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FAS 157: New Reporting Requirements for Employee Benefit Plan Investments

In September 2006, the Financial Accounting Standards Board (FASB) released Statement No. 157, "Fair Value Measurements" (FAS 157), which defines fair value, establishes a framework for measuring fair value and expands financial disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007 and applies whenever accounting principles generally accepted in the United States of America (GAAP) require or permit assets or liabilities to be measured at fair value. Therefore, the provisions of FAS 157 must be taken into consideration in determining the fair values of your employee benefit plan's investments and in reporting such fair value measurements in your plan's financial statements.

For plans that are primarily invested in marketable securities such as publicly traded stocks, bonds or registered investment funds (mutual funds), the implementation of FAS 157 might simply involve additional disclosure requirements. For plans that invest in so-called "alternative investments," which do not have a published market price, the implementation of FAS 157 could prove to be more challenging.

Examples of alternative investments often held by employee benefit plans include the following:

• Common or collective trusts
• Pooled separate accounts
• Stable value investments
• Private equity funds
• Hedge funds
• Real estate funds
• Funds of funds

While fair values of such alternative investments are often provided by custodians, third-party administrators, valuation specialists or the issuers themselves, the plan's sponsor is ultimately responsible for the proper financial statement presentation of its plan's investments in accordance with FAS 157.

The following information and online resources can help you understand and comply with FAS 157. Your Blackman Kallick representative will also be happy to help you.

What is the purpose of FAS 157?

Prior to the issuance of FAS 157, there were different definitions of fair value and limited guidance for applying those definitions to GAAP. Moreover, that guidance was dispersed among the many accounting pronouncements that require fair value measurements. Differences in that guidance created inconsistencies and added to the complexity of applying GAAP. FAS 157 was issued to address the need for increased consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements.

Which employee benefit plans are subject to FAS 157?

FAS 157 impacts all employee benefit plans that hold investments and prepare financial statements using GAAP.

To better understand how FAS 157 applies to you, please see the American Institute of Certified Public Accountants (AICPA) Employee Benefit Plan Audit Quality Center (EBPAQC) online report, "Assessing the Fair Values of Your Plan Investments."

FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market or, in the absence of a principal market, the most advantageous market accessible to the reporting entity as of the measurement date. FAS 157 focuses on the exit price rather than the entry price and market-based assumptions rather than entity-specific assumptions.

For more information on techniques for determining fair value, as well as on the framework for measuring it, please see the AICPA EBPAQC report, "New Accounting Rules for Valuing and Reporting Investments in Plan Financial Statements."

How does FAS 157 apply to alternative investments?

Since alternative investments do not have readily available quoted market prices, FAS 157 provides guidance on how to determine the fair values of such investments. FAS 157 also requires additional disclosures pertaining to the fair value measurements of alternative investments.

The AICPA EBPAQC's report, "Alternative Investments in Employee Benefit Plans," can help you identify alternative investments and understand valuation methods for them. This report also discusses reports commonly used in supporting valuations and offers references to accounting and auditing professional literature on alternative investments.

Allow extra time to comply with FAS 157

The FAS 157 implementation issues you face will depend on the types of investments held by your employee benefit plan as well as the availability of information regarding the fair value measurements of such investments. As discussed above, if your plan holds alternative investments, it is likely that the implementation of FAS 157 will be more onerous. It is important to allow extra time to prepare the investment information and disclosures required under FAS 157.

How can you get started?

For guidance on how to get started with FAS 157 compliance, see the AICPA EBPAQC's report, "Getting Started: Applying New Accounting Rules for Measuring and Reporting Fair Value of Plan Investments."

This report will help you:

• Understand how FAS 157 affects your plan's financial statements
• Learn which additional financial statement disclosures are required and the information you will need to prepare them
• Establish responsibility at the plan level for implementing FAS 157 and participating in the audit process
• Communicate with your plan trustee, custodian or other investment service providers about information they can offer to help you determine the fair value of your plan's investments
• Talk to your plan auditor about how FAS 157 will affect the audit and what information they will need
• Pay special attention to "alternative" and/or hard-to-value investments
• Determine whether you need to hire a third party to perform valuation services to obtain fair values for plan investments
• Know whether you will need to disclose 2007 comparative financial information for your plan
• Establish and monitor proper internal controls over your plan's financial reporting process related to plan investment valuations
• Understand valuation considerations related to your plan's investments

The important thing is to allow ample time to comply with FAS 157. Your Blackman Kallick representative will be happy to help you understand and comply with this new standard.

Questions? Contact Toni Diprizio at tdiprizio@BlackmanKallick.com or call 312-980-3227.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.