions are critical for the growth of the plan. In this example, employees contributed $2,000,000, and the employer contributed an additional $1,500,000 through matching or other arrangements.
• Investment Income: The $1,200,000 in investment income includes $500,000 from interest and dividends, and $700,000 from realized and unrealized gains on investments. Investment income is important in DC plans, as the growth of an employee’s retirement account depends heavily on the performance of the investments they select.
• Distributions to Participants: This section reflects the $2,200,000 in distributions made to participants who may have retired, left the company, or taken other qualifying distributions during the reporting period.
• Administrative Expenses: Administrative costs for the plan, including recordkeeping, legal fees, and compliance, totaled $300,000 for the year. These are deducted from the plan’s assets.
• Net Increase in Assets: The net increase in assets of $2,200,000 is the difference between the total additions ($4,700,000) and the total deductions ($2,500,000). This indicates that the plan’s assets grew over the reporting period.
• Net Assets, Beginning and End of Year: At the start of the year, the plan had $20,000,000 in net assets. After accounting for all contributions, investment income, and deductions, the total net assets at the end of the year increased to $22,200,000.

These example statements highlight the major differences in how Defined Benefit and Defined Contribution plans are funded, how benefits are paid, and how administrative expenses impact the overall financial health of the plan. Defined Benefit plans focus more on employer contributions and long-term actuarial assumptions, while Defined Contribution plans rely heavily on both employer and employee contributions, as well as the performance of investments.

Conclusion

Importance of Accurate Preparation of the Statement

Accurate preparation of the Statement of Changes in Net Assets Available for Benefits is essential for ensuring the transparency and financial integrity of both Defined Benefit and Defined Contribution plans. This statement provides a detailed overview of the plan’s financial activity during a reporting period, allowing stakeholders, including plan participants, auditors, and regulators, to assess the plan’s financial health and performance. Properly capturing contributions, investment income, benefits paid, and administrative expenses ensures that the plan’s assets are reported correctly and that any discrepancies can be quickly identified and addressed.

In Defined Benefit plans, accurate reporting helps ensure that the plan remains properly funded to meet future benefit obligations. For Defined Contribution plans, transparency in contributions and investment income provides employees with a clear view of their retirement savings performance. Ultimately, an accurate statement not only satisfies regulatory requirements but also builds trust among stakeholders.

Key Takeaways for BAR CPA Exam Candidates

For BAR CPA exam candidates, understanding the preparation of the Statement of Changes in Net Assets Available for Benefits is critical for success in the employee benefits area of the exam. Key takeaways include:

• Differentiating Between DB and DC Plans: Candidates must clearly understand the structural and reporting differences between Defined Benefit and Defined Contribution plans, as well as the role of employer versus employee contributions.
• Mastering Investment Income Valuation: Accurate reporting of investment income, including interest, dividends, and realized/unrealized gains, is crucial, especially in complex plans that hold illiquid assets.
• Actuarial and Administrative Costs: Candidates should be aware of how actuarial valuations impact Defined Benefit plans and how administrative expenses affect both DB and DC plans.
• Attention to Detail: Ensuring proper cutoff dates for contributions, benefits paid, and administrative costs is key to accurately reflecting the financial health of a plan.

By mastering these aspects, candidates will be well-prepared to handle questions related to employee benefit plan accounting and reporting on the BAR CPA exam.