Fair Value Measurement Analysis as of 12/31/2025
What is ASC 820?
The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820 establishes a principle-based framework for measuring fair value of assets and liabilities. This framework provides a fair value hierarchy of input levels to be used when valuing plan assets and requires various financial statement disclosures surrounding those inputs based on their source. We would recommend reviewing the disclosure requirements of ASC 820 as well as applicable plan accounting guidance from the FASB. Your plan's auditor is a good source for this information.
Changes to reporting NAV Practical Expedient
Over the last several years the FASB has made several clarifications around the definition of readily determinable fair value when determining if an investment option falls under the Net Asset Value ("NAV") practical expedient. This determination impacts the disclosure of those investment options in the fair value hierarchy. Those deemed utilizing the practical expedient are not required to be included in fair value input levels for disclosure purposes.
One area of confusion was around how pooled separate accounts and common collective trusts should be considered under the definition of readily determinable fair value. These investments are similar to mutual funds as NAV is the basis for current transactions and some were interpreting the NAV as being considered published because it is available via investor online reporting. These are important in determining if an investment meets the practical expedient requirements. A couple of key clarifications led Principal® to change how it's interpreting the NAV practical expedient requirement.
ASU 2018-09 Amended Subtopic 962-325, Plan Accounting - Defined Contribution Plans – Investment – Other. This update removes the stable value common collective trust fund from the illustrative example in paragraph 962-325-55-17 to avoid the interpretation that such an investment would never have a readily determinable fair value and, therefore, would always use the net asset value per share practical expedient. Rather, a plan should evaluate whether a readily determinable fair value exists to determine whether those investment options may qualify for the practical expedient to measure at net asset value in accordance with Topic 820.
We feel this ASU helps clarify the confusion brought on by ASU 2015-10 Technical Correction which did not define what was meant by "published" when determining "readily determinable fair value". Many in the industry felt that if the NAV is made available to its current or prospective investors (e.g., NAV available to investors through accessing their online balances or more broadly available through publishing publicly) then it is "published". ASU 2018-09, by removing the stable value common collective trust fund from this illustration seems to support this interpretation of "published".
To be considered to have a "readily determinable fair value" an investment option's NAV must be "determinable and published" and be the "basis for current transactions" in a manner that is similar to that of a mutual fund.
This new guidance has prompted us to change our suggested input level for common collective trusts and pooled separate accounts from NAV as a practical expedient to a level 1 input*. Based on the above, they do have a readily determinable fair value:
- the NAV is available to current investors and
- the NAV is the basis for current transactions.
*Note – This is only our suggestion. There isn't anything explicit in the guidance that states specifically that an investment option with a readily determinable fair value would be a level 1 input and some may feel that a level 2 is more appropriate. As stated below, it is the plan sponsor's role to ensure plan assets and liabilities are valued appropriately at fair value and related financial statements disclosures are in place as applicable. Our tool is just a reference to be used as a basis for establishing this process. It is up to you, the plan sponsor to come to a final conclusion based on your interpretations of the information available to you. Your interpretation may or may not agree with ours.
Your Role as a Plan Sponsor
The Employee Retirement Income Security Act (ERISA) of 1974 states the named fiduciary of the plan is responsible for the accounting and reporting of plan assets and liabilities. In addition, it indicates the assets and liabilities of the plan must be reported at fair value on the Annual Report of Form 5500.
Your role as plan sponsor and named fiduciary is to ensure your plan assets and liabilities are valued appropriately at fair value and related financial statement disclosures are in place, if applicable. A named fiduciary of a plan that files a Form 5500 as a small plan is just as responsible for the fair value of the plan's assets & liabilities as a named fiduciary of plans that file Form 5500 as a large plan and require a plan audit.
While you may look to others for the mechanics of the fair value determination, it is important you gain sufficient understanding of the methods and assumptions used in the valuation to independently evaluate and possibly challenge the determination.
To ensure fulfillment of your responsibilities, processes should be established to:
- Evaluate the methods used to determine the fair value measurements for each asset & liability.
- Assign fair value hierarchy input levels to each asset and liability.
- Ensure the required disclosures are presented in the employee benefit plan financial statement prepared according to GAAP, if applicable.
You may use this tool as your basis for establishing your processes.