{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/325/","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","number":"325","title":"Investments—Other","area":"Assets","group":"32X Investments","subtopics":[{"number":"325-10","topic":"325","title":"Overall","area":"Assets","paragraphs":4,"summary":"ASC 325-10 is the Overall subtopic of Investments—Other, the residual investments Topic in the Codification. It mainly serves as a roadmap: it explains that investment accounting is split across Topics 320 (debt securities), 321 (equity securities), 323 (equity method and joint ventures), and 325 (other investments), and it lists the Subtopics within Topic 325 — Overall, Investments in Insurance Contracts (325-30), and Beneficial Interests in Securitized Financial Assets (325-40). It contains no substantive recognition or measurement guidance of its own.","concepts":["investments—other","residual investment guidance","debt securities","equity securities","equity method","insurance contracts","beneficial interests in securitized financial assets","cost method superseded"],"categories":["Financial instruments","Recognition","Subsequent measurement"],"level":"introductory","topic_title":"Investments—Other","sections":[{"number":"00","label":"00 Status","anchor":"00-status","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"325-10-00-1","para":"00-1","html":"The following table identifies the changes made to this Subtopic.
The Codification contains several Topics for investments due to the differing accounting treatment for various forms of investment. The Topics include:
- a
Topic
320, Investments—Debt Securities
- aa
Topic 321, Investments—Equity Securities - b
Topic
323, Investments—Equity Method and Joint Ventures
- c
Topic
325, Investments—Other.
The Investments—Other Topic includes the following Subtopics:
- a
Overall
- b
- c
Investments in Insurance Contracts
- d
Beneficial Interests in Securitized Financial Assets.
The following table identifies the changes made to this Subtopic.
The following table identifies the changes made to this Subtopic.
This Subtopic presents guidance in the following Subsections:
- a
General
- b
Life Settlement Contracts.
The General Subsections provide guidance on accounting for investments in life insurance contracts generally, including the calculation of the amount that could be realized under the life insurance contract.
A premium paid by a purchaser of life insurance serves a variety of purposes. A portion of the premium pays the insurer for assumption of mortality risk and provides for recovery of the insurer's contract acquisition, initiation, and maintenance costs. Another portion of the premium contributes to the accumulation of contract values. The relative amounts of premium payment credited to various contract attributes change over time as the age of the insured party increases and as earnings are credited to previously established contract values.
A life insurance contract is significantly different from most investment agreements. The various attributes of the policy could be obtained separately through term insurance and purchase of investment. The combination of benefits and contract values could not, however, typically be acquired absent the insurance contract. Continued protection from mortality risk and realization of scheduled increases in contract accumulation usually requires payment of future premiums.
The payment of insurance premiums may take a number of different forms. The insurance contract may be purchased through payment of a single premium, as opposed to the typical series of future premiums. Alternatively, the premium payments may be made through loans from the insurance entity that are secured by policy cash surrender values. The pattern of premium payments is a decision that does not alter the underlying nature of the insurance contract.
Life insurance policies are purchased by entities for a variety of purposes, including funding the cost of providing employee benefits and protecting against the loss of key persons. These types of policies have generally been known as corporate-owned life insurance or bank-owned life insurance. One of the primary benefits to using an insurance policy as a funding mechanism is the ability for an entity to receive the death benefits tax-free. Investment income is accumulated tax-free through the internal build-up of the cash surrender value. In the event that a policy is surrendered early, the policyholder will be responsible for paying the tax on the previously unrecognized investment income. The tax on the cash surrender value can be significant if the policies have been held for a number of years. Corporate-owned and bank-owned life insurance arrangements are established using several different insurance products, including all of the following: - a
Universal-life policies
- b
Variable-life policies
- c
Whole-life policies.
There are a few basic structures currently used as a framework for most policies in the marketplace. However, these structures can be combined and modified in many different ways and, therefore, can be quite complex. All of the following life insurance policy structures are considered in this guidance: - a
Individual-life policy. The individual-life policy generally has one contract value component and, in some cases, a surrender charge. The amount that could be realized for this policy upon surrender is the amount reported by the insurance entity to the policyholder as the cash surrender value. - b
Multiple individual-life policies. Many entities purchase separate individual-life policies for each employee. Similar to the individual-life policy, each policy has only one contract value component and in some cases a surrender charge. If one or more, but not all, policies are surrendered, the policyholder will incur the surrender charges on those policies surrendered. This will result in a permanent loss of asset value to the extent of the surrender charge. However, a rider (or a contractual stipulation) can be obtained for the insurance policy that will waive the surrender charges on each individual policy if all of the policies are surrendered at the same time. The cost of the rider will vary depending on the individual facts and circumstances.
- c
Group-life policy. The group-life policy constitutes the legal contract with the insurance entity that covers individual-life insurance for multiple employees. Each individual in the group policy is issued a certificate. If the group policy is cancelled, each of the individual certificates is terminated. While certificates are issued pursuant to the policy and form part of the policy, the group-life policy contract is the controlling document. Under the group-life policy, individual-life insurance certificates can be surrendered separately and the cash surrender value for the certificate is received by the policyholder for the full surrender amount of that certificate.
Additionally, a number of policies include certain provisions that can make them more attractive to the policyholder (for example, a provision allowing for the recovery of certain costs). However, many provisions limit the amount that is realized and may necessitate the meeting of certain criteria to recover any of those amounts. Some of the more typical examples of limitations that exist include all of the following: - a
The prohibition against having a change of control or a restructuring occurring within the last 24 months
- b
A planned restructuring within the next 12 months
- c
The extent to which the policyholder is in a net operating loss carryforward position.
The amount associated with the termination of the policy may be received over an extended period of time after the surrender of the life insurance policy or certificate. Other attributes include any of the following: - a
Multiple individual policies with a separate, group-level rider agreement
- b
Multiple individual policies with a contractual stipulation in each individual policy referencing the other policies as a group
- c
A group-life policy that has multiple certificates (individual life insurance for multiple employees).
These contracts may provide the policyholder with an amount that upon surrender is greater if all individual policies are surrendered at the same time rather than if the individual policies are surrendered over a period of time. The amount that can be realized under the insurance contract (that is, converted into cash) is dependent on how the contract is assumed to be hypothetically settled and, if surrendered, whether the insurance policies are surrendered at the individual or group level. To effect a demutualization, an entity may be required to issue consideration, often in the form of stock, to existing participating policyholders in exchange for their current membership interests. The receipt of such stock has no direct effect on the policyholders' contractual interests of their insurance policies (for example, it does not alter the cash surrender value of their life insurance policies). However, the governance of the mutual insurance entity and, in particular, the participating policyholders' interest in that governance are modified. The Life Settlement Contracts Subsections provide guidance on accounting for an investment in a
life settlement contract.
The guidance in this Subtopic applies to all entities.
The guidance in this Subtopic applies to all transactions for entities purchasing life insurance in which the entity is either the owner or beneficiary of the contract, without regard to the funding objective of the purchase (other than life settlement contracts). Such purchases would typically include those intended to meet loan covenants or to fund deferred compensation agreements, buy-sell agreements, or postemployment death benefits. Purchases of life insurance by retirement plans that are subject to Topic 960 are not within the scope of this Subtopic. Internal Revenue Code Section 1035 exchanges do not constitute a cash surrender.
The guidance in the Life Settlement Contracts Subsections applies to all entities.
The guidance in the Life Settlement Contracts Subsections applies to both transactions in which a broker facilitates settlement transactions between the policy owner and the investor, and transactions that do not involve a broker.
An investment in a life insurance contract shall be reported as an asset.
An entity shall recognize stock received from a demutualization and subsequently follow the guidance in Subtopics 320-10 or 323-10 as applicable. An investor shall elect to account for its investments in life settlement contracts using either the investment method or the fair value method. The election shall be made on an instrument-by-instrument basis and is irrevocable. The election shall be supported by concurrent documentation or a preexisting documented policy for automatic election. A policyholder shall consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the life insurance contract.
An entity also shall apply the measurement guidance in paragraphs
at initial measurement.
Stock received from a demutualization shall be measured initially at fair value.
Under the investment method, an investor shall measure its investment in a life settlement contract initially at the transaction price plus all initial direct external costs. Under the fair value method, an investor shall measure its investment in a life settlement contract initially at the transaction price.
An asset representing an investment in a life insurance contract shall be measured subsequently at the amount that could be realized under the insurance contract as of the date of the statement of financial position. It is not appropriate for the purchaser of life insurance to recognize income from death benefits on an actuarially expected basis. The death benefit shall not be realized before the actual death of the insured, and recognizing death benefits on a projected basis is not an appropriate measure of the asset.
The change in cash surrender or contract value during the period is an adjustment of premiums paid in determining the expense or income to be recognized under the contract for the period.
Paragraph 325-30-30-1 states that a policyholder shall consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the life insurance contract. When it is probable that contractual terms would limit the amount that could be realized under the life insurance contract, these contractual limitations shall be considered when determining the realizable amounts. Those amounts that are recoverable by the policyholder at the discretion of the insurance entity shall be excluded from the amount that could be realized under the life insurance contract. Amounts that are recoverable by the policyholder in periods beyond one year from the surrender of the policy shall be discounted in accordance with Topic 835. A policyholder shall determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). Any amount that ultimately would be realized by the policyholder upon the assumed surrender of the final policy (or final certificate in a group policy) shall be included in the amount that could be realized under the insurance contract. See Example 1 (paragraph 325-30-55-1) for an illustration of this guidance. A policyholder shall not discount the cash surrender value component of the amount that could be realized under the insurance contract when contractual restrictions on the ability to surrender a policy exist, as long as the holder of the policy continues to participate in the changes in the cash surrender value as it had done before the surrender request. If, however, the contractual restrictions prevent the policyholder from participating in changes to the cash surrender value component, then the amount that could be realized under the insurance contract at a future date shall be discounted in accordance with Topic 835. Paragraph
325-30-30-1A states that an entity also shall apply the measurement guidance in paragraphs
at initial measurement.
If a group of individual-life policies or a group policy only allows for the surrender of all of the individual-life policies or certificates as a group, then the policyholder shall determine the amount that could be realized under the insurance contract on a group basis. Continuing costs (policy premiums and direct external costs, if any) to keep the policy in force shall be capitalized.
The investor shall not recognize a gain until the insured dies (see paragraph 325-30-40-1A). An investor shall test an investment in a life settlement contract for impairment if the investor becomes aware of new or updated information that indicates that the expected proceeds from the insurance policy will not be sufficient to recover the carrying amount of the investment plus anticipated undiscounted future premiums and capitalizable direct external costs, if any, when the insured dies. Factors include, but are not limited to, a change in expected mortality and a change in the creditworthiness of the issuer of the underlying insurance policy. A change in interest rates would not of itself require an investment in a life settlement contract to be tested for impairment. An investor shall recognize an impairment loss if the expected undiscounted cash inflows (typically, the insurance proceeds) are less than the carrying amount of the investment plus anticipated undiscounted future premiums and capitalizable direct external costs, if any. If an impairment loss is recognized, the investment shall be written down to fair value. The fair value measurement shall consider current interest rates.
In subsequent periods, the investor shall remeasure the investment in a life settlement contract at fair value in its entirety at each reporting period and shall recognize changes in fair value in earnings (or other performance indicators for entities that do not report earnings) in the period in which the changes occur.
Any gain on an exchange of mutual membership interests for stock in a demutualization shall be recognized in income from continuing operations.
Upon the death of the insured, the investor shall recognize in earnings (or other performance indicators for entities that do not report earnings) the difference between the carrying amount of a life settlement contract and the life insurance proceeds of the underlying life insurance policy. An investor shall report its investments that are remeasured at fair value on the face of the statement of financial position separately from those accounted for under the investment method. To accomplish that separate reporting, an investor shall do either of the following: - a
Display separate line items on the statement of financial position for the fair value method and investment method carrying amounts
- b
Present the aggregate of those fair value method and investment method carrying amounts and parenthetically disclose the amount of those investments accounted for under the fair value method included in the aggregate amount.
The investor shall classify the amount recognized upon the death of the insured in accordance with paragraph 325-30-35-9 in earnings (or other performance indicators for entities that do not report earnings). An investor shall report the investment income from its investments in life settlement contracts that are remeasured at fair value on the face of the income statement separately from the investment income from those accounted for under the investment method. To accomplish that separate reporting, an investor shall do either of the following: - a
Display separate line items on the income statement for the investment income from the investments in life settlement contracts that are accounted for under the fair value method and investment method
- b
Present the aggregate of the investment income in life settlement contracts and parenthetically disclose the investment income from those investments accounted for under the fair value method that are included in the aggregate amount.
An investor applying the fair value method shall account for premiums paid and life insurance proceeds received on the same financial reporting line as the changes in fair value are reported.
An investor shall classify cash receipts and cash payments related to life settlement contracts in accordance with Topic 230, based on the nature and purpose for which the life settlements were acquired. A policyholder shall disclose contractual restrictions on the ability to surrender a policy.
An investor shall disclose its accounting policy for life settlement contracts, including the classification of cash receipts and cash disbursements, in the statement of cash flows. The disclosure requirements in this Subsection do not eliminate disclosure requirements included in other Topics, including other disclosure requirements on the use of fair value.
An investor shall disclose all of the following for life settlement contracts accounted for under the investment method based on the remaining life expectancy for each of the first five succeeding years from the date of the statement of financial position and thereafter, as well as in the aggregate: - a
The number of life settlement contracts
- b
The carrying value of the life settlement contracts
- c
The face value (death benefits) of the life insurance policies underlying the contracts.
An investor shall disclose the life insurance premiums anticipated to be paid for each of the five succeeding fiscal years to keep the life settlement contracts in force as of the date of the most recent statement of financial position presented.
If the investor becomes aware of new or updated information that causes it to change its expectations on the timing of the realization of proceeds from the investments in life settlement contracts, the investor shall disclose the nature of the information and the related effect on the timing of the realization of proceeds from the life settlement contracts. This includes disclosing significant changes to the amounts disclosed in accordance with paragraph 325-30-50-4. However, an investor shall not be required to actively seek out new or updated information to update the assumptions used in determining the remaining life expectancy of the life settlement contracts. An investor shall disclose the method(s) and significant assumptions used to estimate the fair value of investments in life settlement contracts, including any mortality assumptions.
An investor shall disclose all of the following for life settlement contracts accounted for under the fair value method based on remaining life expectancy for each of the first five succeeding years from the date of the statement of financial position and thereafter, as well as in the aggregate: - a
The number of life settlement contracts
- b
The carrying value of the life settlement contracts
- c
The face value (death benefits) of the life insurance policies underlying the contracts.
The investor shall disclose the reasons for changes in its expectation of the timing of the realization of the investments in life settlement contracts. This includes disclosing significant changes to the amounts disclosed in accordance with paragraph 325-30-50-8. An investor shall disclose both of the following for each reporting period presented in the income statement: - a
The gains or losses recognized during the period on investments sold during the period
- b
The unrealized gains or losses recognized during the period on investments that are still held at the date of the statement of financial position.
This Example illustrates the application of the guidance in the General Subsections of this Subtopic to life insurance contracts other than life settlement contracts.
On January 1, 19X7, Entity TKO purchases a group variable-life policy on 20 executives of Entity TKO. The insurance entity issued an individual certificate for each executive when the policy was purchased. The entire policy was funded with an initial single premium of $10,000,000. Entity TKO will be paid the stated death benefit of the certificate when the insured dies. The policy contains a surrender charge of $50,000 per certificate if a certificate is surrendered. If all of the certificates are surrendered at once (that is, if the group policy is surrendered) the surrender charge is waived. The policy includes a claims stabilization reserve account and a provision that allows for the recovery of the upfront deferred acquisition costs tax over 11 years on a certificate-by-certificate basis even when an individual certificate is surrendered. The remaining balance in the claims stabilization reserve is paid out in cash to Entity TKO upon surrender of the final certificate. At December 31, 20X5, the individual components of Entity TKO's policy have the following values: - a
- b
- c
Claims stabilization reserve = $500,000
- d
Deferred acquisition costs tax (on a discounted basis) = $250,000.
The following is an illustration of the amounts to be included in Entity TKO's financial statements at December 31, 20X5, under this Subtopic. -
![\"](\"/asc-img/GUID-9894ACEA-6D10-4B86-9A91-F95B987B4F53-low.gif\")
Cash Surrender Value \" $8,700,000 \" Claims Stabilization Reserve \" 500,000 \" Deferred Acquisition Costs tax \" 250,000 \" \" $9,450,000 \"
In evaluating the circumstances to determine the amount that could be realized under the insurance contract, Entity TKO considers the cash surrender value (policy account balance of $9,700,000 less surrender charge of $1,000,000), the claims stabilization reserve, and the deferred acquisition costs tax as each of these amounts is realizable based on the contractual terms and is not dependent on surrendering all of the policies at once. The claims stabilization reserve is included in the amount that could be realized because the claims stabilization reserve will be recovered when the final policy is surrendered and is not dependent on the surrender of all of the policies at once. The surrender charge of $1,000,000 (20 certificates at $50,000 per certificate) is not assumed to be waived because the waiver of those charges requires the surrender of all of the certificates at once.
The following table identifies the changes made to this Subtopic.
This Subtopic addresses accounting for a transferor's interests in securitized transactions accounted for as sales (see Topic 860) and purchased beneficial interests. Collectively, these interests are referred to in this Subtopic as beneficial interests. Changes in cash flows expected to be collected might arise from prepayments, from credit concerns, from changes in interest rates, or for other reasons.
The guidance in this Subtopic applies to all entities.
The guidance in this Subtopic applies to a transferor's interests in securitization transactions that are accounted for as sales under Topic 860 and purchased beneficial interests in securitized financial assets. The guidance in this Subtopic applies to beneficial interests that have all of the following characteristics: - a
Are either debt securities under Subtopic 320-10 or required to be accounted for like debt securities under that Subtopic pursuant to paragraph 860-20-35-2. - b
Involve securitized financial assets that have contractual cash flows (for example, loans, receivables, debt securities, and guaranteed lease residuals, among other items). Thus, the guidance in this Subtopic does not apply to securitized financial assets that do not involve contractual cash flows (for example, common stock equity securities, among other items). See paragraph 320-10-35-38 for guidance on beneficial interests involving securitized financial assets that do not involve contractual cash flows. - c
Do not result in consolidation of the entity issuing the beneficial interest by the holder of the beneficial interests.
- d
- e
Are not beneficial interests in securitized financial assets that have both of the following characteristics:
- 1
Are of high credit quality (for example, guaranteed by the U.S. government, its agencies, or other creditworthy guarantors, and loans or securities sufficiently collateralized to ensure that the possibility of credit loss is remote)
- 2
Cannot contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment.
For guidance on recognition of interest income on beneficial interests that have both of the characteristics described in (e) in the preceding paragraph, see Subtopic 320-10. For guidance on determining the allowance for credit losses on beneficial interests that have both of the characteristics described in (e) in the preceding paragraph (other than trading debt securities), see Topic 326 on measurement of credit losses. A beneficial interest in securitized financial assets that is in equity form may meet the definition of a debt security. For example, some beneficial interests issued in the form of equity represent solely a right to receive a stream of future cash flows to be collected under preset terms and conditions (that is, a creditor relationship), while others, according to the terms of the special-purpose entity, must be redeemed by the issuing entity or must be redeemable at the option of the investor. Consequently, those beneficial interests would be within the scope of both this Subtopic and Topic 320 because they are required to be accounted for as debt securities under that Topic. Beneficial interests issued in the form of equity that do not meet the criteria in the preceding paragraph shall be accounted for under the applicable provisions of Subtopic 323-10, the applicable consolidation guidance (see, for example, Subtopic 810-10), or Subtopic 321-10. For income recognition purposes, beneficial interests classified as trading are included in the scope of this Subtopic because it is practice for certain industries (such as banks and investment companies) to report interest income as a separate item in their income statements, even though the investments are accounted for at fair value.
Included in the scope of this Subtopic are the host contract portion of a hybrid beneficial interest that requires separate accounting for an embedded derivative under paragraphs 815-15-25-1; ; and when the host contract otherwise meets the scope of this Subtopic. The issue of when and how a hybrid contract is to be separated into its component parts is an implementation issue of Topic 815 and, therefore, not within the scope of this Subtopic. The guidance in this Subtopic does not apply to hybrid beneficial interests measured at fair value pursuant to paragraphs for which the transferor does not report interest income as a separate item in its income statements. The carrying amount of the beneficial interest used for purposes of measuring interest income shall be adjusted based on the application of the accounting model described in this Subtopic. The difference between the carrying amount and the fair value of a beneficial interest classified as a trading debt security shall be recorded through earnings as a gain or a loss.
Paragraph 325-40-35-1 addresses how the holder shall recognize accretable yield. If the holder of the beneficial interest is the transferor, the initial investment would be the fair value of the beneficial interest as of the date of transfer, as required by paragraph 860-20-30-1. An entity shall apply the initial measurement guidance for purchased financial assets with credit deterioration in Subtopic 326-20 to a beneficial interest classified as held-to-maturity and in Subtopic 326-30 to a beneficial interest classified as available for sale, if it meets either of the following conditions: - a
There is a significant difference between contractual cash flows and expected cash flows at the date of recognition.
- b
The beneficial interests meet the definition of purchased financial assets with credit deterioration.
For beneficial interests that do not apply the accounting for purchased financial assets with credit deterioration, the holder shall measure accretable yield initially as the excess of all cash flows expected to be collected attributable to the beneficial interest estimated at the acquisition-transaction date (the transaction date) over the initial investment. For beneficial interests that apply the accounting for purchased financial assets with credit deterioration, the holder shall measure accretable yield initially as the excess of all contractual cash flows attributable to the beneficial interest at the acquisition-transaction date (the transaction date) over the amortized cost basis (the purchase price plus the initial allowance for credit losses).
At the transaction date, all cash flows expected to be collected means the holder's estimate of the amount and timing of estimated future principal and interest cash flows used in determining the purchase price or the holder's fair value determination for purposes of determining a gain or loss under Topic 860. See paragraph
325-40-55-1 for implementation guidance.
The holder shall recognize accretable yield as interest income over the life of the beneficial interest using the effective yield method. The holder of a beneficial interest shall continue to update, over the life of the beneficial interest, the expectation of cash flows to be collected. (P) December 16, 2026; (N) December 16, 2026
105-10-65-10The holder shall recognize accretable yield as interest income over the life of the beneficial interest using the effective yield method. Under the effective yield method, the current yield is applied to the amount determined as the initial investment (or initial amortized cost basis for beneficial interests that apply the accounting for purchased financial assets with credit deterioration) minus cash received to date minus writeoff of amortized cost basis plus the yield accreted to date. The holder of a beneficial interest shall continue to update, over the life of the beneficial interest, the expectation of cash flows to be collected. After the transaction date, cash flows expected to be collected are defined as the holder's estimate of the amount and timing of estimated principal and interest cash flows based on the holder's best estimate of current conditions and reasonable and supportable forecasts.
If upon evaluation of a held-to-maturity classified beneficial interest there is a favorable (or an adverse) change in cash flows expected to be collected from the cash flows previously projected, the investor shall first apply the guidance in Subtopic 326-20 on financial instruments measured at amortized cost to account for that favorable (or adverse) change. After application of the guidance in Subtopic 326-20, if the amount of the favorable (or adverse) change in cash flows expected to be collected from the cash flows previously projected is not reflected (either as an increase or as a decrease) in the allowance for credit losses in accordance with Subtopic 326-20, the investor shall recalculate the amount of accretable yield for the beneficial interest on the date of evaluation as the excess of cash flows expected to be collected over the beneficial interest's reference amount. - a
- b
(P) December 16, 2026; (N) December 16, 2026
105-10-65-10If upon evaluation of a held-to-maturity classified beneficial interest there is a favorable (or an adverse) change in cash flows expected to be collected from the cash flows previously projected, the investor shall first apply the guidance in Subtopic 326-20 on financial instruments measured at amortized cost to account for that favorable (or adverse) change. After application of the guidance in Subtopic 326-20, if the amount of the favorable (or adverse) change in cash flows expected to be collected from the cash flows previously projected is not reflected (either as an increase or as a decrease) in the allowance for credit losses in accordance with Subtopic 326-20, the investor shall recalculate the amount of accretable yield for the beneficial interest on the date of evaluation as the excess of cash flows expected to be collected over the beneficial interest's reference amount. The investor shall recalculate the current yield on the date of the evaluation as the rate that equates the cash flows expected to be collected to the beneficial interest’s reference amount.- a
- b
If upon evaluation of an available-for-sale classified beneficial interest there is a favorable (or an adverse) change in cash flows expected to be collected from the cash flows previously projected, the investor shall apply the guidance in Subtopic 326-30 on measuring credit losses on available-for-sale debt securities to account for that favorable (or adverse) change. After application of the guidance in Subtopic 326-30, if the amount of the favorable (or adverse) change in cash flows expected to be collected from the cash flows previously projected is not reflected (either as an increase or as a decrease) in the allowance for credit losses in accordance with Subtopic 326-30, the investor shall recalculate the amount of accretable yield for the beneficial interest on the date of evaluation as the excess of cash flows expected to be collected over the beneficial interest's reference amount. (P) December 16, 2026; (N) December 16, 2026
105-10-65-10If upon evaluation of an available-for-sale classified beneficial interest there is a favorable (or an adverse) change in cash flows expected to be collected from the cash flows previously projected, the investor shall apply the guidance in Subtopic 326-30 on measuring credit losses on available-for-sale debt securities to account for that favorable (or adverse) change. After application of the guidance in Subtopic 326-30, if the amount of the favorable (or adverse) change in cash flows expected to be collected from the cash flows previously projected is not reflected (either as an increase or as a decrease) in the allowance for credit losses in accordance with Subtopic 326-30, the investor shall recalculate the amount of accretable yield for the beneficial interest on the date of evaluation as the excess of cash flows expected to be collected over the beneficial interest's reference amount. The investor shall recalculate the current yield on the date of the evaluation as the rate that equates the cash flows expected to be collected to the beneficial interest’s reference amount. The reference amount in paragraphs 325-40-35-4 through 35-4A is equal to the initial investment (or initial amortized cost basis for beneficial interests that apply the accounting for purchased financial assets with credit deterioration) minus cash received to date minus writeoff of amortized cost basis plus the yield accreted to date. (P) December 16, 2026; (N) December 16, 2026
105-10-65-10The reference amount in paragraphs 325-40-35-4 through 35-4A is equal to the initial investment (or initial amortized cost basis for beneficial interests that apply the accounting for purchased financial assets with credit deterioration) minus cash received to date minus writeoff of amortized cost basis minus the allowance for credit losses plus the yield accreted to date. In this Subtopic, a favorable (or an adverse) change in cash flows expected to be collected is considered in the context of both timing and amount of the cash flows expected to be collected. Based on cash flows expected to be collected, interest income may be recognized on a beneficial interest even if the net investment in the beneficial interest is accreted to an amount greater than the amount at which the beneficial interest could be settled if prepaid immediately in its entirety. The adjustment shall be accounted for prospectively as a change in estimate in conformity with Topic 250, with the amount of periodic accretion adjusted over the remaining life of the beneficial interest. Determining whether there has been a favorable (or an adverse) change in cash flows expected to be collected from the cash flows previously projected (taking into consideration both the timing and amount of the cash flows expected to be collected) involves comparing the present value of the remaining cash flows expected to be collected at the initial transaction date (or at the last date previously revised) against the present value of the cash flows expected to be collected at the current financial reporting date.
The cash flows, including the assessment of expected credit losses, shall be discounted at a rate equal to the current yield used to accrete the beneficial interest.
An entity shall account for credit losses on beneficial interests classified as held to maturity and available for sale in accordance with Topic 326. An entity shall use the present value of expected future cash flows technique to measure credit losses on beneficial interests. If the present value of the original estimate at the initial transaction date (or the last date previously revised) of cash flows expected to be collected is less than the present value of the current estimate of cash flows expected to be collected, the change is considered favorable. If the present value of the original estimate at the initial transaction date (or the last date previously revised) of cash flows expected to be collected is greater than the present value of the current estimate of cash flows expected to be collected, the change is considered adverse.
However, unless the guidance in Topic 326 indicates that a credit loss has occurred, changes in the interest rate of a plain-vanilla, variable-rate beneficial interest generally should not result in the recognition and measurement of a credit loss (a plain-vanilla, variable-rate beneficial interest does not include those variable-rate beneficial interests with interest rate reset formulas that involve either leverage or an inverse floater). See paragraph
325-40-55-1 for implementation guidance.
It is inappropriate to automatically conclude that no credit loss in a security exists because all of the scheduled payments to date have been received. However, it also is inappropriate to automatically conclude that every decline in fair value represents a credit loss. Further analysis and judgment are required to assess whether a decline in fair value is an indicator that the holder will not collect all of the contractual cash flows or cash flows expected to be collected from the security. The more severe the decline in fair value, the more persuasive the evidence that is needed to overcome the premise that the holder will not collect all of the contractual cash flows or cash flows expected to be collected from the issuer of the security.
This Subtopic does not address when a holder of a beneficial interest would place that interest on nonaccrual status or when a holder cannot reliably estimate cash flows. However, for beneficial interests placed on nonaccrual status or when a holder cannot reliably estimate cash flows, the cost recovery method shall be used.
The amount of accretable yield shall not be displayed in the balance sheet.
Paragraph superseded on 03/23/2010 after the end of the transition period stated in FSP EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20.
The following table identifies the changes made to this Subtopic.
This Subtopic addresses all other investments for entities in the agricultural industry. The guidance for accounting by different entities in the agricultural industry is presented in the following two Subsections:
- a
Cooperatives
- b
The Cooperatives Subsections provide guidance for an
agricultural cooperative if it holds investments in other cooperatives.
The Cooperatives—
Patrons Subsections provide guidance for a patron's investments in cooperatives.
Member patrons provide most of the capital required by agricultural cooperatives. The capital usually represents long-term investments acquired through initial cash investments, retains, or noncash patronage allocations. Voting rights for those investments are usually based on one-member-one-vote or limited weighted voting rather than on the number or amount of securities or other evidence of equity ownership held. The significance of investments by patrons results primarily from the purchasing or marketing rights and participation in the operating earnings. The investments are made primarily to obtain an economical source of supply or marketing services and not on the expectation of a return on investment. Investments in cooperatives are not equity securities and usually are not readily marketable, and transfer or sale, other than back to the issuing cooperative, is usually restricted or prohibited. As such, the operations of cooperatives have many of the attributes of corporate joint ventures or partnerships. This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see the
General Subsection of Section 905-10-15.
The Cooperatives Subsections follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see the
Cooperatives Subsection of Section 905-10-15.
The Cooperatives—
Patrons Subsections follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see the
Cooperatives—Patrons Subsection of Section 905-10-15.
Long-term investments, such as nonmarketable investments in agricultural cooperatives, shall be carried at cost if the value of the investments is not impaired. Subtopic 323-10 requires the equity method of accounting for investments in which the investor has significant influence over an investee's operating and financial policies. When a cooperative allocates all earnings to patrons (on a tax or book basis) and there are no unallocated earnings (on a book basis), the principles set forth in Subtopic 323-10 are not applicable. In those infrequent instances when the investor's share of unallocated retained earnings of an investee cooperative is material to the investor, the equity method of accounting shall be applied in a manner that gives consideration to the voting rules or statutory rights applicable to the cooperative. See also paragraphs
concerning cooperative accounting for losses.
Investments in other agricultural cooperatives shall be accounted for at cost, including allocated equities and retains. For this purpose, cost means the amount of any cash investment and the face amount of all written notices of allocation in the form of per-unit retains, capital equity credits, revolving fund certificates, and certificates of equity. Investments in cooperatives shall be accounted for at cost, including allocated equities and retains. For patrons, the retains represent investments in the cooperative. Patrons shall record the per-unit retains at face value. The carrying amount of an investment in a cooperative shall be reduced if the patron is unable to recover the full carrying value of the investment. Losses unallocated by the investee may indicate such an inability, and, at a minimum, the excess of unallocated losses over unallocated equities shall be recognized by the patron based on the patron's proportionate share of the total equity of the investee cooperative, or any other appropriate method, unless the patron demonstrates that it is probable that the carrying amount of the investment in the cooperative can be fully recovered. Factors to consider in making the determination include all of the following: - a
Whether the unallocated losses resulted from identifiable, isolated, and nonrecurring events
- b
Whether the investee cooperative has been profitable over a long period of time and suffered only occasional losses that were offset by unallocated earnings or equities
- c
Whether the investor has ceased or will cease to patronize the investee cooperative on a permanent basis or for an extended period of time.
If retains are not to be redeemed in the current year by the producer (that is, the patron), the retains shall be classified as noncurrent. If a patron is economically dependent on a cooperative for sale of all or a significant portion of annual production, the extent of such transactions shall be disclosed in the financial statements. This Subtopic addresses financial-restructuring transactions by brokers and dealers in securities (broker-dealers). Specifically, a broker-dealer may make investments in the form of equity or provide financing to another entity in connection with financial-restructuring transactions. These investments may take many forms, including a direct investment or an investment in an entity (sometimes referred to as a bridge entity) that is established for the purpose of accumulating funds from several sources sufficient to make the investment.
This Subtopic follows the same Scope and Scope exceptions as outlined in the Overall Subtopic (see Section
940-10-15) with specific qualifications noted below.
Receivables and investments in debt and equity securities that are part of a financial-restructuring transaction (as described in paragraphs
940-325-05-1,
940-325-30-1 and
940-325-35-1) are subject to the related guidance in this Subtopic.
Investments in the form of equity or financing provided to another entity in connection with financial-restructuring transactions shall be measured initially at fair value. Investments in the form of equity or financing provided to another entity in connection with financial-restructuring transactions shall be measured subsequently at fair value. For guidance on consolidation of majority-owned investee entities, see paragraph
940-810-45-1.
The following table identifies the changes made to this Subtopic.
See paragraph 940-325-S99-1, SEC Observer Comment: Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management, for SEC Staff views on accounting for nonderivative energy trading contracts for brokers and dealers. The guidance prohibiting mark-to-market accounting for nonderivative energy trading contracts (see paragraph 932-330-35-1) is equally applicable to brokers and dealers, as the Guide for brokers and dealers in securities does not afford brokers and dealers special treatment in that regard. The following table identifies the changes made to this Subtopic.
This Subtopic provides recognition and measurement guidance concerning Federal Home Loan Bank or Federal Reserve Bank stock, National Credit Union Share Insurance Fund deposits and premiums, regular-way securities, and exchange memberships.
Although Federal Home Loan Bank (or Federal Reserve Bank) stock is an equity interest in a Federal Home Loan Bank (or Federal Reserve Bank), it does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Federal Home Loan Bank (or Federal Reserve Bank) stock can be sold back only at its par value of $100 per share and only to the Federal Home Loan Banks (or Federal Reserve Banks) or to another member institution. In addition, the equity ownership rights represented by Federal Home Loan Bank stock are more limited than would be the case for a public company, because of the oversight role exercised by regulators in the process of budgeting and approving dividends.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
942-10-15.
Federal Home Loan Bank and Federal Reserve Bank stock shall be classified as a restricted investment security.
Regular-way purchases and sales of securities shall be recorded on the trade date. Gains and losses from regular-way security sales or disposals shall be recognized as of the trade date in the statement of operations for the period in which securities are sold or otherwise disposed of. See paragraph 815-10-15-15 for a definition of regular-way security trades. For credit unions and corporate credit unions, amounts deposited with the National Credit Union Share Insurance Fund shall be accounted for and reported as assets as long as such amounts are fully refundable.
Section 940-340-25 provides guidance for recognition of exchange memberships. Section 940-340-30 provides guidance for initial measurement of exchange memberships. Federal Home Loan Bank and Federal Reserve Bank stock shall be carried at cost and evaluated for impairment in accordance with paragraph 942-325-35-3. Both cash and stock dividends received on Federal Home Loan Bank stock shall be reported as income. See Topics 505 and 852 for guidance concerning stock splits. Federal Home Loan Bank stock is generally viewed as a long-term investment. Accordingly, when evaluating Federal Home Loan Bank stock for impairment, its value shall be determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The determination of whether the decline affects the ultimate recoverability is influenced by criteria such as the following: - a
The significance of the decline in net assets of the Federal Home Loan Banks as compared to the capital stock amount for the Federal Home Loan Banks and the length of time this situation has persisted
- b
Commitments by the Federal Home Loan Banks to make payments required by law or regulation and the level of such payments in relation to the operating performance of the Federal Home Loan Banks
- c
The impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the Federal Home Loan Banks
- d
The liquidity position of the Federal Home Loan Banks.
Credit unions and corporate credit unions are subject to all of the following recognition and measurement provisions: - a
The refundability of National Credit Union Share Insurance Fund deposits shall be reviewed for impairment. When the refundability of a deposit is evaluated, the financial condition of both the credit union and of the National Credit Union Share Insurance Fund shall be considered. Deposits may be returned to solvent credit unions for a number of reasons, including termination of insurance coverage, conversion to insurance coverage from another source, or transfer of operations of the insurance fund from the National Credit Union Administration Board. However, insolvent or bankrupt credit unions shall not be entitled to a return of their deposits. To the extent that National Credit Union Share Insurance Fund deposits are not refundable, they shall be charged to expense in the period in which the deposits are made or the assets become impaired.
- b
In years in which the equity of the National Credit Union Share Insurance Fund exceeds normal operating levels, the National Credit Union Administration is required to make distributions to insured credit unions to reduce the equity of the National Credit Union Share Insurance Fund to normal operating levels. Such distributions may be in the form of a waiver of insurance premiums, premium rebates, or cash payments. Distributions in connection with that reduction in the equity of the National Credit Union Share Insurance Fund shall be reported in the income statement in the period in which it is determined that a distribution will be made.
- c
The system of savings account insurance established by the recapitalization of the National Credit Union Share Insurance Fund, which provided for reserves of 1 percent of insured deposits, is based on the concept that the required deposits create a fund with an earning potential sufficient to provide for the risk of losses in the credit union system. In years in which the earnings of the fund have been adequate to provide insurance protection and cover all expenses and losses incurred by the fund, the National Credit Union Administration Board has elected to waive the insurance premiums due from insured credit unions. In those years, it has been industry practice to net imputed earnings on the insurance deposits against imputed premium expense rather than present them as gross amounts on the statement of income. In years in which the insurance premiums are not waived by the National Credit Union Administration, the premiums shall be expensed in the period to which they relate. To the extent that the National Credit Union Administration assesses premiums to cover prior operating losses of the insurance fund or to increase the fund balance to normal operating levels, credit unions shall expense those premiums when assessed.
Section 940-340-35 provides guidance for subsequent measurement of exchange memberships. Investments in Federal Home Loan Bank or Federal Reserve Bank stock shall not be shown with securities accounted for under Topic 321. The following table identifies the changes made to this Subtopic.
The following table identifies the changes made to this Subtopic.
This Subtopic addresses an investment company's accounting for its other investments.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 946-10-15. An investment company shall initially measure its other investments at their transaction price. The transaction price shall include commissions and other charges that are part of the purchase transaction.
An investment company shall subsequently measure its other investments at fair value. The following table identifies the changes made to this Subtopic.
This Subtopic provides guidance on investments of the health care entities within the scope of this Topic if those investments are not
financial instruments.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
954-10-15, with specific instrument exceptions noted below.
This Subtopic provides guidance on investments that are other than financial instruments. This Subtopic does not provide guidance on investments of a not-for-profit business-oriented health care entity that are held by a
financially interrelated entity.
Other types of investments that are not financial instruments (such as real estate or certain oil and gas interests) are reported at amortized cost and are subject to impairment considerations consistent with the Impairment or Disposal of Long-lived Assets Subsections of Subtopic 360-10. Pursuant to paragraph 954-360-45-1, property held for investment purposes shall be presented as part of investments. The following table identifies the changes made to this Subtopic.
The Not-for-Profit Topic contains several Subtopics for investments held by
not-for-profit entities (NFPs), because the guidance differs by form of the investment. The Subtopics are:
- a
Financially Interrelated Entities
- b
Investments—Debt Securities
- bb
Investments—Equity Securities
- c
Investments—Other
- d
Consolidation.
This Subtopic provides guidance for investments other than the following:
- a
Equity securities
- b
Debt securities
- c
Investments in derivative instruments, including embedded derivatives, that are subject to the requirements of Topic
815 - d
Investments in for-profit entities that are accounted for under the equity method
- e
Investments in for-profit consolidated subsidiaries
- f
Investments in not-for-profit consolidated subsidiaries
- g
Thus, this Subtopic provides guidance for investments of the following types, among others, unless because of their characteristics they are included in the above list: investments in real estate, mortgage notes, and oil and gas interests.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
958-10-15, with specific instrument exceptions noted below.
The guidance in this Subtopic applies to other investments held by not-for-profit entities (NFPs) of the following types, among others, unless because of their characteristics they are included in paragraph 958-325-15-3: - a
Investments in real estate
- b
Mortgage notes that are not debt securities
- c
- d
- e
Oil and gas interests
- f
The guidance in this Subtopic does not apply to the following investments: - a
Equity securities, which are subject to the requirements of Subtopic 958-321 - b
Debt securities, which are subject to the requirements of Subtopic
958-320 - c
Derivative instruments, including embedded derivatives, that are subject to the requirements of Topic 815 - d
Investments in for-profit entities that are accounted for using the equity method in accordance with paragraph
958-810-15-4 - e
Investments in for-profit subsidiaries that are consolidated in accordance with paragraph 958-810-15-4 - f
- g
Interests in investments held for the NFP by a financially interrelated entity, which are subject to the requirements of Subtopic
958-20.
If an investment is acquired by contribution, it shall be recognized as an asset and as revenues or gains in the period received, pursuant to paragraph 958-605-25-2. If a not-for-profit entity (NFP) acquires an investment as an agent and has little or no discretion in determining how the investment income, unrealized gains and losses, and realized gains and losses resulting from that investment will be used, the investment's acquisition shall be reported as an agency transaction. That is, the NFP agent recognizes the acquisition as an asset and a liability rather than as a change in net assets. See paragraphs
for additional guidance.
Other investments shall be initially measured at their acquisition cost (including brokerage and other transaction fees) if they are purchased. They shall be initially measured at fair value if they are received as a contribution or through an agency transaction. Credit losses on financial instruments within the scope of Topic 326 shall be measured in accordance with that Topic. Institutions of higher education, including colleges, universities, and community or junior colleges, shall subsequently report other investments at either of the following measures: - a
Carrying value—that is, those that were acquired by purchase are reported at cost, and those that were contributed are reported at their fair value at the date of the gift. However, the carrying value shall be reduced by an allowance for credit losses (if applicable) under Topic 326. - b
Fair value.
(P) December 16, 2026; (N) December 16, 2026
105-10-65-10Institutions of higher education, including colleges, universities, and community or junior colleges, shall subsequently report other investments at either of the following measures: - a
Carrying value—that is, those that were acquired by purchase are reported at cost, and those that were contributed are reported at their fair value at the date of the gift. If an asset is subject to the impairment provisions of other generally accepted accounting principles (GAAP), the carrying value shall be reduced in accordance with the guidance in the applicable Subtopic. An allowance for credit losses shall be recognized (if applicable) for financial assets subject to the guidance in Topic 326. - b
Fair value.
The same measurement attribute shall be used for all other investments excluding those for which the institution chose, at a specified election date, to measure at fair value pursuant to Section 815-15-25 or to the Fair Value Option Subsections of Subtopic 825-10. Investments in wasting assets are usually reported net of an allowance for depreciation or depletion. Voluntary health and welfare entities shall subsequently report other investments at either of the following measures: - a
Carrying value—that is, cost if purchased and fair value at the date of the contribution if contributed - b
Fair value.
The same measurement attribute shall be used for all other investments excluding those for which the voluntary health and welfare entity chose, at a specified election date, to measure at fair value pursuant to Section 815-15-25 or the Fair Value Option Subsections of Subtopic 825-10. If other investments are not equity securities and the fair value of the portfolio of those investments is below the recorded amount, it may be necessary to reduce the carrying amount of the portfolio to fair value or to provide an allowance for decline in fair value. If it can reasonably be expected that the voluntary health and welfare entity will suffer a loss on the disposition of an investment, an impairment loss shall be recognized in the period in which the decline in fair value occurs.
(P) December 16, 2026; (N) December 16, 2026
105-10-65-10If the fair value of the portfolio of other investments is below the recorded amount, it may be necessary to reduce the carrying amount of the portfolio to fair value or to provide an allowance for decline in fair value. If it can reasonably be expected that the voluntary health and welfare entity will suffer a loss on the disposition of an investment, an impairment loss shall be recognized in the period in which the decline in fair value occurs. Not-for-profit, business-oriented health care entities shall apply the guidance in Section 954-325-35. Not-for-profit entities (NFPs) that are not colleges, universities, voluntary health and welfare entities, or health care entities (see paragraph 958-10-15-3) shall report other investments using one of the following measures: - a
Fair value
- b
The lower of cost or fair value.
The same measurement attribute shall be used for all other investments excluding those for which the NFP chose, at a specified election date, to measure at fair value pursuant to Section 815-15-25 or the Fair Value Option Subsections of Subtopic 825-10. If other investments are not equity securities and are carried at the lower of cost or fair value, declines in the value of those investments shall be recognized if their aggregate fair value is less than their carrying amount; recoveries of aggregate fair value in subsequent periods shall be recorded in those periods subject only to the limitation that the carrying amount shall not exceed the original cost.
(P) December 16, 2026; (N) December 16, 2026
105-10-65-10If other investments are carried at the lower of cost or fair value, declines in the value of those investments shall be recognized if their aggregate fair value is less than their carrying amount; recoveries of aggregate fair value in subsequent periods shall be recorded in those periods subject only to the limitation that the carrying amount shall not exceed the original cost. If an NFP is holding an investment as an agent and has little or no discretion in determining how the investment income, unrealized gains and losses, and realized gains and losses resulting from that investment will be used, those investment activities shall be reported as agency transactions and, therefore, as changes in assets and liabilities, rather than as changes in net assets. See paragraphs
for additional guidance.
The reporting standards of Section 958-220-45 apply to other investments and the investment return generated by other investments held by not-for-profit entities (NFPs). The disclosure standards of Section 958-320-50 apply to other investments and the investment return generated by other investments held by not-for-profit entities (NFPs). For each period for which a statement of financial position is presented, an NFP shall disclose all of the following: - a
The basis for determining the carrying amount for other investments
- b
The method(s) and significant assumptions used to estimate the fair values of investments other than financial instruments if those other investments are reported at fair value - c
- d
For guidance on disclosures about fair value measurements, see Topic
820.
For guidance on disclosures about the fair value election under Section
815-15-25 or the Fair Value Option Subsections of Subtopic
825-10, see the
Fair Value Option Subsection of Section 825-10-50.
For guidance on recognition by an NFP of the gain or loss on a hedging instrument or a nonhedging derivative instrument, see paragraphs
815-25-35-19 and
815-10-35-3, respectively.
For equity securities held by NFPs that conduct insurance activities, see Subtopic
944-325.
The following table identifies the changes made to this Subtopic.
This Subtopic provides guidance on investments and insurance contracts for
defined benefit pension plans.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
960-10-15.
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 reporting date, accounting on a settlement-date basis is acceptable if both of the following conditions exist: - a
The fair value of securities purchased (or sold) just before the reporting date does not change significantly from the trade date to the reporting date.
- b
The purchases (or sales) do not significantly affect the composition of the plan's assets available for benefits.
Plan investments—whether equity or debt securities, real estate, or other types (excluding insurance contracts)—shall be presented at their fair value at the reporting date. A contract with benefit-responsive provisions shall be reported as an investment contract if it cannot otherwise be considered an insurance contract (see paragraph 960-325-35-3). 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).
Insurance contracts shall be presented in the same manner as specified in the annual report filed by the plan with certain governmental agencies pursuant to the Employee Retirement Income Security Act; that is, either at fair value or at amounts determined by the insurance entity (contract value). The credit quality of the issuer also must be evaluated when using contract value to report an investment contract with significant insurance risk. A plan not subject to the Employee Retirement Income Security Act shall present its insurance contracts as if the plan were subject to the reporting requirements of that Act. 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.
See Section
960-325-25 for guidance on the use of the trade-date basis in recording sales of securities.
Information regarding a plan's investments that are measured using fair value shall indicate whether reported fair values have been measured by quoted prices in an active market or are fair values otherwise determined.
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:- a
Registered investment companies (for example, mutual funds)
- b
Government securities
- c
Common-collective trusts
- d
Pooled separate accounts
- e
Short-term securities
- f
Corporate bonds
- g
Common stocks
- h
Mortgages
- i
Real estate.
Disclosure of the plan's accounting policies shall include a description of valuation techniques and inputs used to measure the fair value 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 contracts with insurance entities. However, defined benefit 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 960-325-45-2. The historical cost of plan investments presented at fair value is neither required nor proscribed.
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 960-325-35-4 and the month-end measurement date. If a plan measures investments and investment-related accounts in accordance with paragraph 960-325-35-4 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. 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. 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: - 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.
- b
Investment income (exclusive of (a)).
A plan also shall include in the notes to financial statements both of the following: - a
Description of the basis used to allocate both of the following:
- 1
Net assets
- 2
Total investment income. See paragraph 960-325-50-7 for the components of total investment income.
- 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.
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: - a
Registered investment companies (for example, mutual funds)
- b
Government securities
- c
Common-collective trusts
- d
Pooled separate accounts
- e
Short-term securities
- f
Corporate bonds
- g
Common stocks
- h
Mortgages
- i
Real estate.
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 960-325-50-9. See paragraph 962-325-55-18 for an example of this disclosure. 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: - a
Amounts due from brokers for securities sold
- b
Amounts due to brokers for securities purchased
- c
Receivables relating to derivatives
- d
Payables relating to derivatives
- e
Accrued interest and dividends
- f
Accrued expenses.
See paragraph 962-325-55-18 for an example of this disclosure. For reporting of gains or losses on hedging instruments and nonhedging derivative instruments, see Section 815-10-35. For accounting for nonleveraged inflation-indexed contracts for pension obligations, see paragraph 815-15-25-50. The following table identifies the changes made to this Subtopic.
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.
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: - a
Forfeitures
- b
Investment experience
- c
Administrative expenses.
The Internal Revenue Code generally requires that all investment experience under defined contribution plans be allocated to individual account balances.
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. This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Topic, see Section
962-10-15.
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:- 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.
- b
The purchases or sales do not significantly affect the composition of the plan's assets available for benefits.
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). 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).
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.
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: - a
Real estate
- b
Mortgages or other loans
- c
Limited partnerships
- d
Restricted securities
- e
Unregistered securities
- f
Securities that are traded in inactive markets
- g
Nontransferable investment contracts.
Both of the following are the obligation of the plan's trustees, the administrator, and the corporate trustee: - a
To satisfy themselves that all appropriate factors relevant to the value of the investments have been considered
- b
To select a method to measure the fair value of the investments.
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. 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]). 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. 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. See paragraphs
for a discussion of the purpose, types, and a general characterization of insurance transactions.
See paragraphs
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.
If a plan holds multiple contracts, each contract shall be evaluated individually for benefit responsiveness.
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.
Paragraphs include implementation guidance for the application of the definition of fully benefit-responsive for defined contribution plan investments. 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: - a
Registered investment companies (for example, mutual funds)
- b
Government securities
- c
Common-collective trusts
- d
Pooled separate accounts
- e
Short-term securities
- f
Corporate bonds
- g
Common stocks
- h
Mortgages
- i
- j
Real estate
- 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. 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.
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. 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.
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. Original cost of investments is not required to be disclosed.
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. 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. Defined contribution plans shall disclose the following in connection with fully benefit-responsive investment contracts, in the aggregate: - 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
- 2
- b
- c
- 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
Premature termination of the contracts by the plan
- 2
Plant closings
- 3
Layoffs
- 4
Plan termination
- 5
Bankruptcy
- 6
Mergers
- 7
Early retirement incentives.
The term probable is used in this Subtopic consistent with its use in Section 450-20-25. - 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.
- f
The total contract value of each type of investment contract (for example, synthetic investment contracts or traditional investment contracts).
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. 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: - 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.
- b
Investment income (exclusive of (a)).
A plan also shall include in the notes to financial statements both of the following:- a
Description of the basis used to allocate both of the following:
- 1
Net assets
- 2
Total investment income. See paragraph 962-325-50-7 for the components of total investment income. - 3
- 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.
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: - a
Registered investment companies (for example, mutual funds)
- b
Government securities
- c
Common-collective trusts
- d
Pooled separate accounts
- e
Short-term securities
- f
Corporate bonds
- g
Common stocks
- h
Mortgages
- i
Real estate
- 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. 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. 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:- a
Amounts due from brokers for securities sold
- b
Amounts due to brokers for securities purchased
- c
Receivables relating to derivatives
- d
Payables relating to derivatives
- e
Accrued interest and dividends
- f
Accrued expenses.
See paragraph 962-325-55-18 for an example of this disclosure. 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. The following illustrate
fair value and contract value reporting guidance in paragraphs
(also see
fully benefit-responsive investment contract) for defined-contribution plan investments.
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. 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.
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. 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.
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.
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: - 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.
- 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.
- 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.
- 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.
- 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.
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. 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.
Net assets available for benefits should reflect the contract value for this investment contract because participants are guaranteed return of principal and accrued interest.
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.
Net assets available for benefits should reflect the contract value for this investment contract because participants are guaranteed return of principal and accrued interest.
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).
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.
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. 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.![](\"/asc-img/GUID-E77C27D7-6980-4829-AC6C-09B2C9360CD7-low.gif\")
\"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\t\" 366,000 \" \" 410,000 \" Total assets\t\" 9,263,000 \" \" 8,074,000 \" Liabilities: Accrued expenses \" 10,000 \" \" 20,000 \" Excess contributions payable \" 15,000 \" - Total liabilities\t\" 25,000 \" \" 20,000 \" Net assets available for benefits \" $9,238,000 \" \" $8,054,000 \" See accompanying notes to the financial statements.
![](\"/asc-img/GUID-BACBE044-1C78-405C-A029-B7144595A45C-low.gif\")
\"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
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
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
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
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
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
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
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:
![](\"/asc-img/GUID-E2BD1338-E115-4AF8-8A74-2C9C52508C48-low.gif\")
Level 1\tInputs 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\t\"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\tInputs 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
Common stocks. Valued at the closing price reported on the active market on which the individual securities are traded.
- 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
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
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
- 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.
![](\"/asc-img/GUID-97BC5D3D-1418-4847-9E38-3E7B23118E4F-low.gif\")
\"Assets at Fair Value as of December 31, 20X1\" Level 1 Level 2 Level 3 Total Mutual funds\t\" $5,859,500 \" $ - $ - \" $5,859,500 \" Self-directed brokerage account\t\" 25,000 \" - - \" 25,000 \" Common stocks\t\" 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\t\" $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\t\" $5,730,000 \" $- $- \" $5,730,000 \" Self-directed brokerage account\t\" 20,000 \" - - \" 20,000 \" Common stocks\t\" 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\t\" $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.
![](\"/asc-img/GUID-D92CC593-B9C4-4F39-8ADF-D62967FD58C5-low.gif\")
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.
![](\"/asc-img/GUID-2A1C4E8E-65DD-450E-B2EA-031FB8ACC10D-low.gif\")
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.
![](\"/asc-img/GUID-1BB80AD7-C5A5-4046-878A-ACCEACFFC744-low.gif\")
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
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
Premature termination of the contracts
- 3
Plan termination or merger
- 4
Changes to the Plan's prohibition on competing investment options
- 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
An uncured violation of the Plan's investment guidelines
- 2
A breach of material obligation under the contract
- 3
A material misrepresentation
- 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:
![](\"/asc-img/GUID-33CCB203-651C-4F89-AF04-11414A2C70BE-low.gif\")
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:
![](\"/asc-img/GUID-7D103E67-C083-4AC2-9BF8-03D437839111-low.gif\")
\"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.
(P) December 16, 2026; (N) December 16, 2026
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.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.
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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).
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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.
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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.
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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.
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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.
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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.
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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:
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
Common stocks. Valued at the closing price reported on the active market on which the individual securities are traded.
- 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
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.
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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.
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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.
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.
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.
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
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
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Premature termination of the contracts
- 3
Plan termination or merger
- 4
Changes to the Plan's prohibition on competing investment options
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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:
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An uncured violation of the Plan's investment guidelines
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A breach of material obligation under the contract
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A material misrepresentation
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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:
The following is a reconciliation of benefits paid to participants per the financial statements for the year ended December 31, 20X1, to Form 5500:
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.
This Example illustrates the disclosures required by paragraphs 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.![](\"/asc-img/GUID-B8989318-2F2B-4AC1-B582-4DD621A203A4-low.gif\")
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 \"
The following table identifies the changes made to this Subtopic.
This Subtopic provides guidance on investment and insurance contracts for health and welfare benefit plans. 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 all of the following: - a
Forfeitures
- b
Investment experience
- c
Administrative expenses.
In such defined contribution plans, plan participants have a vested interest in monitoring the financial condition and operations of the plan since they bear investment risk under these plans, and plan transactions can directly affect their benefits (for example, investment mix, and risk and return).
The Internal Revenue Code generally requires that all investment experience under defined contribution plans be allocated to individual account balances.
Plan assets of health and welfare benefit plans shall be measured and reported at values that are meaningful to financial statement users, including plan participants. This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
965-10-15.
Plan investments, whether they are in the form of equity or debt securities, real estate, or other investments (excluding insurance contracts and fully benefit-responsive investment contracts [see paragraph 965-325-35-3 for special provisions on the valuation of insurance contracts and paragraph 965-325-35-8 for special provisions on the valuation of fully benefit-responsive investment contracts]), shall be reported at their fair value less costs to sell, if significant, at the financial statement date. If significant, the fair value of an investment shall be reduced by brokerage commissions and other costs normally incurred in a sale.
Investment contracts held by defined benefit health and welfare benefit plans shall be reported at their fair values. 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.
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 pursuant to 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. See paragraphs
for a discussion of the purpose, types, and a general characterization of insurance transactions.
See paragraphs
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.
If a plan holds multiple contracts, each contract shall be evaluated individually for benefit responsiveness. 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.
Section 965-325-55 includes implementation guidance for the application of the definition of fully benefit-responsive for defined contribution health and welfare plan investments. Contract value is the relevant measure for the portion of the net assets available for benefits of a defined contribution health and welfare benefit plan attributable to fully benefit-responsive investment contracts.
Information regarding a plan's investments shall be presented in enough detail to identify the types of investments and shall indicate whether reported fair values have been measured by quoted prices in an active market or have been determined otherwise (paragraph 965-325-50-2 specifies additional disclosures related to investments). Investments measured using fair value in the statement of net assets available for benefits or in the notes shall be presented by general type, including the following: - a
Registered investment companies (also known as mutual funds)
- b
Government securities
- c
Short-term securities
- d
Corporate bonds
- e
Common stocks
- f
Mortgages
- g
- h
Real estate.
For the presentation of fully benefit-responsive investment contracts, which are measured at contract value, see paragraphs 965-325-35-8 and 965-325-50-2. Disclosure of a health and welfare benefit 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. However, health and welfare benefit 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 965-325-45-2. 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 965-325-35-2A and the month-end measurement date. If a plan measures investments and investment-related accounts in accordance with paragraph 965-325-35-2A 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. Health and welfare plans shall disclose the following in connection with
fully benefit-responsive investment contracts, in the aggregate:
- 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
- 2
- 3
- b
- c
- 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 term probable is used in this Subtopic consistent with its use in Topic 450). Such events might include, among others, all of the following: - 1
Premature termination of the contracts by the plan
- 2
Plant closings
- 3
Layoffs
- 4
Plan termination
- 5
Bankruptcy
- 6
Mergers
- 7
Early retirement incentives.
- 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.
- f
The total contract value of each type of investment contract (for example, synthetic investment contracts or traditional investment contracts).
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. 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: - 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.
- b
Investment income (exclusive of (a)).
A plan also shall include in the notes to financial statements both of the following:- a
Description of the basis used to allocate both of the following:- 1
Net assets
- 2
Total investment income. See paragraph 965-325-50-5 for the components of total investment income.
- b
For a plan with an undivided interest in the master trust (that is, when the plan has a proportionate, rather than 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.
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:- a
Registered investment companies (for example, mutual funds)
- b
Government securities
- c
Common-collective trusts
- d
Pooled separate accounts
- e
Short-term securities
- f
Corporate bonds
- g
Common stocks
- h
Mortgages
- i
Real estate.
For the presentation of fully benefit-responsive investment contracts, which are measured at contract value, see paragraphs 965-325-35-8 and 965-325-50-2. 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 965-325-50-7. See paragraph 962-325-55-18 for an example of this disclosure. 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:- a
Amounts due from brokers for securities sold
- b
Amounts due to brokers for securities purchased
- c
Receivables relating to derivatives
- d
Payables relating to derivatives
- e
Accrued interest and dividends
- f
Accrued expenses.
See paragraph 962-325-55-18 for an example of this disclosure. Implementation guidance in Section
962-325-55 illustrates the guidance in paragraphs
for the application of
fair value less costs to sell, if significant, and contract value reporting for health and welfare plan investments.
In each situation, 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. See paragraph
962-325-55-3 for implementation guidance on a five-year public bond (or portfolio of bonds) that is guaranteed by a third party to have a fixed value at the end of three years.
See paragraphs for implementation guidance on a fully benefit-responsive investment contract. See paragraph
962-325-55-8 for implementation guidance on a five-year, non-benefit-responsive investment contract that has no liquid market for trading.
See paragraph
962-325-55-10 for implementation guidance on a benefit-responsive participating separate account investment contract.
See paragraph
962-325-55-12 for implementation guidance on a synthetic contract (managed type).
See paragraph
962-325-55-13 for implementation guidance on a synthetic investment contract (repurchase type).
See Example 2 (paragraph 962-325-55-17) for financial statements that illustrate certain applications of the provisions of this Subtopic that apply to the annual financial statements of a defined contribution plan.