Advanced Financial Statement Reporting

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Advanced Financial Statement Reporting

  1. 1. Advanced Financial Statement Reporting & Disclosure Session 57 McGladrey & Pullen, LLP is a member firm of RSM International – an affiliation of separate and independent legal entities. Common Problems with Auditors’ Reports • Improper use of limited scope audit • Reporting on the financial statements of a trust established under a plan • Terminating plans 1
  2. 2. Improper Use of Limited Scope Audit • Certified by agent • Improper language in certification • Improper time period • Certification does not cover all assets • Certification is not signed (see 29CFR2520.103-8 in Exhibit A) Reporting on Financial Statements of a Trust Established under a Plan • Only to report on the financial statements of a trust established under a plan • Is not for ERISA purposes 2
  3. 3. Terminating Plans Basis of accounting is dependent on when decision is made: • Decision made before year end – liquidation basis • Decision made after year-end – basis of accounting is not changed (accrual, cash, modified cash) Auditor Report for 11-K filing • Auditor must be PCAOB registrant • Non audit services and independence • Pre-Approval Requirements • Partner rotation • Audit reports to Audit Committees 3
  4. 4. Auditor Report for 11-K filing • Must be full scope audit • Filing deadline dependent on type of filing – Pursuant to ERISA: 180 days after year-end – Pursuant to Article 6A of Regulation S-X: 90 days after year-end Statements Required for 11-K Filings Statement ERISA Regulation S-X Of Net Assets Comparative Comparative Available for (2 years) (2 years) Benefits Of Changes in Singe Year Comparative Net Assets (3 years) Available for Benefits 4
  5. 5. Supplemental Schedules for 11-K filing under ERISA Same as for Form 5500 • Schedule of Assets Held (at end of year) and if applicable: • Schedule of Assets Bought and Sold During the Year • Schedule of Reportable Transactions • Schedule of Prohibited Transactions • Schedule of Loans or Leases in Default Supplemental Schedules for 11-K filing under Regulation S-X • Schedule I – Investments • Schedule II – Allocation of plan assets and liabilities to investment programs • Schedule III – Allocation of plan income and changes in plan equity to investment programs 5
  6. 6. Reporting for Investments • Self-directed brokerage accounts • Nonreadily marketable securities • Pooled separate accounts in a full scope audit • Synthetic GICs Self-Directed Brokerage Accounts Differences for 5500 reporting and FS reporting • Identification of investments representing 5% of more of plan assets • Reporting of investment income • Reporting of net appreciation/depreciation by investment type 6
  7. 7. Nonreadily Marketable Securities • Mortgages – report at basis of future principal and interest payments discounted at prevailing interest rates for similar investments • Restricted common stock – report at: – quoted market price of issuer’s unrestricted stock less an appropriate discount – if no quoted market price available, report at a multiple of current earnings less an appropriate discount Nonreadily Marketable Securities • Real estate investments, principally rental property – estimate on basis of future rental receipts and estimated residual values discounted at interest rates commensurate with the risks involved. • Master Trust – based on beginning of year value of the Plan’s interest in the trust plus actual contributions and allocated investment income, less actual distributions and allocated administrative expenses. Quoted market prices can be used to value the underlying investments. 7
  8. 8. Pooled Separate Accounts in a Full Scope Audit Issues: • Need to report at fair value • May no longer have an audit done for the pooled separate account • Need to get comfortable with the value reported Synthetic GICs (Guaranteed Investment Contract) • Similarities to traditional GIC – Offers a guaranteed rate of return • Differences from traditional GIC – Plan actually owns the underlying investments of the investment contract – The bank or insurance company generally contracts with a third party to offer “the wrapper” which absorbs the increases and decreases in FMV of the underlying securities 8
  9. 9. Synthetic GICs (Guaranteed Investment Contract) More differences from traditional GIC – Are always benefit responsive – Must include on Schedule H, Line 4i, Schedule of Assets Held, each asset that comprises the synthetic GIC, including the wrapper • Each investment is reported at fair value • The wrapper will have either a negative or positive FMV – Individual underlying assets > 5% net assets disclosure Synthetic GICs (Guaranteed Investment Contract) • Underlying securities are valued at FMV • Wrapper has either a – negative value if the earnings on the underlying securities were higher than the guaranteed interest rate of return – Positive value if the earnings were not high enough to satisfy the guaranteed interest rate of return • Total of wrapper plus the underlying fair value of investments equals contract value 9
  10. 10. Footnote Disclosures • Interest in a master trust • Derivative financial instruments • Fully benefit responsive investment contracts • Transfers to and from plans • Changes in accounting principles • Amounts related to obligation of 401(h) accounts (H&W plans) Interest in a Master Trust • Reported as a single line item on the assets and liability statement and the income and expense statement on the Form 5500 • Reported as single line item on the statement of net assets available for benefits • Is eligible for limited scope opinion • Required footnote disclosure 10
  11. 11. Interest in a Master Trust • Reported as a single line item on the assets and liability statement and the income and expense statement on the Form 5500 • Reported as single line item on the statement of net assets available for benefits • Is eligible for limited scope opinion • Required footnote disclosure Interest in a Master Trust • 5500 attachment – additional schedule listing – each master trust investment account – Plan’s name, EIN, plan number – Name of master trust – Table showing net value of plan’s investment in each investment account at the beginning and end of the plan year and the net investment gain or loss allocated to the plan from each investment account • If all assets of plan are in master trust, no ERISA supplemental schedules are needed for plan FS 11
  12. 12. Derivative Financial Instruments • FASB 133, Accounting for Derivative Instruments and Hedging Activities • FASB 137, Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement 133 • Effective for plan years beginning after June 15, 2000 • All derivatives must be recognized as either an asset or liability at fair value SOP 94-4, Reporting of Investment Contracts Held by Health & Welfare Benefit Plans and Defined Contribution Plans • Defined contribution plans – if fully benefit responsive at contract value • Defined benefit H&W plans – at fair value 12
  13. 13. Fully Benefit Responsive Investment Contracts • Definition of “Fully benefit responsive” • Report on statement of net assets available for benefits at contract value • Key components of footnote disclosure – With whom contract is maintained – Definition of contract value – Whether there are reserves against contract value – Crediting, average, and minimum interest rates Obligations of 401(h) Accounts • Used to fund a portion of postretirement obligations for retirees and their beneficiaries • Reported as obligations in the H&W FS statements (not as obligations in the DB plan’s statement of accumulated plan benefits) • Required footnote disclosures (3) – Accounting policies – Description of 401(k) account and components – Included in the Form 5500 reconciliation 13
  14. 14. SOP 01-2, Accounting and Reporting by Health and Welfare Benefit Plans • Revises the standards for measuring, reporting, and disclosing estimated future postretirement benefits that are to be funded partially or entirely by plan participants • Specifies the benefit obligation information presentation requirements • Establishes standards of financial accounting and reporting for certain postemployment benefits • Clarifies the measurement date for benefit obligations Measurement and Reporting Postemployment Benefit Obligations If all of the following conditions are met: • Participants’ rights to receive benefits are attributable to services already rendered • Participants’ benefits vest or accumulate • Payment of benefits is probable • Amount can be reasonably estimated 14
  15. 15. Measurement and Reporting Postemployment Benefit Obligations • Measured as the actuarial PV of future benefits reduced by actuarial PV of future contributions to be received by the participants • Measured as of the plan’s year-end Types of Benefit Obligations • Claims payable and currently due for active and retired participants • Premiums due under insurance arrangements • Claims incurred but not reported (IBNR) to the plan for active participants • Accumulated eligibility credits for active participants • Postretirement benefits 15
  16. 16. Miscellaneous Footnote Disclosures • Transfers to and from plans • Changes in accounting principles 16
  17. 17. Exhibit A Limited Scope Audit Per DOL website http://www.dol.gov/dol/allcfr/Title_29/Part_2520/29CFR2520.103- 8.htm 29CFR 2520-103-8 (a) General. Under the authority of section 103(a)(3)(C) of the Act, the examination and report of an independent qualified public accountant need not extend to any statement or information prepared and certified by a bank or similar institution or insurance carrier. A plan, trust or other entity which meets the requirements of paragraph (b) of this section is not required to have covered by the accountant's examination or report any of the information described in paragraph (c) of this section. (b) Application. This section applies to any plan, trust or other entity some or all of the assets of which are held by a bank or similar institution or insurance carrier which is regulated and supervised and subject to periodic examination by a State or Federal agency. (c) Excluded information. Any statements or information certified to by a bank or similar institution or insurance carrier described in paragraph (b) of this section, provided that the statements or information regarding assets so held are prepared and certified to by the bank or insurance carrier in accordance with Sec. 2520.103-5. 29CFR 2520-103-5(d) (d) Certification. (1) An insurance carrier or other organization, a bank, trust company, or similar institution, or plan sponsor, as described in paragraph (b) of this section, shall certify to the accuracy and completeness of the information described in paragraph (c) of this section by a written declaration which is signed by a person authorized to represent the insurance carrier, bank, or plan sponsor. Such certification will serve as a written assurance of the truth of the facts stated therein.
  18. 18. Exhibit B Illustrative report on comparative financial statements where only the financial statements of a trust established under a pension plan are presented and benefit information is excluded.1 IT IS NOT CONTEMPLATED THAT A REPORT LIKE THIS WOULD BE PREPARED FOR ERISA PURPOSES SINCE ERISA REQUIRES AN AUDIT OF THE PLAN, NOT JUST THE TRUST. INDEPENDENT AUDITOR'S REPORT To the Trustee(s) ABC Pension Trust Clientown, State We have audited the accompanying statements of net assets of ABC Pension Trust as of December 31, 2004 and 2003 and the related statements of changes in net assets and trust balance for the years then ended. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets of ABC Pension Trust as of December 31, 2004 and 2003, and the changes in its net assets and trust balance for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying statements are those of ABC Pension Trust, which is established under XYZ Pension Plan; the statements do not purport to present the financial status of XYZ Pension Plan. The statements do not contain certain information on accumulated plan benefits and other disclosures necessary for a fair presentation of the financial status of XYZ Pension Plan in conformity with accounting principles generally accepted in the United States of America. Furthermore, these statements do not purport to satisfy the United States Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 relating to the financial statements of employee benefit plans. Officetown, State February 20, 2005 This form of report is acceptable to use only when we have been engaged to report on the financial statements of a trust established under a pension plan. If this report is used because plan benefit information is not available, or if the client elects not to have it included in the financial report, this omission would be a departure from generally accepted accounting principles, and this form of report would not be appropriate. This form of report generally is used in conjunction with financial statements of the plan.
  19. 19. Exhibit C SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 COMMISSION FILE NUMBER THE XYZ 401(k) Savings Plan 100 Park Avenue Clientown, State, Zip Code (Full title of the plan and the address of the plan) XYZ Corporation 100 Park Avenue Clientown, State, Zip Code (Name of issuer of the securities held pursuant to the plan and the address of its principal executive office)
  20. 20. Exhibit C (continued) REQUIRED INFORMATION 1. Not Applicable. 2. Not Applicable. 3. Not Applicable. 4. The XYZ 401(k) Savings Plan (the “XYZ Plan”) is subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Attached hereto are the financial statements of the XYZ Plan for the fiscal year ended December 31, 2004 prepared in accordance with the financial reporting requirements of ERISA. EXHIBITS 1. Financial statements of the XYZ Plan for the fiscal year ended December 31, 2004 prepared in accordance with the financial reporting requirements of ERISA. 2. Consent of [Audit Firm name], independent accountants.
  21. 21. Exhibit C (continued) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on their behalf by the undersigned hereunto duly authorized. XYZ 401(k) SAVINGS PLAN By /s/ Andy Accountant ---------------------------------- Andy Accountant Benefits Director XYZ Corporation Date: June 20, 2005 THE XYZ 401(k) SAVINGS PLAN FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003
  22. 22. Exhibit C (continued) THE XYZ 401(k) SAVINGS PLAN INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report 1 Statement of Net Assets Available for Benefits 2 Statement of Changes in Net Assets Available for Benefits 3 Notes to Financial Statements 4-7 NOTE: Include financial statements here.
  23. 23. Exhibit C (continued) CONSENT OF INDEPENDENT ACCOUNTANTS The XYZ Corporation The XYZ 401(k) Savings Plan We hereby consent to the incorporation by reference in [Form S-8 Registration Statement No. XX-XXX] of our report dated June 15, 2005 which appears in your Annual Report on Form 11-K of The XYZ Corporation 401(k) Savings Plan for the fiscal year ended December 31, 2004. FIRM NAME Firm office, state June 20, 2005
  24. 24. Exhibit D Note F. Interest in ABC Master Trust A portion of the Plan's investments are in ABC Master Trust which was established for the investment of assets of the Plan and several other ABC Company sponsored retirement plans. Each participating retirement plan has an undivided interest in the Master Trust. The assets of the Master Trust are held by ZYX Trust Company (Trustee). At December 31, 2004 and 2003, the Plan's interest in the net assets of the Master Trust was approximately 9% and 11%, respectively. Investment income and administrative expenses relating to the Master Trust are allocated to the individual plans based upon average monthly balances invested by each plan. The following table presents the fair values of investments for the Master Trust. December 31, 2004 2003 Investments at fair value: Common stocks $ 11,900,000 $ 8,800,000 Corporate bonds 11,800,000 6,700,000 U.S. government securities 867,000 750,000 $ 24,567,000 $ 16,250,000 Investment income for the Master Trust is as follows: Year Ended December 31, 2004 2003 Investment income: Net appreciation in fair value of investments: Common stocks $ 300,000 $ 200,000 Corporate bonds 200,000 200,000 U.S. government securities 300,000 200,000 800,000 600,000 Interest 400,000 300,000 Dividends 230,000 300,000 $ 1,430,000 $ 1,200,000
  25. 25. Exhibit E Fully Benefit Responsive Insurance Contracts Definition of benefit responsive – permits withdrawals at the individual participant level at contract value; that is, no early withdrawal penalty for withdrawals/transfers from the investment contract. Investment Contract with Insurance Company In 2000, the Plan entered into a benefit responsive investment contract with National Insurance Company (National). National maintains the contributions in a general account. The account is credited with earnings on the underlying investments and charged for participant withdrawals and administrative expenses. The contract is included in the financial statements at contract value as reported to the Plan by National. Contract value represents contributions made under the contact, plus earnings, less participant withdrawals and administrative expenses. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value. There are no reserves against contract value for credit risk of the issuer or otherwise. The average yield and crediting interest rates were approximately 4 percent for 2004 and 2003. The crediting interest rate is based on a formula agreed upon with the issuer, but may not be less than 3 percent. Such interest rates are reviewed on a quarterly basis for resetting.
  26. 26. Exhibit F 401(h) Accounts Note A (in plan description section) 401(h) Account Effective January 1, 2004, the [Company’s defined benefit pension plan] was amended to include a medical- benefit component in addition to normal retirement benefits to fund a portion of the postretirement obligations for retirees and their beneficiaries in accordance with Section 401(h) of the Internal Revenue Code (IRC). A separate account has been established and maintained in the [defined benefit pension plan] for such contributions. In accordance with IRC Section 401(h), the Plans investments in the 401(h) account may not be used for, or diverted to, any purpose other than providing health benefits for retirees and their beneficiaries. The related obligations for health benefits are not included in the [defined benefit pension plan’s] obligations in the statement of accumulated plan benefits but are reported as obligations in the financial statements of [health and welfare benefit plan]. Note E (separate footnote) 401(h) Account A portion of the Plan’s obligations is funded through contributions to the Company’s [defined benefit pension plan] in accordance with IRC Section 401(h). The following table presents the components of the net assets available for such obligations and the related changes in net assets available. Net Assets Available For Postretirement Health and Welfare Benefits in 401(h) Account December, 31 2004 2003 Investments (at fair value) U.S. government securities $ 140,000 $ 150,000 Money market fund 900,000 800,000 1,040,000 950,000 Cash 20,000 10,000 Employer's contribution receivable 20,000 15,000 Accrued interest 7,000 6,000 Total assets 1,087,000 981,000 Accrued administrative expenses 15,000 15,000 Net assets available $ 1,072,000 $ 966,000
  27. 27. Exhibit F (continued) Changes in Net Assets in 401(h) Account For the Year Ended December 31, 2004 Net appreciation in fair value of investments: U.S. government securities $ 10,800 Interest 80,200 91,000 Employer contributions 40,000 Health and welfare benefits paid to participants (10,000) Administrative expenses (15,000) Net increase in net assets available $ 106,000 Note H. Reconciliation of Financial Statements to Form 5500 The following is a reconciliation of net assets available for benefits per the financial statements to the Form 5500 as of December 31, 2004 and 2003: 2004 2003 Net assets available for benefits per the financial statements $ 9,557,000 $ 8,639,000 Claims payable (1,200,000) (1,050,000) Net assets held in defined benefit plan - 401(h) account (1,072,000) (966,000) Net assets available for benefits per the Form 5500 $ 7,285,000 $ 6,623,000 The following is a reconciliation of claims paid per the financial statements to the Form 5500 for the year ended December 31, 2004: Claims paid per the financial statements $ 16,770,000 Add: Amounts payable at December 31, 2004 1,200,000 Less: Amounts payable at December 31, 2003 (1,050,000) Claims paid per the Form 5500 $ 16,920,000 The following is a reconciliation of claims paid per the financial statements to the Form 5500 for the year ended December 31, 2004: Total additions per the financial statements $ 18,941,000 Less: Net increase in 401(h) net assets available (106,000) Total additions per the Form 5500 $ 18,835,000

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