In response to concerns expressed by leading organizations that specialize in employee stock ownership plans (ESOPs), the FASB has proposed an indefinite deferral of certain Level 3 fair value measurement disclosure requirements for nonpublic employee benefit plans holding private company employer equity securities. Without the deferral, these disclosure requirements would take effect in financial statements of nonpublic employee benefit plans for periods beginning on or after December 15, 2011 (calendar year 2012), and these disclosures would be included in Form 5500 filings that are generally due within seven months after the plan’s year-end. This Messenger highlights the proposed changes and suggests topics that plan sponsors should discuss with their ESOP plan independent auditor at this time.
Text of MHM Messenger: FASB Proposal Affects Employee Benefit Plans
1. our roots rundeepTMMAYER HOFFMAN MCCANN P.C. AN INDEPENDENT CPA FIRMA publication of the Professional Standards GroupMHMMessenger 2 0 1 3 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 www.mhm-pc.com All rights reserved.TMIn response to concerns expressed by leadingorganizations that specialize in employee stockownership plans (ESOPs), the FASB has proposedan indefinite deferral of certain Level 3 fair valuemeasurement disclosure requirements for nonpublicemployee benefit plans holding private companyemployer equity securities. Without the deferral, thesedisclosure requirements would take effect in financialstatements of nonpublic employee benefit plans forperiods beginning on or after December 15, 2011(calendar year 2012), and these disclosures would beincluded in Form 5500 filings that are generally duewithin seven months after the plans year-end.This Messenger highlights the proposed changes andsuggests topics that plan sponsors should discusswith their ESOP plan independent auditor at this time.Highlights of Proposed ChangesThe reasons for the proposed changes and the natureof the disclosures are as follows: Reasons for changes. The concerns wereexpressed in a joint letter from the National Centerfor Employee Ownership, the ESOP Association,and the Employee-Owned S Corporations ofMay 2013FASB Proposal Affects Employee Benefit PlansAmerica. The key points include the following: Cost-benefits. The costs would outweigh thebenefits for certain disclosures about valuationsof Level 3 fair value measurements that wereintroduced in Accounting Standards Update(ASU) 2011-04. (See MHM Messenger 3-13 formore details.) Examples include quantitativeinformation regarding unobservable inputs,including the weighted average cost of capitalused in the discounted cash flow method,pricing multiples applied, operating margins,long-term revenue growth rates, and othersensitive information. Access to regulatory databases. The disclosureof proprietary, sensitve information would beespecially problematic for plans that cover 100or more participants and are subject to auditunder the Employee Retirement Security Act of1974 because the audited financial statementsfor these plans are filed in the Department ofLabors EFAST2 database which is readilyaccessible by the public via the Internet. Risks of releasing proprietary information.The easy public access to these disclosures,combined with the nature of the informationthat is required to be disclosed, would openthe door for both plan participants and thegeneral public to obtain information that wouldnot otherwise be available about the valuationsof the ESOP sponsor entities. Although thereare risks related to release of the proprietaryinformation to competitors, customers and
2. 2 0 1 3 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 www.mhm-pc.com All rights reserved.MHMMessenger2suppliers, arguably the most damaging effectscould come from release of the informationto corporate raiders because it could helpthem launch takeovers that would work to thedetriment of the employee-owners. Nature of changes. The disclosures at issuegenerally relate to the quantitative informationabout the unobservable inputs used in the fair valuemeasurement of Level 3 financial instruments.Although these disclosures can be aggregatedby class of assets, the investment in the ESOPsponsors equity securities is often the only Level3 measurement in the plans financial statementswith the result that there is only one asset withinthe class. In these cases, the information disclosedwould be specific to the entity, and the disclosure ofa range of values like those shown in the appendixto Messenger 3-13 would not be a viable option.Instead, the FASB is proposing the following: New definition. The FASBs exposure draftincludes a new definition of a nonpublicemployee benefit plan. If adopted as proposed,this term would be defined as an employeebenefit plan other than a plan that is subject tothe SECs Form 11-K filing requirements. Indefinite deferral. The exposure draft proposesto defer indefinitely the requirement in ASC820-10-50-2(bbb) for investments held by anonpublic employee benefit plan in its plansponsors own nonpublic equity securities.Paragraph 820-10-50-2(bbb) requiresquantitative information about the significantunobservable inputs used in a Level 3 fair valuemeasurement.Open questionsThe purpose of the proposed deferral is to allow moretime for discussions among regulators, nonpublicemployee benefit plan sponsors, and others aboutpossible ways to deal with the concerns about therelease of proprietary information. To expedite thedeferral, the proposed ASU is on a fast track, with acomment period ending May 31, 2013. The expectationis that a final ASU will be issued before the deadlinefor the first set of Form 5500 filings that would besubject to the expanded Level 3 fair value disclosures.Without an extension, the filing deadline for calendar-year 2012 financial statements for nonpublic employeebenefit plans is July 31, 2013.Specific questions on which the FASB is seekingcomment include the following:1.Should the deferral apply to certain qualitativeinformation (in addition to the quantitativeinformation described above)?2.Should the deferral apply to additional investments(other than the plan sponsors own nonpublic entityequity securities)?3.Should other employee benefit plans be includedin the scope of the deferral?4.Is the definition of nonpublic employee benefit planappropriate, understandable, and operational?Steps to take nowIn view of the proposal and timetable, nonpublicemployee benefit plan sponsors may wish to consultnow with their ESOP plan independent auditor aboutthe nature of the information to be disclosed.The deferral is expected to eliminate many of thequalified opinions that might otherwise result fromplans that elect not to disclose such information.However, plan sponsors should be aware that, if anindependent auditor concludes that there is a departurefrom generally accepted accounting principles, thisMHMMessenger 3. 2 0 1 3 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 www.mhm-pc.com All rights reserved.MHMMessenger3The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.Please contact your MHM service provider to further discuss the impact on your financial statements.conclusion will be apparent in the Form 5500 filing.This notation may lead to an increased risk of reviewby the Department of Labor, and there is a risk of afine for failure to file a complete and accurate Form5500.For more informationIf you would like more information about the topicsdiscussed in this Messenger, please contact HalHunt of MHMs Professional Standards Group orthe MHM location nearest you. You can reach Hal firstname.lastname@example.org or 913-234-1012.