With interest rates on the rise, it has become more attractive to plan sponsors to terminate their legacy-defined benefit pension plans. When a plan sponsor decides to terminate an employee benefit plan, they must look to the liquidation basis of accounting requirements for proper presentation of their plan’s financial statements.
During 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2013-07, Liquidation Basis of Accounting. Under the amended guidance, an entity is required to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is considered imminent when the plan for liquidation is approved and the likelihood is remote that an entity will return from liquidation or the execution of the plan will be blocked by other parties, or a plan for liquidation is imposed by other forces.
When financial statements are prepared under the liquidation basis, an entity would measure its assets at the amount of expected cash proceeds from the liquidation, and include in its assets any items it had not previously recognized under U.S. Generally Accepted Accounting Principles (GAAP), but expects to either sell in liquidation or use to settle its obligations. The entity would continue to recognize and measure its liabilities in accordance with GAAP.
Employee benefit plans that are classified as “large plans” are required to attach audited financial statements, prepared in accordance with GAAP, to their Form 5500 annual filing.
Questions have been raised by preparers of financial statements regarding how to apply the guidance in ASU 2013-07 to employee benefit plans. Various Technical Questions and Answers (TIS) sections have been issued as a result. The full TIS sections can be found on the AICPA’s website. The following is a summary of the content of selected TIS sections.
When is liquidation “imminent” as it relates to an employee benefit plan? This will depend on whether the plan is a defined benefit or a defined contribution plan and whether the termination is standard or forced. For a defined benefit pension plan, there are specific rules and procedures that must be followed involving the PBGC and the IRS in order to voluntarily terminate a plan. As noted above, the likelihood needs to be remote that the execution of the plan for liquidation will be blocked by other parties. It is not uncommon for terminations of defined benefit pension plans to be blocked by the PBGC or IRS, at least temporarily. In addition, the PBGC may take over a defined benefit pension plan and initiate a distressed termination. A defined contribution plan can generally be terminated by approval of the governing body of the plan and after applying for a determination letter from the IRS. Liquidation is imminent when a plan for liquidation is approved by the governing body of the plan, and the likelihood that that plan will be blocked is remote (such as by the PBGC or the IRS).
Would you use liquidation basis for a partial plan termination or a plan merger? A partial plan termination or plan merger generally does not qualify as a liquidation, and ongoing plan accounting should be followed.
Can the beginning-of-year benefit information date be used for a defined benefit plan using the liquidation basis of accounting? The end-of year benefit information date is preferable to use in a terminating plan as the beginning-of-year benefit information date is not the most meaningful or useful method to the reader of the financial statements for a terminating plan; however, the beginning-of-year information date is permitted.
Would a contribution receivable from the plan sponsor be recognized for a defined benefit plan under the liquidation basis? When using the liquidation basis of accounting, the entity should recognize assets it expects to sell in liquidation or use to settle liabilities, and, therefore, receivables from the plan sponsor would be recorded. Typically these receivables relate to minimum required contributions as determined by the plan’s actuary.
Does the plan record a payable to the plan sponsor when a defined benefit plan is overfunded when using the liquidation basis? The plan should recognize and measure liabilities under the liquidation basis in accordance with GAAP. The plan should also defer to the provisions in the termination documents, which would indicate how any excess assets should be handled. This may result in a payable to the plan sponsor to be recorded for excess assets.
What costs are to be accrued under the liquidation basis? Under the liquidation basis of accounting, the entity is to accrue for income and expenses expected to be recognized over the termination period. Such future expenses for an employee benefit pension plan may include trustee fees, audit fees, actuarial service fees and PBGC premiums. If these fees can be reasonably estimated, the amounts should be accrued in the financial statements.
Are fair value disclosures under ASC 820 required under the liquidation basis? When liquidation basis is the same as fair value, which, in most cases, for employee benefit plans it will be, the disclosures under ASC 820 would still be required.
ASU 2013-07 was effective for reporting periods beginning after December 15, 2013. Plans that were using the liquidation basis under prior guidance are not required to apply the amended guidance and should continue to apply the guidance under the topics they are currently following until liquidation is complete.