ASC

ASC 325-962

Plan Accounting—Defined Contribution Pension Plans

325 Investments—Other

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In brief

IntermediateSubsequent measurementFair valueDisclosureCompensation and benefits

ASC 962-325 governs how a defined contribution pension plan reports its investments and insurance contracts. The core rule is that plan investments (including derivatives) are reported at fair value under Topic 820, with two exceptions: fully benefit-responsive investment contracts are reported at contract value, and insurance contracts as defined in Subtopic 944-20 are presented the same way as in the plan's ERISA Form 5500 filing (fair value or contract value). It also prescribes trade-date recording, presentation of investments by general type, master trust disclosures, and disclosures about benefit-responsive contracts.

Key points (7)
  • Plan investments are generally presented at fair value at the reporting date, reduced if significant by brokerage commissions and other costs normally incurred in a sale (962-325-35-1 and 35-1A).
  • Defined contribution plans report investments, including derivative contracts, at fair value except insurance contracts and fully benefit-responsive investment contracts; contract value is the relevant measure for the portion of net assets attributable to fully benefit-responsive investment contracts (962-325-35-5 and 35-5A).
  • Insurance contracts as defined by Subtopic 944-20 are presented as in the plan's ERISA annual report—either fair value or contract value—and non-ERISA plans follow as if subject to the Act (962-325-35-6).
  • Each contract is evaluated individually for benefit responsiveness, and contracts with prospective interest adjustments can still be fully benefit-responsive if the crediting rate cannot be less than zero (962-325-35-9 and 35-10).
  • Purchases and sales of securities are recorded on a trade-date basis; settlement-date accounting is acceptable only if fair value did not change significantly and the plan's asset composition is not significantly affected (962-325-25-1).
  • A plan whose fiscal year-end is not a month-end may elect, applied consistently, to measure investments and investment-related accounts at the nearest month-end, and must disclose the election, the measurement date, and any intervening contributions, distributions, or significant events (962-325-35-1B, 50-2A, 50-2B).
  • Investments measured at fair value must be presented by general type (mutual funds, government securities, common-collective trusts, common stocks, real estate, self-directed brokerage accounts, etc.), and plans must disclose master trust investments by general type plus the plan's dollar interest in each type and in the master trust's other assets and liabilities (962-325-45-5, 50-8A through 50-8C).

For students. This is the employee benefit plan analogue of Topic 820: nearly everything is at fair value, and the tested exception is fully benefit-responsive investment contracts (stable value/GIC-type contracts) measured at contract value. A common misunderstanding is thinking a contract is benefit-responsive whenever a third party guarantees value—the guarantee must cover participant-initiated withdrawals, loans, and transfers at contract value, and each contract is tested separately.

defined contribution planfully benefit-responsive investment contractcontract valuefair value hierarchynet assets available for benefitsmaster trust interestsynthetic investment contractparticipant-directed investments

Machine-generated study aid for ASC 325-962. Check the source paragraphs below.

325-962-00Status

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325-962-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
Benefit-Responsive Investment ContractSupersededAccounting Standards Update No. 2015-12 (Part I)07/31/2015
BenefitsAmendedAccounting Standards Update No. 2016-1912/14/2016
Benefits (3rd def.)AddedAccounting Standards Update No. 2014-0603/14/2014
Defined Contribution PlanAmendedAccounting Standards Update No. 2014-0603/14/2014
Level 1 InputsAddedAccounting Standards Update No. 2012-0410/01/2012
Net Assets Available for BenefitsAddedAccounting Standards Update No. 2012-0410/01/2012
Sponsor (3rd def.)AddedAccounting Standards Update No. 2014-0603/14/2014
962-325-35-1AAddedAccounting Standards Update No. 2012-0410/01/2012
962-325-35-1BAddedAccounting Standards Update No. 2015-12 (Part III)07/31/2015
962-325-35-2 through 35-4
AmendedAccounting Standards Update No. 2012-0410/01/2012
962-325-35-2AmendedAccounting Standards Update No. 2010-2509/28/2010
962-325-35-5AmendedAccounting Standards Update No. 2015-12 (Part I)07/31/2015
962-325-35-5AAddedAccounting Standards Update No. 2015-12 (Part I)07/31/2015
962-325-35-6AmendedAccounting Standards Update No. 2015-12 (Part I)07/31/2015
962-325-35-9AmendedAccounting Standards Update No. 2015-12 (Part I)07/31/2015
962-325-35-9AmendedAccounting Standards Update No. 2014-0603/14/2014
962-325-35-12SupersededAccounting Standards Update No. 2015-12 (Part I)07/31/2015
962-325-45-1 through 45-4
SupersededAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-45-5AmendedAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-45-5AmendedAccounting Standards Update No. 2015-12 (Part I)07/31/2015
962-325-45-5AmendedAccounting Standards Update No. 2010-2509/28/2010
962-325-45-7SupersededAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-45-7AmendedAccounting Standards Update No. 2012-0410/01/2012
962-325-45-10SupersededAccounting Standards Update No. 2010-2509/28/2010
962-325-50-1AmendedAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-50-1AmendedAccounting Standards Update No. 2012-0410/01/2012
962-325-50-1ASupersededAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-50-1AAddedAccounting Standards Update No. 2012-0410/01/2012
962-325-50-2AAddedAccounting Standards Update No. 2015-12 (Part III)07/31/2015
962-325-50-2BAddedAccounting Standards Update No. 2015-12 (Part III)07/31/2015
962-325-50-3AmendedAccounting Standards Update No. 2015-12 (Part I)07/31/2015
962-325-50-4SupersededAccounting Standards Update No. 2015-12 (Part I)07/31/2015
962-325-50-5AmendedMaintenance Update 2016-11 (PDF)06/27/2016
962-325-50-6SupersededAccounting Standards Update No. 2017-0602/27/2017
962-325-50-6AmendedAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-50-6AmendedAccounting Standards Update No. 2015-12 (Part I)07/31/2015
962-325-50-7AmendedAccounting Standards Update No. 2017-0602/27/2017
962-325-50-7AmendedAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-50-8AmendedAccounting Standards Update No. 2017-0602/27/2017
962-325-50-8A through 50-8C
AddedAccounting Standards Update No. 2017-0602/27/2017
962-325-50-9AddedAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-55-2AmendedAccounting Standards Update No. 2014-0603/14/2014
962-325-55-3AmendedAccounting Standards Update No. 2012-0410/01/2012
962-325-55-4AmendedAccounting Standards Update No. 2012-0410/01/2012
962-325-55-7AmendedAccounting Standards Update No. 2012-0410/01/2012
962-325-55-8AmendedAccounting Standards Update No. 2012-0410/01/2012
962-325-55-15AmendedAccounting Standards Update No. 2014-0603/14/2014
962-325-55-16SupersededAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-55-16AmendedAccounting Standards Update No. 2010-2509/28/2010
962-325-55-17AmendedAccounting Standards Update No. 2025-1212/17/2025
962-325-55-17AmendedAccounting Standards Update No. 2018-0907/16/2018
962-325-55-17AddedAccounting Standards Update No. 2015-12 (Part II)07/31/2015
962-325-55-18AddedAccounting Standards Update No. 2017-0602/27/2017

325-962-05Overview and Background

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325-962-05-1
This Subtopic provides guidance on investments for defined contribution pension plans. In particular, this Subtopic provides guidance on the reporting of investment and insurance contracts held by defined contribution pension plans.
325-962-05-2
Defined benefit plans provide participants with a determinable benefit based on a formula provided for in the plans, whereas defined contribution plans provide benefits based on amounts contributed to an employee's individual account plus or minus the following:
  1. a
    Forfeitures
  2. b
    Investment experience
  3. c
    Administrative expenses.
325-962-05-3
The Internal Revenue Code generally requires that all investment experience under defined contribution plans be allocated to individual account balances.
325-962-05-4
A defined contribution plan provides for participant-directed investment programs if it allows participants to choose among various investment alternatives. The available alternatives are usually pooled fund vehicles, such as registered investment companies or commingled funds of banks, that provide varying kinds of investments—for example, equity funds and fixed income funds. The participant may select among the various available alternatives and periodically change that selection.

325-962-15Scope and Scope Exceptions

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Overall Guidance

325-962-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Topic, see Section 962-10-15.

325-962-25Recognition

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325-962-25-1
The accrual basis requires that purchases and sales of securities be recorded on a trade-date basis. However, if the settlement date is after the financial statement date, accounting on a settlement-date basis is acceptable if both of the following conditions exist:
  1. a
    The fair value of securities purchased or sold immediately before the financial statement date does not change significantly from the trade date to the financial statement date.
  2. b
    The purchases or sales do not significantly affect the composition of the plan's assets available for benefits.

325-962-35Subsequent Measurement

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Reporting at Fair Value

325-962-35-1
Plan investments should generally be presented at their fair value at the reporting date (see paragraph 965-325-35-3 for special provisions concerning the valuation of insurance contracts and paragraph 962-325-35-5 for special provisions concerning the valuation of fully benefit-responsive investment contracts).
325-962-35-1A
If significant, the fair value of an investment shall be reduced by brokerage commissions and other costs normally incurred in a sale (similar to fair value less cost to sell).
325-962-35-1B
If a plan's fiscal year-end does not coincide with a month-end, the plan may measure investments and investment-related accounts (for example, a liability for a pending trade with a broker) using the month-end that is closest to the plan's fiscal year-end. That election shall be applied consistently from year to year.
325-962-35-2
Some plan investments may not have Level 1 inputs to measure fair value. Therefore, they will need to be measured in accordance with the other valuation techniques described in Topic 820. Examples include all of the following:
  1. a
    Real estate
  2. b
    Mortgages or other loans
  3. c
    Limited partnerships
  4. d
    Restricted securities
  5. e
    Unregistered securities
  6. f
    Securities that are traded in inactive markets
  7. g
    Nontransferable investment contracts.
325-962-35-3
Both of the following are the obligation of the plan's trustees, the administrator, and the corporate trustee:
  1. a
    To satisfy themselves that all appropriate factors relevant to the value of the investments have been considered
  2. b
    To select a method to measure the fair value of the investments.
325-962-35-4
To the extent considered necessary, the plan may use the services of a specialist to assist the plan (or the administrators) in measuring the fair value of investments. Topic 820 provides guidance on how to measure fair value.

Investment and Insurance Contracts

325-962-35-5
Defined contribution plans, including both health and welfare and pension plans, shall report investments (including derivative contracts) at fair value (excluding insurance contracts and fully benefit-responsive investment contracts [see paragraph 962-325-35-6 for special provisions on the valuation of insurance contracts and paragraph 962-325-35-5A for special provisions on the valuation of fully benefit-responsive investment contracts]).
325-962-35-5A
Contract value is the relevant measure for the portion of the net assets available for benefits of a defined contribution plan attributable to fully benefit-responsive investment contracts.
325-962-35-6
Insurance contracts, as defined by Subtopic 944-20, shall be presented in the same manner as specified in the annual report filed by the plan with certain governmental agencies in accordance with the Employee Retirement Income Security Act; that is, either at fair value or at amounts determined by the insurance entity (contract value). Plans not subject to the Employee Retirement Income Security Act shall present insurance contracts as if the plans were subject to the reporting requirements of the Act.
325-962-35-7
See paragraphs
944-20-05-5 through 05-7
for a discussion of the purpose, types, and a general characterization of insurance transactions.
325-962-35-8
See paragraphs
944-20-15-16 through 15-19
for a discussion of certain types of insurance contracts, including long-duration contracts that do not subject the insurance entities to mortality or morbidity risks (investment contracts) and annuity contracts.

Evaluation of Benefit Responsiveness

325-962-35-9
If a plan holds multiple contracts, each contract shall be evaluated individually for benefit responsiveness.
325-962-35-10
Contracts that provide for prospective interest adjustments may still be fully benefit-responsive provided that the terms of the contracts specify that the crediting interest rate cannot be less than zero.

Application of Benefit Responsiveness

325-962-35-11
Paragraphs
962-325-55-2 through 55-15
include implementation guidance for the application of the definition of fully benefit-responsive for defined contribution plan investments.

325-962-45Other Presentation Matters

Source downloaded: .Record version ce91814dfccb. Effective date must be checked in the source.

325-962-45-5
Investments measured using fair value in the statement of net assets available for benefits or in the notes shall be presented by general type, such as the following:
  1. a
    Registered investment companies (for example, mutual funds)
  2. b
    Government securities
  3. c
    Common-collective trusts
  4. d
    Pooled separate accounts
  5. e
    Short-term securities
  6. f
    Corporate bonds
  7. g
    Common stocks
  8. h
    Mortgages
  9. i
    Subparagraph superseded by Accounting Standards Update No. 2010-25.
  10. j
    Real estate
  11. k
    Self-directed brokerage accounts (that is, an investment option that allows participants to select investments outside the plan's core options).
For the presentation of fully benefit-responsive investment contracts, which are measured at contract value, see paragraphs 962-325-35-5A and 962-325-50-3.
325-962-45-6
The presentation shall indicate whether the fair values of the investments have been measured by quoted market prices in an active market or were determined otherwise.
325-962-45-8
If a defined contribution plan provides for participant-directed and non-participant-directed investment programs, the plan shall disclose information in the financial statements about the net assets and significant components of the changes in net assets relating to the non-participant-directed program with such reasonable detail, either in the financial statements or accompanying notes, as is necessary to identify the types of investments and changes therein.
325-962-45-9
The interest income earned and rebate interest paid as a result of securities lending activity shall be recorded on the statement of changes in net assets available for benefits.

325-962-50Disclosure

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325-962-50-1
Disclosure of a defined contribution plan's accounting policies shall include a description of the valuation techniques and inputs used to measure the fair value less costs to sell, if significant, of investments (as required by Section 820-10-50) and a description of the methods and significant assumptions used to measure the reported value of insurance contracts (if any). However, defined contribution pension plans are exempt from the requirements in paragraph 820-10-50-2B(a) to disaggregate assets by nature, characteristics, and risks. The disclosures of information by classes of assets required by Section 820-10-50 shall be provided by general type of plan assets consistent with paragraph 962-325-45-5.
325-962-50-2
Original cost of investments is not required to be disclosed.
325-962-50-2A
If applicable, a plan shall disclose the accounting policy election to measure investments and investment-related accounts using the month-end that is closest to the plan's fiscal year-end in accordance with paragraph 962-325-35-1B and the month-end measurement date.
325-962-50-2B
If a plan measures investments and investment-related accounts in accordance with paragraph 962-325-35-1B and contributions, distributions, and/or significant events (such as a plan amendment, a merger, or a termination) occur between the month-end date used to measure investments and investment-related accounts and the plan's fiscal year-end, the plan shall disclose the amounts of those contributions, distributions, and/or significant events.

Fully Benefit-Responsive Investment Contracts

325-962-50-3
Defined contribution plans shall disclose the following in connection with fully benefit-responsive investment contracts, in the aggregate:
  1. a
    A description of the nature of those investment contracts (including how they operate) by the type of investment contract (for example, synthetic investment contracts or traditional investment contracts).
    1. 1
      Subparagraph superseded by Accounting Standards Update No. 2015-12. (Part I).
    2. 2
      Subparagraph superseded by Accounting Standards Update No. 2015-12. (Part I).
  2. b
    Subparagraph superseded by Accounting Standards Update No. 2015-12. (Part I).
  3. c
    Subparagraph superseded by Accounting Standards Update No. 2015-12. (Part I).
  4. d
    A description of the events that limit the ability of the plan to transact at contract value with the issuer, including a statement that the occurrence of each of those events that would limit the plan's ability to transact at contract value with participants in the plan is not probable of occurring. The following are examples of events that may limit the ability of the plan to transact at contract value:
    1. 1
      Premature termination of the contracts by the plan
    2. 2
      Plant closings
    3. 3
      Layoffs
    4. 4
      Plan termination
    5. 5
      Bankruptcy
    6. 6
      Mergers
    7. 7
      Early retirement incentives.
    The term probable is used in this Subtopic consistent with its use in Section 450-20-25.
  5. e
    A description of the events and circumstances that would allow issuers to terminate fully benefit-responsive investment contracts with the plan and settle at an amount different from contract value.
  6. f
    The total contract value of each type of investment contract (for example, synthetic investment contracts or traditional investment contracts).

Non-Participant-Directed Investments

325-962-50-5
If the disclosures regarding non-participant-directed investments required by paragraph 962-325-45-5 are not made in the basic financial statements, they shall be made in the notes to financial statements. If a plan offers a program that is both participant- and non-participant-directed, and if the participant- and non-participant-directed amounts cannot be separately determined, the plan will be deemed to be non-participant-directed for purposes of these disclosures. For example, an employer-sponsored plan offers six investment fund options, one of which is a stock fund that includes only the employer's stock. Employees at their discretion may invest their contributions in any of the six options. However, the employer's contribution to the plan (for example, the entity match) is automatically invested in the employer's stock fund. The stock fund is considered to be nonparticipant-directed for purposes of this disclosure if the employee and the employer amounts cannot be separately determined.

Interests in Master Trusts

325-962-50-7
A plan shall disclose the following in the notes to financial statements for each period for which a statement of changes in net assets available for benefits is presented:
  1. a
    Net appreciation or depreciation in the fair value of investments of the master trust. Net appreciation or depreciation includes realized gains and losses on investments that were both purchased and sold during the period as well as unrealized appreciation or depreciation of the investments held at year-end.
  2. b
    Investment income (exclusive of (a)).
325-962-50-8
A plan also shall include in the notes to financial statements both of the following:
  1. a
    Description of the basis used to allocate both of the following:
    1. 1
      Net assets
    2. 2
      Total investment income. See paragraph 962-325-50-7 for the components of total investment income.
    3. 3
      Subparagraph superseded by Accounting Standards Update No. 2017-06.
  2. b
    For a plan with an undivided interest in the master trust (that is, when the plan has a proportionate, rather than a specific, interest in the master trust), its percentage interest in the master trust as of the date of each statement of net assets available for benefits presented.
325-962-50-8A
In the notes to financial statements a plan shall include the investments of a master trust measured using fair value presented by general type of investment, such as the following, as of the date of each statement of net assets available for benefits presented:
  1. a
    Registered investment companies (for example, mutual funds)
  2. b
    Government securities
  3. c
    Common-collective trusts
  4. d
    Pooled separate accounts
  5. e
    Short-term securities
  6. f
    Corporate bonds
  7. g
    Common stocks
  8. h
    Mortgages
  9. i
    Real estate
  10. j
    Self-directed brokerage accounts (that is, an investment option that allows participants to select investments outside the plan's core options).
For the presentation of fully benefit-responsive investment contracts, which are measured at contract value, see paragraphs 962-325-35-5A and 962-325-50-3.
325-962-50-8B
A plan shall disclose the dollar amount of its interest in each general type of investment held by the master trust, consistent with the disclosure required by paragraph 962-325-50-8A. See paragraph 962-325-55-18 for an example of this disclosure.
325-962-50-8C
A plan also shall disclose the master trust's other assets and liabilities and the dollar amount of the plan's interest in each of those other assets and liabilities. Examples of those balances include the following:
  1. a
    Amounts due from brokers for securities sold
  2. b
    Amounts due to brokers for securities purchased
  3. c
    Receivables relating to derivatives
  4. d
    Payables relating to derivatives
  5. e
    Accrued interest and dividends
  6. f
    Accrued expenses.
See paragraph 962-325-55-18 for an example of this disclosure.

Investments Measured Using the Net Asset Value per Share Practical Expedient

325-962-50-9
If an investment is measured using the net asset value per share (or its equivalent) practical expedient in paragraph 820-10-35-59 and that investment is in a fund that files U.S. Department of Labor Form 5500 as a direct filing entity, disclosure of that investment's significant investment strategy, as discussed in paragraph 820-10-50-6A(a), is not required.

325-962-55Implementation Guidance and Illustrations

Source downloaded: .Record version 067afc1e2801. Effective date must be checked in the source.

Implementation Guidance

325-962-55-1
The following illustrate fair value and contract value reporting guidance in paragraphs
962-325-35-5 through 35-12
(also see fully benefit-responsive investment contract) for defined-contribution plan investments.
325-962-55-2
The value is determined within the context of the objectives of financial statements for a defined contribution plan. The valuation must reflect the ability of the plan to pay benefits from the perspective of the participants. This value is then reflected on participants' statements to disclose the amount they can expect to receive when they exercise their rights to withdraw, borrow, or transfer funds under the terms of the plan.
325-962-55-3
A five-year public bond (or portfolio of bonds) is guaranteed by a third party to have a fixed value at the end of three years. The guarantee applies only to the extent that the bond (or portfolio) is not liquidated before the end of three years. Liquidation within three years is at fair value.
325-962-55-4
Because guaranteed proceeds from the bond are not available for benefit withdrawals or transfers prior to maturity, the contract is not fully benefit-responsive and, therefore, net assets available for benefits shall reflect the fair value for this investment contract. Fair value should be measured in accordance with Topic 820.
325-962-55-5
A contract provides a fixed crediting interest rate, and a financially responsible entity guarantees liquidity at contract value before maturity for any and all participant-initiated benefit withdrawals, loans, or transfers arising under the terms of the plan, which allows access for all participants on a quarterly basis.
325-962-55-6
The net assets available for benefits should reflect the contract value for this investment contract, because the plan will receive such value and only such value if the contract is accessed to pay participant benefits or transfers.
325-962-55-7
This contract would be viewed as fully benefit-responsive. Examples of some variations on this contract, and their impact on the valuation, include the following:
  1. a
    Liquidity at contract value is not guaranteed for benefits that are attributable to termination of the plan, a plan spinoff to a new employer plan, or amendments to plan provisions. Net assets available for benefits should reflect the contract value for this investment contract, unless it is probable that the plan will be terminated, spun off, or amended.
  2. b
    Liquidity at contract value is not guaranteed for benefits that are attributable to the layoff of a large group of workers or an early retirement program. Net assets available for benefits should reflect the contract value for this investment contract, unless it is probable that termination of the employment of a significant number of employees will occur.
  3. c
    The contract will pay for benefits of up to 30 percent of the contract at contract value, and any excess benefits will be at some adjusted value. Net assets available for benefits should reflect the fair value for this investment contract because they are not fully benefit-responsive.
  4. d
    The contract will pay benefits at contract value, but only if the issuer of the contract determines that there is sufficient liquidity in the portfolio of assets that backs the contract. Because the third party has not guaranteed liquidity for participant-initiated withdrawals, net assets available for benefits should reflect the fair value for this investment contract because they are not fully benefit-responsive.
  5. e
    The contract will not pay benefits at contract value if benefits are due to participant transfers to another fixed income investment option, unless the funds are invested in an equity option for at least three months (equity wash provisions). Net assets available for benefits shall reflect the contract value for this investment contract because the contract would be considered fully benefit-responsive.
325-962-55-8
Net assets available for benefits should reflect the fair value for such an investment contract because there is no guarantee of liquidity at contract value. Fair value would be measured in the same manner as for an illiquid bond. Topic 820 includes a discussion of methods used to measure the fair values of illiquid instruments.
325-962-55-9
A financially responsible issuer pays contract value for participant withdrawals, regardless of the value of the assets in the separate account. The credited interest rate is a function of the relationship between the contract value and the value of the assets in the separate account. The rate is reset periodically, daily, monthly, quarterly, and so on, by the issuer and cannot be less than zero. There may or may not be a specified maturity date on the contract. The contract holder may terminate the contract at any time, and receive the value of the assets in the separate account.
325-962-55-10
Net assets available for benefits should reflect the contract value for this investment contract because participants are guaranteed return of principal and accrued interest.
325-962-55-11
Such a contract operates similarly to a separate account guaranteed investment contract, except that the assets are placed in a trust (with ownership by the plan) rather than a separate account of the issuer and a financially responsible third party issues a wrapper contract that provides that participants can, and must, execute plan transactions at contract value.
325-962-55-12
Net assets available for benefits should reflect the contract value for this investment contract because participants are guaranteed return of principal and accrued interest.
325-962-55-13
Under such a contract, the plan purchases a bond and places it in trust. The plan then contracts with a financially responsible third party to provide benefit responsiveness. Under the contract, should the bond need to be sold to meet a participant-initiated withdrawal benefit, loan, or transfer, the plan is obligated to sell the bond to the contract issuer, and the issuer is obligated to buy the bond. The transaction price is defined under the contract (for example, amortized cost).
325-962-55-14
Net assets available for benefits should reflect the contract value for this investment contract because return of principal and accrued interest has been guaranteed to participants.
325-962-55-15
If the contract provided only an option for the sponsor to sell the bond to the issuer, rather than an obligation to do so, reflecting net assets available for benefits at contract value for this investment contract would also apply.

Illustrations

325-962-55-17
This Example illustrates certain applications of the provisions of this Subtopic to the annual financial statements of a defined contribution plan. The following are illustrative financial statements and disclosures.
  • a. Subparagraph superseded by Accounting Standards Update No. 2018-09.
  • b. Subparagraph superseded by Accounting Standards Update No. 2018-09.
    • "XYZ Company 401(k) Plan" "Statement of Net Assets Available for Benefits" "December 31, " 20X1 20X0 Assets: Investments at fair value (See Note C) " $7,397,000 " " $7,014,000 " Investments at contract value (See Note D) " 1,500,000 " " 650,000 " Receivables: Employer contributions " 14,000 " " 10,000 " Participant contributions " 52,000 " " 50,000 " Notes receivable from participants " 300,000 " " 350,000 " Total receivables " 366,000 " " 410,000 " Total assets " 9,263,000 " " 8,074,000 " Liabilities: Accrued expenses " 10,000 " " 20,000 " Excess contributions payable " 15,000 " - Total liabilities " 25,000 " " 20,000 " Net assets available for benefits " $9,238,000 " " $8,054,000 " See accompanying notes to the financial statements.
    • "XYZ Company 401(k) Plan" "Statement of Changes in Net Assets Available for Benefits" "Year Ended December 31, 20X1" Additions: Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments " $280,000 " Interest " 369,000 " Dividends " 165,000 " " 814,000 " Interest income on notes receivable from participants " 20,000 " Contributions: Employer (see Note A) " 599,000 " Participants " 800,000 " Rollovers (see Note E) " 200,000 " " 1,599,000 " Total additions " 2,433,000 " Deductions: Deductions from net assets attributed to: Benefits paid to participants " 526,000 " Administrative expenses " 10,000 " Total deductions " 536,000 " Net increase " 1,897,000 " Transfer to GHI plan (see Note A) " 713,000 " Net assets available for benefits: Beginning of year " 8,054,000 " End of year " $9,238,000 " See accompanying notes to the financial statements.
  • Notes to Financial Statements
  • A. Description of Plan
  • The following description of the XYZ Company (Company) 401(k) Plan (Plan) provides only general information. Participants should refer to the plan agreement for a more complete description of the Plan's provisions.
    1. 1
      General. The Plan is a defined contribution plan covering all full-time employees of the Company and its wholly owned subsidiaries who have 1 year of service and are age 21 or older. The Plan is subject to the provisions of the Employment Retirement Income Security Act of 1974 (ERISA). In November 20X1, the Company sold its wholly owned subsidiary, Sub Company. As a result of its sale, on December 1, 20X1, the accounts of all Sub Company employees were transferred out of the Plan to GHI Plan (an existing plan controlled by the acquiring company).
    2. 2
      Contributions. Each year, participants may contribute up to XX percent of pretax annual compensation, as defined in the Plan. Participants who have attained age 50 before the end of the Plan year are eligible to make catch-up contributions. Participants also may contribute amounts representing distributions from other qualified defined benefit or defined contribution plans (rollover). Participants direct the investment of their contributions into various investment options offered by the Plan. The Plan includes an auto-enrollment provision whereby all newly eligible employees are automatically enrolled in the Plan unless they affirmatively elect not to participate in the Plan. Automatically enrolled participants have their deferral rate set at 2 percent of eligible compensation and their contributions invested in a designated balanced fund until changed by the participant. The Company contributes 25 percent of the first 6 percent of base compensation that a participant contributes to the Plan. The matching Company contribution is invested as directed by the participant.
    3. 3
      Participant accounts. Each participant's account is credited with the participant's contributions and the Company's matching contributions, as well as allocations of Plan earnings. Participant accounts are charged with an allocation of administrative expenses. Allocations are based on participant earnings, account balances, or specific participant transactions, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account.
    4. 4
      Vesting. Participants are vested immediately in their contributions plus actual earnings on the contributions. Vesting in the Company's contribution portion of their accounts is based on years of continuous service. A participant is 100 percent vested after 3 years of credited service.
    5. 5
      Notes receivable from participants. Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50 percent of their account balance. The loans are secured by the balance in the participant's account. The loan interest rate, determined quarterly, is set at 2 percent above the prime rate, as defined. Principal and interest is paid ratably through monthly payroll deductions.
    6. 6
      Payment of benefits. On termination of service due to death, disability, or retirement, a participant may elect to receive either a lump-sum amount equal to the value of the participant's vested interest in his or her account or annual installments over a 10-year period. For termination of service for other reasons, a participant may receive the value of the vested interest in his or her account as a lump-sum distribution.
    7. 7
      Forfeited accounts. At December 31, 20X1, and 20X0, forfeited nonvested accounts totaled $7,500 and $5,000, respectively. These accounts will be used to reduce future employer contributions. Also, in 20X1, employer contributions were reduced by $5,000 from forfeited nonvested accounts.
  • B. Summary of Accounting Policies
  • Basis of Accounting
  • The financial statements of the Plan are prepared on the accrual basis of accounting.
  • Investments held by a defined contribution plan are required to be reported at fair value, except for fully benefit-responsive investment contracts. Contract value is the relevant measure for the portion of the net assets available for benefits of a defined contribution plan attributable to fully benefit-responsive investment contracts because contract value is the amount participants normally would receive if they were to initiate permitted transactions under the terms of the Plan.
  • Use of Estimates
  • The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes in those assets and liabilities, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
  • Investment Valuation and Income Recognition
  • Investments are reported at fair value (except for fully benefit-responsive investment contracts, which are reported at contract value). Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Plan's Investment Committee determines the Plan's valuation policies utilizing information provided by the investment advisers, custodians, and insurance company. See Note C for discussion of fair value measurements.
  • Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation includes the Plan's gains and losses on investments purchased and sold as well as held during the year.
  • Notes Receivable from Participants
  • Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Interest income is recorded on the accrual basis. Related fees are recorded as administrative expenses and are expensed when they are incurred. No allowance for credit losses has been recorded as of December 31, 20X1, or 20X0. Delinquent participant loans are recorded as distributions on the basis of the terms of the Plan agreement.
  • Excess Contributions Payable
  • Amounts payable to participants for contributions in excess of amounts allowed by the Internal Revenue Service are recorded as a liability with a corresponding reduction to contributions. The Plan distributed the 20X1 excess contributions to the applicable participants before March 15, 20X2.
  • Payment of Benefits
  • Benefits are recorded when paid.
  • Expenses
  • Certain expenses incurred maintaining the Plan are paid directly by the Company and are excluded from these financial statements. Investment-related expenses are included in net appreciation of fair value of investments.
  • Subsequent Events
  • The Plan has evaluated subsequent events through [insert date], the date the financial statements were available to be issued.
  • C. Fair Value Measurements
  • The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy under Topic 820 are described as follows:
    • Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Plan can access at the measurement date. Level 2 "Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as:" a. Quoted prices for similar assets or liabilities in active markets b. Quoted prices for identical or similar assets or liabilities in inactive markets c. Inputs other than quoted prices that are observable for the asset or liability d. Inputs that are derived principally from or corroborated by observable market data by correlation or other means. "If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability." Level 3 Inputs that are unobservable inputs for the asset or liability.
  • Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 20X1, and 20X0.
    1. 1
      Common stocks. Valued at the closing price reported on the active market on which the individual securities are traded.
    2. 2
      Self-directed brokerage accounts. Accounts primarily consist of mutual funds and common stocks that are valued on the basis of readily determinable market prices.
    3. 3
      Corporate bonds. Valued using pricing models maximizing the use of observable inputs for similar securities. This includes basing the value on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, those corporate bonds are valued under a discounted cash flow approach that maximizes observable inputs, such as current yields or similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks.
    4. 4
      Mutual funds. Valued at the daily closing price as reported by the fund. Mutual funds held by the Plan are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
    5. 5
      Subparagraph superseded by Accounting Standards Update No. 2018-09.
    6. 6
      U.S. government securities. Valued using pricing models maximizing the use of observable inputs for similar securities.
  • The following table sets forth by level, within the fair value hierarchy, the Plan's assets at fair value as of December 31, 20X1, and 20X0. Classification within the fair value hierarchy table is based on the lowest level of any input that is significant to the fair value measurement.
    • "Assets at Fair Value as of December 31, 20X1" Level 1 Level 2 Level 3 Total Mutual funds " $5,859,500 " $ - $ - " $5,859,500 " Self-directed brokerage account " 25,000 " - - " 25,000 " Common stocks " 960,000 " - - " 960,000 " U.S. government securities - " 225,000 " - " 225,000 " Corporate bonds (Aaa credit rating & noninvestment grade) - " 307,500 " " 20,000 " " 327,500 " Investments at fair value " $6,844,500 " " $532,500 " " $20,000 " " $7,397,000 " "Assets at Fair Value as of December 31, 20X0" Level 1 Level 2 Level 3 Total Mutual funds " $5,730,000 " $- $- " $5,730,000 " Self-directed brokerage account " 20,000 " - - " 20,000 " Common stocks " 870,000 " - - " 870,000 " U.S. government securities - " 120,000 " - " 120,000 " Corporate bonds (Aaa credit rating & noninvestment grade) - " 255,000 " " 19,000 " " 274,000 " Investments at fair value " $6,620,000 " " $375,000 " " $19,000 " " $7,014,000 "
  • Transfers between Levels
  • For years ended December 31, 20X1, and 20X0, there were no significant transfers between Levels 1 and 2 and no transfers in or out of Level 3.
  • Changes in Fair Value of Level 3 Assets and Related Gains and Losses
  • The following table sets forth a summary of changes in the fair value of the Plan's Level 3 assets for the year ended December 31, 20X1.
    • Level 3 Assets Year Ended " December 31, 20X1 " (Corporate Bonds) "Balance, beginning of year" " $19,000 " Realized gains/(losses) 500 Unrealized gains/(losses) relating to instruments still held at the reporting date " 2,000 " Purchases - Sales " (1,500)" Transfers in and/or out of Level 3 - "Balance, end of year" " $20,000 " The amount of total gains or losses for the period attributable to the change in unrealized gains or losses relating to assets still held at the reporting date " $2,000 "
  • Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements
  • The following table represents the Plan's Level 3 financial instruments, the valuation techniques used to measure the fair value of those financial instruments, and the significant unobservable inputs and the ranges of values for those inputs.
    • Instrument Fair Value Principal Valuation Technique Unobservable Inputs Range of Significant Input Values Weighted Average Corporate bonds "$20,000 " Discounted cash flow Credit risk (basis points) xx-xxx Y% Liquidity risk (basis points) xx-xxx Y%
  • D. Fully Benefit-Responsive Investment Contracts
  • The Plan holds a portfolio of investment contracts that are directly effected with the issuer that comprises a traditional investment contract and a portfolio of synthetic investment contracts. These contracts meet the fully benefit-responsive investment contract criteria and therefore are reported at contract value. Contract value is the relevant measure for fully benefit-responsive investment contracts because this is the amount received by participants if they were to initiate permitted transactions under the terms of the Plan. Contract value represents contributions made under each contract, plus earnings, less participant withdrawals, and administrative expenses. The following represents the disaggregation of contract value between types of investment contracts held by the Plan.
    • 20X1 20X0 Synthetic investment contracts " $1,250,000 " " $500,000 " Traditional Investment contract " 250,000 " " 150,000 " Total " $1,500,000 " " $650,000 "
  • The key difference between a synthetic investment contract and a traditional investment contract is that the Plan owns the underlying assets of the synthetic investment contract. A synthetic investment contract includes a wrapper contract, which is an agreement for the wrap issuer, such as a bank or insurance company, to make payments to the Plan in certain circumstances. The wrapper contract typically includes certain conditions and limitations on the underlying assets owned by the Plan. With traditional investment contracts, the Plan owns only the contract itself. Synthetic and traditional investment contracts are designed to accrue interest based on crediting rates established by the contract issuers.
  • The synthetic investment contracts held by the Plan include wrapper contracts that provide a guarantee that the credit rate will not fall below 0 percent. Cash flow volatility (for example, timing of benefit payments) as well as asset underperformance can be passed through to the Plan through adjustments to future contract crediting rates. Formulas are provided in each contract that adjusts renewal crediting rates to recognize the difference between the fair value and the book value of the underlying assets. Crediting rates are reviewed monthly for resetting.
  • The traditional investment contract held by the Plan is a guaranteed investment contract. The contract issuer is contractually obligated to repay the principal and interest at a specified interest rate that is guaranteed to the Plan. The crediting rate is based on a formula established by the contract issuer but may not be less than 4 percent. The crediting rate is reviewed on a quarterly basis for resetting. The contract cannot be terminated before the scheduled maturity date.
  • The Plan's ability to receive amounts due in accordance with fully benefit-responsive investment contracts is dependent on the third-party issuer's ability to meet its financial obligations. The issuer's ability to meet its contractual obligations may be affected by future economic and regulatory developments.
  • Certain events might limit the ability of the Plan to transact at contract value with the contract issuer. These events may be different under each contract. Examples of such events include the following:
    1. 1
      The Plan's failure to qualify under Section 401(a) of the Internal Revenue Code or the failure of the trust to be tax-exempt under Section 501(a) of the Internal Revenue Code
    2. 2
      Premature termination of the contracts
    3. 3
      Plan termination or merger
    4. 4
      Changes to the Plan's prohibition on competing investment options
    5. 5
      Bankruptcy of the plan sponsor or other plan sponsor events (for example, divestitures or spinoffs of a subsidiary) that significantly affect the Plan's normal operations.
  • No events are probable of occurring that might limit the ability of the Plan to transact at contract value with the contract issuers and that also would limit the ability of the Plan to transact at contract value with the participants.
  • In addition, certain events allow the issuer to terminate the contracts with the Plan and settle at an amount different from contract value. Those events may be different under each contract. Examples of such events include the following:
    1. 1
      An uncured violation of the Plan's investment guidelines
    2. 2
      A breach of material obligation under the contract
    3. 3
      A material misrepresentation
    4. 4
      A material amendment to the agreements without the consent of the issuer.
  • E. Rollover Contributions
  • On January 20, 20X1, XYZ Company acquired ABC Company and approved an amendment to terminate the ABC 401(k) Plan effective November 1, 20X1. All participants in the ABC 401(k) Plan became 100 percent vested in that plan upon termination and were provided with the option to have their account balance rolled into any qualified plan (including the Plan) or IRA, receive a lump-sum distribution, or be paid through an annuity contract. An aggregate of $XXX,000 was rolled into the Plan during the year ended December 31, 20X1, and is included in rollovers on the statement of changes in net assets available for benefits.
  • F. Related-Party Transactions and Party-in-Interest Transactions
  • Certain Plan investments are shares of mutual funds managed by Prosperity Investments. Prosperity Investments is the trustee as defined by the Plan, and, therefore, these transactions qualify as party-in-interest transactions. Fees incurred and paid directly by the Plan for the investment management services were $10,000.
  • G. Plan Termination
  • Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants would become 100 percent vested in their employer contributions.
  • H. Tax Status
  • The IRS has determined and informed the Company by a letter dated August 30, 20XX, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code. Although the Plan has been amended since receiving the determination letter, the Plan administrator and the Plan's tax counsel believe that the Plan is designed, and is currently being operated, in compliance with the applicable requirements of the Internal Revenue Code and, therefore, believe that the Plan is qualified and that the related trust is tax-exempt.
  • I. Risks and Uncertainties
  • The Plan invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market, and credit risks. Because of the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants' account balances and the amounts reported in the statement of net assets available for benefits.
  • J. Reconciliation of Financial Statements to Form 5500
  • The following is a reconciliation of net assets available for benefits per the financial statements at December 31, 20X1, and 20X0, to Form 5500:
    • 20X1 20X0 "Net assets available for benefits per the financial statements" " $9,238,000 " " $8,054,000 " Amounts allocated to withdrawing participants " (50,000)" " (35,000)" Net assets available for benefits per the Form 5500 " $9,188,000 " " $8,019,000 "
  • The following is a reconciliation of benefits paid to participants per the financial statements for the year ended December 31, 20X1, to Form 5500:
    • "Benefits paid to participants per the financial statements" " $526,000 " "Add: Amounts allocated to withdrawing participants at December 31, 20X1" " 50,000 " "Less: Amounts allocated to withdrawing participants at December 31, 20X0" " (35,000)" Benefits paid to participants per Form 5500 " $541,000 "
  • Amounts allocated to withdrawing participants are recorded on Form 5500 for benefit claims that have been processed and approved for payment before year-end, but not yet paid as of that date.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10This Example illustrates certain applications of the provisions of this Subtopic to the annual financial statements of a defined contribution plan. The following are illustrative financial statements and disclosures.
    • "XYZ Company 401(k) Plan" "Statement of Net Assets Available for Benefits" "December 31, " 20X1 20X0 Assets: Investments at fair value (See Note C) " $7,397,000 " " $7,014,000 " Investments at contract value (See Note D) " 1,500,000 " " 650,000 " Receivables: Employer contributions " 14,000 " " 10,000 " Participant contributions " 52,000 " " 50,000 " Notes receivable from participants " 300,000 " " 350,000 " Total receivables " 366,000 " " 410,000 " Total assets " 9,263,000 " " 8,074,000 " Liabilities: Accrued expenses " 10,000 " " 20,000 " Excess contributions payable " 15,000 " - Total liabilities " 25,000 " " 20,000 " Net assets available for benefits " $9,238,000 " " $8,054,000 " See accompanying notes to the financial statements.
    • "XYZ Company 401(k) Plan" "Statement of Changes in Net Assets Available for Benefits" "Year Ended December 31, 20X1" Additions: Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments " $280,000 " Interest " 369,000 " Dividends " 165,000 " " 814,000 " Interest income on notes receivable from participants " 20,000 " Contributions: Employer (see Note A) " 599,000 " Participants " 800,000 " Rollovers (see Note E) " 200,000 " " 1,599,000 " Total additions " 2,433,000 " Deductions: Deductions from net assets attributed to: Benefits paid to participants " 526,000 " Administrative expenses " 10,000 " Total deductions " 536,000 " Net increase " 1,897,000 " Transfer to GHI plan (see Note A) " 713,000 " Net assets available for benefits: Beginning of year " 8,054,000 " End of year " $9,238,000 " See accompanying notes to the financial statements.
  • Notes to Financial Statements
  • A. Description of Plan
  • The following description of the XYZ Company (Company) 401(k) Plan (Plan) provides only general information. Participants should refer to the plan agreement for a more complete description of the Plan's provisions.
    1. 1
      General. The Plan is a defined contribution plan covering all full-time employees of the Company and its wholly owned subsidiaries who have 1 year of service and are age 21 or older. The Plan is subject to the provisions of the Employment Retirement Income Security Act of 1974 (ERISA). In November 20X1, the Company sold its wholly owned subsidiary, Sub Company. As a result of its sale, on December 1, 20X1, the accounts of all Sub Company employees were transferred out of the Plan to GHI Plan (an existing plan controlled by the acquiring company).
    2. 2
      Contributions. Each year, participants may contribute up to XX percent of pretax annual compensation, as defined in the Plan. Participants who have attained age 50 before the end of the Plan year are eligible to make catch-up contributions. Participants also may contribute amounts representing distributions from other qualified defined benefit or defined contribution plans (rollover). Participants direct the investment of their contributions into various investment options offered by the Plan. The Plan includes an auto-enrollment provision whereby all newly eligible employees are automatically enrolled in the Plan unless they affirmatively elect not to participate in the Plan. Automatically enrolled participants have their deferral rate set at 2 percent of eligible compensation and their contributions invested in a designated balanced fund until changed by the participant. The Company contributes 25 percent of the first 6 percent of base compensation that a participant contributes to the Plan. The matching Company contribution is invested as directed by the participant.
    3. 3
      Participant accounts. Each participant's account is credited with the participant's contributions and the Company's matching contributions, as well as allocations of Plan earnings. Participant accounts are charged with an allocation of administrative expenses. Allocations are based on participant earnings, account balances, or specific participant transactions, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account.
    4. 4
      Vesting. Participants are vested immediately in their contributions plus actual earnings on the contributions. Vesting in the Company's contribution portion of their accounts is based on years of continuous service. A participant is 100 percent vested after 3 years of credited service.
    5. 5
      Notes receivable from participants. Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50 percent of their account balance. The loans are secured by the balance in the participant's account. The loan interest rate, determined quarterly, is set at 2 percent above the prime rate, as defined. Principal and interest is paid ratably through monthly payroll deductions.
    6. 6
      Payment of benefits. On termination of service due to death, disability, or retirement, a participant may elect to receive either a lump-sum amount equal to the value of the participant's vested interest in his or her account or annual installments over a 10-year period. For termination of service for other reasons, a participant may receive the value of the vested interest in his or her account as a lump-sum distribution.
    7. 7
      Forfeited accounts. At December 31, 20X1, and 20X0, forfeited nonvested accounts totaled $7,500 and $5,000, respectively. These accounts will be used to reduce future employer contributions. Also, in 20X1, employer contributions were reduced by $5,000 from forfeited nonvested accounts.
  • B. Summary of Accounting Policies
  • Basis of Accounting
  • The financial statements of the Plan are prepared on the accrual basis of accounting.
  • Investments held by a defined contribution plan are required to be reported at fair value, except for fully benefit-responsive investment contracts. Contract value is the relevant measure for the portion of the net assets available for benefits of a defined contribution plan attributable to fully benefit-responsive investment contracts because contract value is the amount participants normally would receive if they were to initiate permitted transactions under the terms of the Plan.
  • Use of Estimates
  • The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes in those assets and liabilities, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
  • Investment Valuation and Income Recognition
  • Investments are reported at fair value (except for fully benefit-responsive investment contracts, which are reported at contract value). Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Plan's Investment Committee determines the Plan's valuation policies utilizing information provided by the investment advisers, custodians, and insurance company. See Note C for discussion of fair value measurements.
  • Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation includes the Plan's gains and losses on investments purchased and sold as well as held during the year.
  • Notes Receivable from Participants
  • Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Interest income is recorded on the accrual basis. Related fees are recorded as administrative expenses and are expensed when they are incurred. Delinquent participant loans are recorded as distributions on the basis of the terms of the Plan agreement.
  • Excess Contributions Payable
  • Amounts payable to participants for contributions in excess of amounts allowed by the Internal Revenue Service are recorded as a liability with a corresponding reduction to contributions. The Plan distributed the 20X1 excess contributions to the applicable participants before March 15, 20X2.
  • Payment of Benefits
  • Benefits are recorded when paid.
  • Expenses
  • Certain expenses incurred maintaining the Plan are paid directly by the Company and are excluded from these financial statements. Investment-related expenses are included in net appreciation of fair value of investments.
  • Subsequent Events
  • The Plan has evaluated subsequent events through [insert date], the date the financial statements were available to be issued.
  • C. Fair Value Measurements
  • The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy under Topic 820 are described as follows:
    • Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Plan can access at the measurement date. Level 2 "Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as:" a. Quoted prices for similar assets or liabilities in active markets b. Quoted prices for identical or similar assets or liabilities in inactive markets c. Inputs other than quoted prices that are observable for the asset or liability d. Inputs that are derived principally from or corroborated by observable market data by correlation or other means. "If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability." Level 3 Inputs that are unobservable inputs for the asset or liability.
  • Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 20X1, and 20X0.
    1. 1
      Common stocks. Valued at the closing price reported on the active market on which the individual securities are traded.
    2. 2
      Self-directed brokerage accounts. Accounts primarily consist of mutual funds and common stocks that are valued on the basis of readily determinable market prices.
    3. 3
      Corporate bonds. Valued using pricing models maximizing the use of observable inputs for similar securities. This includes basing the value on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, those corporate bonds are valued under a discounted cash flow approach that maximizes observable inputs, such as current yields or similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks.
    4. 4
      Mutual funds. Valued at the daily closing price as reported by the fund. Mutual funds held by the Plan are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
    5. 5
    6. 6
      U.S. government securities. Valued using pricing models maximizing the use of observable inputs for similar securities.
  • The following table sets forth by level, within the fair value hierarchy, the Plan's assets at fair value as of December 31, 20X1, and 20X0. Classification within the fair value hierarchy table is based on the lowest level of any input that is significant to the fair value measurement.
    • "Assets at Fair Value as of December 31, 20X1" Level 1 Level 2 Level 3 Total Mutual funds " $5,859,500 " $ - $ - " $5,859,500 " Self-directed brokerage account " 25,000 " - - " 25,000 " Common stocks " 960,000 " - - " 960,000 " U.S. government securities - " 225,000 " - " 225,000 " Corporate bonds (Aaa credit rating & noninvestment grade) - " 307,500 " " 20,000 " " 327,500 " Investments at fair value " $6,844,500 " " $532,500 " " $20,000 " " $7,397,000 " "Assets at Fair Value as of December 31, 20X0" Level 1 Level 2 Level 3 Total Mutual funds " $5,730,000 " $- $- " $5,730,000 " Self-directed brokerage account " 20,000 " - - " 20,000 " Common stocks " 870,000 " - - " 870,000 " U.S. government securities - " 120,000 " - " 120,000 " Corporate bonds (Aaa credit rating & noninvestment grade) - " 255,000 " " 19,000 " " 274,000 " Investments at fair value " $6,620,000 " " $375,000 " " $19,000 " " $7,014,000 "
  • Level 3 Transfers
  • For years ended December 31, 20X1, and 20X0, there were no transfers in or out of Level 3.
  • Changes in Fair Value of Level 3 Assets and Related Gains and Losses
  • The following table sets forth a summary of changes in the fair value of the Plan's Level 3 assets for the year ended December 31, 20X1.
    • Level 3 Assets Year Ended " December 31, 20X1 " (Corporate Bonds) "Balance, beginning of year" " $19,000 " Realized gains/(losses) 500 Unrealized gains/(losses) relating to instruments still held at the reporting date " 2,000 " Purchases - Sales " (1,500)" Transfers in and/or out of Level 3 - "Balance, end of year" " $20,000 " The amount of total gains or losses for the period attributable to the change in unrealized gains or losses relating to assets still held at the reporting date " $2,000 "
  • Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements
  • The following table represents the Plan's Level 3 financial instruments, the valuation techniques used to measure the fair value of those financial instruments, and the significant unobservable inputs and the ranges of values for those inputs.
    • Instrument Fair Value Principal Valuation Technique Unobservable Inputs Range of Significant Input Values Weighted Average Corporate bonds "$20,000 " Discounted cash flow Credit risk (basis points) xx-xxx Y% Liquidity risk (basis points) xx-xxx Y%
  • D. Fully Benefit-Responsive Investment Contracts
  • The Plan holds a portfolio of investment contracts that are directly effected with the issuer that comprises a traditional investment contract and a portfolio of synthetic investment contracts. These contracts meet the fully benefit-responsive investment contract criteria and therefore are reported at contract value. Contract value is the relevant measure for fully benefit-responsive investment contracts because this is the amount received by participants if they were to initiate permitted transactions under the terms of the Plan. Contract value represents contributions made under each contract, plus earnings, less participant withdrawals, and administrative expenses. The following represents the disaggregation of contract value between types of investment contracts held by the Plan.
    • 20X1 20X0 Synthetic investment contracts " $1,250,000 " " $500,000 " Traditional Investment contract " 250,000 " " 150,000 " Total " $1,500,000 " " $650,000 "
  • The key difference between a synthetic investment contract and a traditional investment contract is that the Plan owns the underlying assets of the synthetic investment contract. A synthetic investment contract includes a wrapper contract, which is an agreement for the wrap issuer, such as a bank or insurance company, to make payments to the Plan in certain circumstances. The wrapper contract typically includes certain conditions and limitations on the underlying assets owned by the Plan. With traditional investment contracts, the Plan owns only the contract itself. Synthetic and traditional investment contracts are designed to accrue interest based on crediting rates established by the contract issuers.
  • The synthetic investment contracts held by the Plan include wrapper contracts that provide a guarantee that the credit rate will not fall below 0 percent. Cash flow volatility (for example, timing of benefit payments) as well as asset underperformance can be passed through to the Plan through adjustments to future contract crediting rates. Formulas are provided in each contract that adjusts renewal crediting rates to recognize the difference between the fair value and the book value of the underlying assets. Crediting rates are reviewed monthly for resetting.
  • The traditional investment contract held by the Plan is a guaranteed investment contract. The contract issuer is contractually obligated to repay the principal and interest at a specified interest rate that is guaranteed to the Plan. The crediting rate is based on a formula established by the contract issuer but may not be less than 4 percent. The crediting rate is reviewed on a quarterly basis for resetting. The contract cannot be terminated before the scheduled maturity date.
  • The Plan's ability to receive amounts due in accordance with fully benefit-responsive investment contracts is dependent on the third-party issuer's ability to meet its financial obligations. The issuer's ability to meet its contractual obligations may be affected by future economic and regulatory developments.
  • Certain events might limit the ability of the Plan to transact at contract value with the contract issuer. These events may be different under each contract. Examples of such events include the following:
    1. 1
      The Plan's failure to qualify under Section 401(a) of the Internal Revenue Code or the failure of the trust to be tax-exempt under Section 501(a) of the Internal Revenue Code
    2. 2
      Premature termination of the contracts
    3. 3
      Plan termination or merger
    4. 4
      Changes to the Plan's prohibition on competing investment options
    5. 5
      Bankruptcy of the plan sponsor or other plan sponsor events (for example, divestitures or spinoffs of a subsidiary) that significantly affect the Plan's normal operations.
  • No events are probable of occurring that might limit the ability of the Plan to transact at contract value with the contract issuers and that also would limit the ability of the Plan to transact at contract value with the participants.
  • In addition, certain events allow the issuer to terminate the contracts with the Plan and settle at an amount different from contract value. Those events may be different under each contract. Examples of such events include the following:
    1. 1
      An uncured violation of the Plan's investment guidelines
    2. 2
      A breach of material obligation under the contract
    3. 3
      A material misrepresentation
    4. 4
      A material amendment to the agreements without the consent of the issuer.
  • E. Rollover Contributions
  • On January 20, 20X1, XYZ Company acquired ABC Company and approved an amendment to terminate the ABC 401(k) Plan effective November 1, 20X1. All participants in the ABC 401(k) Plan became 100 percent vested in that plan upon termination and were provided with the option to have their account balance rolled into any qualified plan (including the Plan) or IRA, receive a lump-sum distribution, or be paid through an annuity contract. An aggregate of $XXX,000 was rolled into the Plan during the year ended December 31, 20X1, and is included in rollovers on the statement of changes in net assets available for benefits.
  • F. Related-Party Transactions and Party-in-Interest Transactions
  • Certain Plan investments are shares of mutual funds managed by Prosperity Investments. Prosperity Investments is the trustee as defined by the Plan, and, therefore, these transactions qualify as party-in-interest transactions. Fees incurred and paid directly by the Plan for the investment management services were $10,000.
  • G. Plan Termination
  • Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants would become 100 percent vested in their employer contributions.
  • H. Tax Status
  • The IRS has determined and informed the Company by a letter dated August 30, 20XX, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code. Although the Plan has been amended since receiving the determination letter, the Plan administrator and the Plan's tax counsel believe that the Plan is designed, and is currently being operated, in compliance with the applicable requirements of the Internal Revenue Code and, therefore, believe that the Plan is qualified and that the related trust is tax-exempt.
  • I. Risks and Uncertainties
  • The Plan invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market, and credit risks. Because of the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants' account balances and the amounts reported in the statement of net assets available for benefits.
  • J. Reconciliation of Financial Statements to Form 5500
  • The following is a reconciliation of net assets available for benefits per the financial statements at December 31, 20X1, and 20X0, to Form 5500:
    • 20X1 20X0 "Net assets available for benefits per the financial statements" " $9,238,000 " " $8,054,000 " Amounts allocated to withdrawing participants " (50,000)" " (35,000)" Net assets available for benefits per the Form 5500 " $9,188,000 " " $8,019,000 "
  • The following is a reconciliation of benefits paid to participants per the financial statements for the year ended December 31, 20X1, to Form 5500:
    • "Benefits paid to participants per the financial statements" " $526,000 " "Add: Amounts allocated to withdrawing participants at December 31, 20X1" " 50,000 " "Less: Amounts allocated to withdrawing participants at December 31, 20X0" " (35,000)" Benefits paid to participants per Form 5500 " $541,000 "
  • Amounts allocated to withdrawing participants are recorded on Form 5500 for benefit claims that have been processed and approved for payment before year-end, but not yet paid as of that date.
325-962-55-18
This Example illustrates the disclosures required by paragraphs
962-325-50-8A through 50-8C
for the interest a plan has in each master trust. The plan's interest in the master trust, as presented on the statement of net assets available for benefits, is $8,540,000 as of December 31, 20X2. In this Example, the plan has a divided interest in the master trust; however, those disclosures also are required for plans with undivided interests.
  • Master Trust Balances Plan's Interest in Master Trust Balances Mutual funds " $13,560,000 " " $6,816,800 " Common stocks " 2,245,000 " " 1,638,200 " U.S. government securities " 575,000 " - Corporate bonds " 327,500 " - Total investments at fair value " 16,707,500 " " 8,455,000 " Plus: Due from broker for securities sold " 225,000 " " 100,000 " Accrued interest and dividends " 125,000 " " 50,000 " Less: Due to broker for securities purchased " (95,000)" " (50,000)" Accrued expenses " (30,000)" " (15,000)" Total " $16,932,500 " " $8,540,000 "

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