Financial Statements of Employee Benefit Plans

Employee benefit plans — both defined benefit and defined contribution — are separate reporting entities that must issue their own financial statements under U.S. GAAP. The primary guidance is found in ASC 960 (defined benefit pension plans) and ASC 962 (defined contribution pension plans). The BAR section tests your ability to identify the required financial statements for each plan type, recall note disclosure requirements, and prepare the core statements: the Statement of Net Assets Available for Benefits and the Statement of Changes in Net Assets Available for Benefits.

Blueprint Coverage

This topic maps to Area II, Group K of the 2026 CPA Exam Blueprints for Business Analysis and Reporting (BAR). The blueprint expects candidates to:

• 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.

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Overview of Applicable Standards

Employee benefit plan financial statements are governed by two primary ASC topics. These are plan-level (trust-level) statements — they report on the plan itself, not the sponsoring employer.

Standard	Applies To	Key Focus
ASC 960	Defined benefit pension plans	Net assets available for benefits plus accumulated plan benefits (the obligation)
ASC 962	Defined contribution pension plans	Net assets available for benefits only (no obligation to report)
ASC 965	Health and welfare benefit plans	Similar framework; not tested on BAR

Exam Tip

The critical distinction: defined benefit plan statements must report the plan's obligation (accumulated plan benefits), whereas defined contribution plan statements only report the plan's assets. This is because in a defined contribution plan, the employer's obligation is satisfied once contributions are made — participants bear investment risk.

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Defined Benefit vs. Defined Contribution — Key Differences

Feature	Defined Benefit (ASC 960)	Defined Contribution (ASC 962)
Benefit promise	Specified future benefit (e.g., formula based on salary and years of service)	Specified current contribution (e.g., 6% of salary)
Investment risk borne by	Employer/plan sponsor	Participants
Plan obligation reported?	Yes — accumulated plan benefits	No
Number of required statements	4 (or combined)	2
Examples	Traditional pension plans	401(k), 403(b), profit-sharing plans

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Required Financial Statements

Defined Benefit Pension Plans (ASC 960)

ASC 960 requires the following financial statements:

1. Statement of Net Assets Available for Benefits — a snapshot of plan assets at the reporting date
2. Statement of Changes in Net Assets Available for Benefits — activity during the period
3. Statement of Accumulated Plan Benefits — the actuarial present value of all benefits earned to date
4. Statement of Changes in Accumulated Plan Benefits — changes in the obligation during the period

warning

Statements 3 and 4 relate to the plan's obligation — the present value of benefits promised to participants. Do not confuse these with the employer-level pension accounting (ASC 715). ASC 960 is about the plan as a separate reporting entity.

Defined Contribution Pension Plans (ASC 962)

ASC 962 requires only:

1. Statement of Net Assets Available for Benefits
2. Statement of Changes in Net Assets Available for Benefits

No obligation statement is needed because participants — not the plan — bear the investment risk.

Statement	Defined Benefit	Defined Contribution
Statement of Net Assets Available for Benefits	✓	✓
Statement of Changes in Net Assets Available for Benefits	✓	✓
Statement of Accumulated Plan Benefits	✓	✗
Statement of Changes in Accumulated Plan Benefits	✓	✗

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Measurement of Plan Investments

A foundational principle for both plan types: investments are reported at fair value on the reporting date.

Investment Type	Measurement
Marketable securities (stocks, bonds)	Quoted market prices (Level 1)
Real estate	Appraised fair value
Insurance contracts (e.g., guaranteed investment contracts)	Contract value (approximates fair value for fully benefit-responsive contracts)
Participant loans	Outstanding balance (approximates fair value)
Alternative investments (hedge funds, PE)	Net asset value (NAV) as practical expedient

Exam Tip

The key rule is simple: plan investments = fair value. This includes unrealized appreciation and depreciation in the net assets figure. There is no "held-to-maturity" or "amortized cost" exception for plan financial statements — everything is marked to market.

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Statement of Net Assets Available for Benefits

This statement is a balance sheet for the plan. It presents plan assets minus plan liabilities (other than the benefit obligation) to arrive at net assets available for benefits.

Format and Components

Line Item	Description
Investments	All plan investments at fair value (broken out by type)
Receivables	Employer contributions receivable, participant contributions receivable, accrued interest/dividends
Cash and cash equivalents	Operating cash of the plan
Total assets	Sum of the above
Liabilities	Accounts payable, accrued expenses, benefits payable
Net assets available for benefits	Total assets − Liabilities

Example — Acme Corp Defined Benefit Pension Plan

Statement of Net Assets Available for Benefits — December 31, Year 2

	Amount
Assets:
Investments at fair value:
U.S. government securities	$4,200,000
Corporate bonds	3,100,000
Common stocks	8,500,000
Real estate fund	1,800,000
Total investments	17,600,000
Employer contributions receivable	350,000
Accrued interest and dividends	125,000
Cash	75,000
Total assets	18,150,000
Liabilities:
Accrued administrative expenses	90,000
Benefits payable to participants	210,000
Total liabilities	300,000
Net assets available for benefits	$17,850,000

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Statement of Changes in Net Assets Available for Benefits

This statement explains why net assets changed during the period — similar to a statement of activities.

Format and Components

Line Item	Description
Additions:
Investment income	Interest, dividends, rents
Net appreciation (depreciation) in fair value	Realized + unrealized gains/losses
Employer contributions	Amounts contributed by the sponsor
Participant contributions	Employee deferrals (if applicable)
Total additions	Sum of all additions
Deductions:
Benefits paid to participants	Lump sums, annuity payments, withdrawals
Administrative expenses	Trustee fees, audit fees, legal fees
Total deductions	Sum of all deductions
Net increase (decrease)	Total additions − Total deductions
Net assets, beginning of year	Prior year ending balance
Net assets, end of year	Beginning balance + Net increase (decrease)

warning

Net appreciation in fair value combines both realized gains/losses on investments sold during the year and unrealized gains/losses from remeasuring investments still held at year-end. These are not separated in the statement — they are reported as a single line.

Example — Acme Corp Defined Benefit Pension Plan

Statement of Changes in Net Assets Available for Benefits — Year Ended December 31, Year 2

	Amount
Additions:
Investment income:
Interest	$620,000
Dividends	310,000
Net appreciation in fair value of investments	1,450,000
Total investment income	2,380,000
Employer contributions	1,200,000
Participant contributions	480,000
Total additions	4,060,000
Deductions:
Benefits paid to participants	2,850,000
Administrative expenses	160,000
Total deductions	3,010,000
Net increase	1,050,000
Net assets available for benefits, beginning of year	16,800,000
Net assets available for benefits, end of year	$17,850,000

Verification Formula

$$\text{Ending Net Assets} = \text{Beginning Net Assets} + \text{Additions} - \text{Deductions}$$ $$\$17{,}850{,}000 = \$16{,}800{,}000 + \$4{,}060{,}000 - \$3{,}010{,}000$$

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Statement of Accumulated Plan Benefits (Defined Benefit Only)

This statement reports the actuarial present value of accumulated plan benefits — the obligation the plan owes to participants. It is unique to defined benefit plans (ASC 960).

Components

Category	Description
Vested benefits — participants currently receiving payments	Present value of benefits already being paid to retirees
Vested benefits — other participants	Present value of benefits earned by active and terminated vested employees
Nonvested benefits	Present value of benefits earned but not yet vested
Total actuarial present value of accumulated plan benefits	Sum of all three categories

Example

Statement of Accumulated Plan Benefits — December 31, Year 2

	Amount
Vested benefits:
Participants currently receiving payments	$8,400,000
Other participants	6,900,000
Total vested benefits	15,300,000
Nonvested benefits	1,200,000
Actuarial present value of accumulated plan benefits	$16,500,000

Exam Tip

Compare the accumulated plan benefits ($16,500,000) with net assets available for benefits ($17,850,000). In this example, the plan is overfunded by $1,350,000. If accumulated plan benefits exceed net assets, the plan is underfunded. The exam may ask you to determine funded status at the plan level.

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Statement of Changes in Accumulated Plan Benefits (Defined Benefit Only)

This statement reconciles the beginning and ending obligation.

Line Item	Amount
Actuarial present value of accumulated plan benefits, beginning of year	$15,800,000
Increases:
Benefits earned during the period	900,000
Interest (discount rate applied to obligation)	630,000
Changes in actuarial assumptions	120,000
Decreases:
Benefits paid	(950,000)
Net increase	700,000
Actuarial present value of accumulated plan benefits, end of year	$16,500,000

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Defined Contribution Plan Example

Bright Future 401(k) Plan

Statement of Net Assets Available for Benefits — December 31, Year 2

	Amount
Assets:
Investments at fair value:
Mutual funds — equity	$12,400,000
Mutual funds — bond	4,600,000
Company stock fund	2,100,000
Stable value fund	3,200,000
Participant loans	450,000
Total investments	22,750,000
Employer contributions receivable	180,000
Cash	40,000
Total assets	22,970,000
Liabilities:
Accrued administrative expenses	70,000
Total liabilities	70,000
Net assets available for benefits	$22,900,000

Statement of Changes in Net Assets Available for Benefits — Year Ended December 31, Year 2

	Amount
Additions:
Investment income:
Interest and dividends	$680,000
Net appreciation in fair value of investments	2,150,000
Total investment income	2,830,000
Employer contributions	1,500,000
Participant contributions	3,200,000
Rollovers from other plans	320,000
Total additions	7,850,000
Deductions:
Benefits paid to participants	4,100,000
Administrative expenses	150,000
Total deductions	4,250,000
Net increase	3,600,000
Net assets available for benefits, beginning of year	19,300,000
Net assets available for benefits, end of year	$22,900,000

Exam Tip

In defined contribution plans, participant contributions (employee deferrals) are often a significant addition — much larger relative to employer contributions than in many defined benefit plans. Also note the rollovers from other plans line item, which is unique to participant-directed plans.

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Recording Contributions — Journal Entry Perspective

While plan-level financial statements don't typically show debits and credits (they report balances and activity), understanding the underlying entries helps with exam preparation.

Employer contribution received by the plan trust:

Debit

Credit

Cash

$1,200,000

Employer Contributions Revenue

$1,200,000

Participant payroll deductions received by the plan trust:

Debit

Credit

Cash

$480,000

Participant Contributions Revenue

$480,000

Purchase of investments by the plan:

Debit

Credit

Investments

$2,000,000

Cash

$2,000,000

Benefits paid to a retired participant:

Debit

Credit

Benefits Paid Expense

$50,000

Cash

$50,000

Recognition of net appreciation in fair value:

Debit

Credit

Investments

$1,450,000

Net Appreciation in Fair Value of Investments

$1,450,000

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Note Disclosure Requirements

Both plan types require extensive disclosures. The exam frequently tests whether candidates can recall what must be disclosed.

Disclosures Common to Both Plan Types

Disclosure	Description
Description of the plan	Type of plan, participant groups, vesting provisions, contribution requirements
Significant accounting policies	Basis for investment valuation, income recognition methods
Investment information	Fair value by category, concentrations exceeding 5% of net assets
Tax status	Whether the plan has received a favorable IRS determination letter
Related-party transactions	Transactions with the plan sponsor, trustee, or other parties-in-interest
Plan amendments	Significant changes adopted during the period
Risks and uncertainties	Concentrations that could cause a near-term severe impact

Additional Disclosures — Defined Benefit Plans (ASC 960)

Disclosure	Description
Actuarial present value of accumulated plan benefits	If not presented as a separate statement, must be disclosed
Significant actuarial assumptions	Discount rate, retirement age, mortality tables, turnover rates
Changes in assumptions	Any changes from the prior year and their effects
Funding policy	How the sponsor determines its contributions
Plan termination priority	The order in which benefits would be distributed upon plan termination

Additional Disclosures — Defined Contribution Plans (ASC 962)

Disclosure	Description
Participant-directed investment programs	How participants can direct their investments among options
Allocation methods	How employer contributions and forfeitures are allocated to participant accounts
Forfeiture policy	How nonvested amounts of terminated participants are handled
Significant plan amendments	Including automatic enrollment features or matching formula changes

warning

A common exam trap: the IRS determination letter disclosure. Plans must disclose whether they have received a favorable determination letter or, if not, whether the plan administrator believes the plan is qualified. This applies to both defined benefit and defined contribution plans.

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Fair Value Hierarchy for Plan Investments

Plan investments follow the same ASC 820 fair value hierarchy used elsewhere in GAAP:

Level	Plan Investment Examples
Level 1	Publicly traded stocks, U.S. Treasury securities, mutual funds with daily NAV
Level 2	Corporate bonds (priced via matrix pricing), commingled trust funds
Level 3	Real estate partnerships, private equity, certain insurance contracts
NAV practical expedient	Hedge funds, collective investment trusts measured at NAV (not categorized in hierarchy)

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Key Differences Summary — Reporting by Plan Type

Item	Defined Benefit (ASC 960)	Defined Contribution (ASC 962)
Required statements	4 (net assets, changes in net assets, accumulated benefits, changes in accumulated benefits)	2 (net assets, changes in net assets)
Obligation reported?	Yes — actuarial PV of accumulated plan benefits	No
Actuarial assumptions needed?	Yes (discount rate, mortality, etc.)	No
Investment measurement	Fair value	Fair value
Participant account balances disclosed?	Not applicable	Yes — plan must present or disclose individual account information
Funded status	Can be determined (net assets vs. obligation)	Not applicable (no obligation)

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Practice Problem

Facts: The Evergreen Defined Benefit Pension Plan provides the following data for the year ended December 31, Year 3:

Item	Amount
Net assets available for benefits, January 1	$25,000,000
Interest and dividend income	890,000
Net appreciation in fair value of investments	1,620,000
Employer contributions	1,800,000
Participant contributions	600,000
Benefits paid to participants	3,400,000
Administrative expenses	210,000

Required: Prepare the Statement of Changes in Net Assets Available for Benefits.

Solution:

$$\text{Total Additions} = \$890{,}000 + \$1{,}620{,}000 + \$1{,}800{,}000 + \$600{,}000 = \$4{,}910{,}000$$ $$\text{Total Deductions} = \$3{,}400{,}000 + \$210{,}000 = \$3{,}610{,}000$$ $$\text{Net Increase} = \$4{,}910{,}000 - \$3{,}610{,}000 = \$1{,}300{,}000$$ $$\text{Ending Net Assets} = \$25{,}000{,}000 + \$1{,}300{,}000 = \$26{,}300{,}000$$

Statement of Changes in Net Assets Available for Benefits — Year Ended December 31, Year 3

	Amount
Additions:
Interest and dividends	$890,000
Net appreciation in fair value of investments	1,620,000
Employer contributions	1,800,000
Participant contributions	600,000
Total additions	4,910,000
Deductions:
Benefits paid to participants	3,400,000
Administrative expenses	210,000
Total deductions	3,610,000
Net increase	1,300,000
Net assets available for benefits, beginning of year	25,000,000
Net assets available for benefits, end of year	$26,300,000

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Summary

Concept	Key Point
ASC 960	Governs defined benefit plan financial statements — 4 required statements
ASC 962	Governs defined contribution plan financial statements — 2 required statements
Investments	Always reported at fair value
Net appreciation	Combines realized and unrealized gains/losses in one line
Obligation	Only defined benefit plans report accumulated plan benefits
Disclosures	Both plan types require description, accounting policies, investments, tax status, and related parties
Funded status	Net assets available for benefits vs. accumulated plan benefits (DB only)