2.48 APB Opinion No. 22, Disclosure of Accounting Policies, requires the disclosure of significant accounting policies, and FASB Statement No. 35, as amended, requires disclosure of (a) the method and significant assumptions used to value investments and contracts with insurance companies and (b) the method and significant assumptions used in determining the actuarial present value of accumulated plan benefits, including any significant changes in the method or assumptions during the year.
2.49 FASB Statement No. 35, as amended, also requires disclosure of—
a. A brief general description of the plan agreement, including its vesting and benefit provisions.
b. A description of significant plan amendments adopted during the year. If the amendments were adopted after the date of the accu-mulated benefit information, and accordingly their effect was not included in the calculation, this fact should be stated.
c. A brief description of the benefit priority and PBGC coverage in the event of plan termination.
d. The funding policy and any changes in the policy during the year.
When applicable, the method of determining employee contribu-tions should be disclosed. ERISA plans should disclose their status with respect to any applicable minimum funding requirements.
e. The policy regarding the purchase of insurance contracts that have been excluded from plan assets and the income from those contracts for the year.
f. The federal income tax status of the plan if a favorable determina-tion letter from the IRS has not been obtained or maintained. Note that reports filed in accordance with the requirements of ERISA must include disclosure of "information concerning whether or not a tax ruling or determination letter has been obtained," which is more than is required by FASB Statement No. 35, as amended.
g. Investments that represent 5 percent or more of total net assets.
(Listing all investments in Schedule H, line 4i—Schedule of Assets [Held at End of Year] required by ERISA does not eliminate the requirement to include this disclosure in the financial statements.) h. Significant related-party transactions (see appendix A and
chap-ter 11 for a discussion of related-party transactions).
i. Significant subsequent events that may affect the usefulness of the financial statements (see chapter 12 for a discussion of subsequent events).
This list is not intended to modify the disclosure requirements of FASB State-ment No. 35, as amended, but, rather, to serve as a reference to the major requirements. Nor does this list include information required by ERISA to be disclosed in the schedules filed as part of a plan's annual report. In this con-nection, it is important to note that any information required by ERISA to be disclosed in the schedules must be disclosed in the schedules; disclosure of the information on the face of the financial statements or in the notes to the financial statements but not in the schedules is not acceptable.
2.50 FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, establishes accounting and reporting stan-dards for derivative instruments, including certain derivative instruments em-bedded in other contracts (collectively referred to as derivatives), and for hedg-ing activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instru-ments at fair value. FASB Statement No. 133, as amended, says that a contract that is accounted for under either paragraph 4 of FASB Statement No. 110 or paragraph 12 of FASB Statement No. 35, as amended, is not subject to FASB Statement No. 133. Those exceptions apply only to the party that accounts for the contract under FASB Statement Nos. 35 and 110.
2.51 If FASB Statement No. 157, as amended, has been adopted, the disclo-sures required by paragraphs 32–33 of FASB Statement No. 157 in the format described in paragraph 34 of that statement should be made.
2.52 As indicated in paragraph 2.31 investments in master trusts are presented in a single line item in the statement of net assets available for benefits. In the notes to the financial statements the investments of the master
trust should be detailed by general type, such as government securities, short-term securities, corporate bonds, common stocks, mortgages and real estate, as of the date of each statement of net assets available for benefits presented. The net change in the fair value of each significant type of investment of the master trust and total investment income of the master trust by type, for example, interest and dividends, should also be disclosed in the notes for each period for which a statement of changes in net assets available for benefits is presented.
The notes to the financial statements should also include a description of the basis used to allocate net assets, net investment income, gains and losses to participating plans, and the plan's percentage interest in the master trust as of the date of each statement of net assets available for benefits presented.
2.53 FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, as amended, requires all entities except for those covered by the exemption in FASB Statement No. 126,6for which the disclosure is optional, to disclose within the body of the financial statements or in the accompanying notes, the fair value of financial instruments for which it is practicable to esti-mate fair value.7An entity should also disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. Generally, financial instruments of a pension plan other than (a) obligations for pension benefits as defined in FASB Statement No. 35, as amended, and (b) insurance contracts as defined in FASB Statement No. 110 are included in the scope of FASB Statement No. 107, as amended, and are subject to the disclosure require-ments of paragraphs 10–14 of that statement. If FASB Statement No. 157, as amended, is adopted, the disclosure requirements of FASB Statement No. 157 may also apply.
2.54 FASB Statement No. 107, as amended, requires disclosure of all sig-nificant concentrations of credit risk arising from all financial instruments. The following information shall be disclosed about each significant concentration:
r
Information about the (shared) activity, region, or economic char-acteristic that identifies the concentrationr
The maximum amount of loss due to credit risk that, based on the gross fair value of the financial instrument, the entity would incur if parties to the financial instruments that make up the concentration failed completely to perform according to the terms of the contracts and the collateral or other security, if any, for the amount due proved to be of no value to the entityr
The entity's policy of requiring collateral or other security to sup-port financial instruments subject to credit risk, information about6FASB Statement No. 126, Exemption from Certain Requested Disclosures about Financial In-struments for Certain Nonpublic Entities—an amendment to FASB Statement No. 107, amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to make the disclosures prescribed in FASB Statement No. 107 optional for plans that meet all of the following criteria:
a. The plan is a nonpublic entity.
b. The plan's total assets are less than $100 million on the date of the financial statements.
c. The plan has no instrument that, in whole or in part, is accounted for as a derivative instrument under FASB Statement No. 133, Accounting for Derivative Insturments and Hedging Activities, during the reporting period.
7Fair value disclosed in the notes should be presented together with the related carrying amount in a form that makes it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amounts relate to what is reported in the statement of net assets available for benefits.
the entity's access to that collateral or other security, and the na-ture and a brief description of the collateral or other security sup-porting those financial instruments
r
The entity's policy of entering into master netting arrangements to mitigate the credit risk of financial instruments, information about the arrangements for which the entity is a party, and a brief description of the terms of those arrangements, including the extent to which they would reduce the entity's maximum amount of loss due to credit risk.2.55 401(h) Accounts. Some defined benefit pension plans provide a postre-tirement medical-benefit component in addition to the normal repostre-tirement bene-fits of the plan, pursuant to Section 401(h) of the Internal Revenue Code (IRC).
Employers may fund a portion of their postretirement medical-benefit obliga-tions related to their health and welfare benefit plans through a health ben-efit account (401(h) account) in their defined benben-efit pension plans, subject to certain restrictions and limitations. Funding can be accomplished through a qualified transfer of excess pension plan assets or through additional contri-butions. Any assets transferred to a 401(h) account in a qualified transfer of excess pension plan assets (and any income allocable thereto) must be used only to pay qualified current retiree health benefits for the taxable year of the transfer (whether directly or through reimbursement). Any assets transferred to a 401(h) account in a qualified transfer of excess pension plan assets (and any income allocable thereto) that are not used in the year must be transferred out of the account to the pension plan.
2.56 The IRC allows employers to allocate up to 25 percent of total con-tributions to the plan, subject to certain limitations, to the 401(h) account. If the full amount of these contributions is not used during the year, they may be accumulated for future retiree medical expenses in the 401(h) account. The de-ductibility of employer contributions to a 401(h) account is subject to separate limitations and, therefore, such contributions have no effect on the amount of deductible contributions an employer can make to fund pension benefits under the plan. The earnings on the 401(h) account are ignored for minimum funding purposes. Additionally, under the IRC, qualified transfers are not treated as prohibited transactions for purposes of Section 4975.
2.57 The plan sponsor has discretion in making contributions to the 401(h) account. A pension or annuity plan may provide for payment of medical benefits for retired employees, their spouses, and their dependents if all of the following conditions are met.
a. Benefits are subordinate (as defined in Section 401(h) of the IRC) to the retirement benefits provided by the plan.
b. A separate account is established and maintained for such benefits.
c. The employer's contributions to the separate account are reason-able and ascertainreason-able.
d. It is impossible, at any time prior to the satisfaction of all obligations under the plan to provide such benefits, for any part of the corpus or income of the separate account to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of such benefits.
e. Notwithstanding the provisions of certain IRC sections, upon sat-isfaction of all obligations under the plan to provide such benefits,
any amount remaining in the separate account must, under the terms of the plan, be returned to the employer.
f. In the case of an employee who is a key employee (as defined in Sec-tion 416(i)), a separate account is established and maintained for such benefits which are payable to such employee (and the spouse and dependents), and such benefits (to the extent attributable to plan years beginning after March 31, 1984, for which the employee is a key employee) are payable only to that employee (and the spouse and dependents) from the separate account.
2.58 The 401(h) assets may be used only to pay current retiree health ben-efits, which generally are obligations of a separate health and welfare benefit plan or health benefit arrangement. They may not be used to satisfy pension obligations. Although the assets may be invested together with assets that are available to pay pension benefits, a separate accounting must be maintained for all qualified transfers, contributions, distributions and/or expenses, and income earned thereon.
2.59 Because the 401(h) net assets may not be used to satisfy pension obligations, the total of net assets available for pension benefits must not in-clude net assets held in the 401(h) account related to obligations of the health and welfare benefit plan. The 401(h) account assets less liabilities (net assets of the 401(h) account) are required to be shown in defined benefit pension plan financial statements as a single line item on the face of the statements (as illus-trated in appendix B of Statement of Position (SOP) 99-2, Accounting for and Reporting of Postretirement Medical Benefit (401(h)) Features of Defined Benefit Pension Plans (AICPA, Technical Practice Aids, ACC sec. 10,780). Those net as-sets related to the 401(h) account also must be deducted before arriving at the total of net assets available for pension benefits. In deducting those net assets, the amount related to the 401(h) features should be presented as a separate line item in the liabilities section of the statement of net assets available for pension benefits. The financial statement caption should clearly denote that the net assets held in the 401(h) account relate to obligations of the health and welfare benefit plan or arrangement. The statement of changes in net assets should show only the changes in net assets of the pension plan and not any of the components of the changes in the net assets in the 401(h) account. The only amounts that should be reported in the statement of changes in net assets are qualified transfers to the 401(h) account and any unused or unspent amounts (including allocated income) in the 401(h) account at the end of the year that were qualified transfers of excess pension plan assets that should have been, but were not, transferred back to the defined benefit pension plan.
2.60 Information regarding accumulated plan benefits should relate only to pension obligations. Even in situations in which separate financial state-ments are not prepared for the health and welfare benefit plan, obligations related to retiree health benefits should not be reported in the statement of accumulated plan benefits of the defined benefit pension plan financial state-ments.
2.61 Defined benefit pension plans should disclose in the notes to the fi-nancial statements the nature of the assets and the fact that the 401(h) account assets are available only to pay retiree health benefits.
2.62 Because ERISA requires 401(h) accounts to be reported as assets of the pension plan, a reconciliation of the net assets reported in the financial
statements to those reported in Form 5500 is required. Additionally, any assets held for investment purposes in the 401(h) account should be shown on Schedule H, line 4i—Schedule of Assets (Held at End of Year) and Schedule H, line 4j—
Schedule of Reportable Transactions for the pension plan.