Financial Statement Disclosures Unique to Defined Benefit Plans

There are many disclosure requirements in the financial statements of a defined benefit plan that are similar to those of a defined contribution plan:

• Plan description
• Use of estimates
• Accounting policies
• Investment certification [applicable to Section 103(a)(3)(C) audits, f/k/a limited scope audits]
• Fair value measurements
• Income tax status
• Related-party transactions and party-in-interest transactions
• Risks and uncertainties
• Plan termination
• Subsequent events

However, defined benefit plans, by their nature, require certain additional unique disclosures that may be problematic for plan sponsors who are accustomed to preparing plan financial statements for defined contribution plans. Let’s examine financial statement disclosures that are unique to defined benefit plans.

Funding Policy

A defined benefit plan is required to disclose the plan sponsor’s funding policy for the annual contribution to the plan, as well as any change in the funding policy during the year. In addition, if the plan is subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), the plan sponsor must disclose whether it met the ERISA minimum-funding requirement for the plan year.

Significant Actuarial Assumptions

The plan must disclose, under the summary of significant accounting policies, the significant actuarial assumptions used to determine the actuarial present value of accumulated plan benefits. Examples include the discount rate, mortality assumption, retirement rates, turnover rates, and benefit election.

Actuarial Present Value of Accumulated Plan Benefits

The financial statements are required to include information regarding the actuarial present value of accumulated plan benefits as either the beginning or end of the plan year. The total actuarial present value of accumulated plan benefits are to be segmented by (1) vested benefits, such as participants currently receiving benefits as well as other participants; and (2) non-vested benefits.

Changes in the Actuarial Present Value of Accumulated Plan Benefits

The financial statements must include the changes in actuarial present value of accumulated plan benefits from the previous-plan-year valuation date to the current-plan-year valuation date. Increases and decreases during the year may be attributable to:

• Benefits accumulated
• Increase in interest due to the decrease in the discount period
• Benefits paid
• Plan amendments
• Changes in actuarial assumptions

Both the actuarial present value of accumulated plan benefits and the changes in the actuarial present value of accumulated plan benefits can be presented entirely as separate statements, on the face of another statement, or included in the footnotes to the financial statements—as long as they are presented in the same location each year.

While defined benefit plans disclosures differ from those required for defined contribution plans, preparation of this information is relatively straightforward. Standard actuarial reports typically include the components needed to prepare the required disclosures, allowing plan sponsors to simply insert the figures into standard disclosures.