A pension plan auditor receives the draft financials and notices the defined benefit plan includes only a statement of net assets available for benefits. The plan administrator asks whether that is sufficient. The answer is no: defined benefit plans require additional statements that defined contribution plans do not. The exam tests whether you know which statements each plan type requires, what goes in each statement, and what disclosures accompany them.
AICPA Representative Tasks (verbatim). "Identify the required financial statements for a defined benefit pension plan and a defined contribution pension plan." "Recall the disclosure requirements for the notes to the financial statements of a defined benefit pension plan and a defined contribution pension plan." "Prepare a statement of changes in net assets available for benefits for a defined benefit pension plan and a defined contribution pension plan." "Prepare a statement of net assets available for benefits for a defined benefit pension plan and a defined contribution pension plan."
ASC 960 governs defined benefit pension plans: plans that promise a specified monthly benefit at retirement, typically based on salary and years of service.
Common mistakes
- Applying defined benefit requirements to a defined contribution plan. A 401(k) plan does not report accumulated plan benefits or a funded status; those concepts apply only to defined benefit plans. The exam will describe a plan type and test whether you apply the correct framework.
- Reporting investments at cost instead of fair value. Plan investments must be reported at fair value, not historical cost. The only exception is participant loans, which are reported at unpaid principal balance because they are demand obligations.
- Excluding unrealized gains from net appreciation. Net appreciation in fair value includes both realized and unrealized components. Some candidates separate these when the standards require a single net figure.
Bottom line
- Defined contribution plans require two statements: statement of net assets available for benefits and statement of changes in net assets available for benefits
- Defined benefit plans require four statements: the two above plus statement of accumulated plan benefits and statement of changes in accumulated plan benefits
- Plan investments are reported at fair value using the ASC 820 hierarchy: Level 1 quoted prices, Level 2 observable inputs, Level 3 unobservable inputs
- Participant loans are plan assets reported at unpaid principal balance, not fair value
Exam shortcut
When a question describes "participants direct their own investments" or "employer contributes a set amount each period," the plan is defined contribution, two statements only. When the question describes "promises a monthly benefit at retirement based on salary and service," the plan is defined benefit, four statements required.
The full lesson (about 2,614 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.K1
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