For Institutional Investor Use Only. Not for Use With or Distribution to the Public. Accounting Standards Codification Topic 820 Fair value measurements and disclosures Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures must be considered in the preparation of an ERISA plan’s financial statements. ASC 820 is required to be followed for any entity’s financial statements prepared in compliance with generally accepted accounting principles (GAAP) for reporting periods beginning on or after November 15, 2007. The Employee Retirement Income Security Act (ERISA) requires that financial statements for employee benefit plans subject to Title I of ERISA be prepared in conformity with GAAP. ASC 820 may also affect the reporting for non-ERISA plans if the assets are reported on the financial statements of the plan sponsor. ASC 820 fundamentally changes the definition of value from an entry concept (value at which the asset is purchased) to an exit concept (expected proceeds realized from the sale of the asset). Prior to the effective date of ASC 820, purchase price was used as the reporting measurement, whereas ASC 820 requires exit value. As such, there is a shift of emphasis from purchase price to selling price. ASC 820 clarifies that the exit price is the price in an orderly transaction between market participants to sell the asset in the principal market where the reporting entity would transact for the asset or its most advantageous market. For ERISA plans, the focus of ASC 820 is on valuation and categorization of the valuation within a prescribed hierarchy. ASC 820 stipulates that measurements should be based on the assumptions that market participants would use in pricing individual investments. Thus, it establishes a hierarchy on a scale of 1 to 3, with 1 representing the most observable market inputs and 3 representing the least. Plan management is responsible for financial reporting. This includes the determination of proper reporting of asset valuations, level assignments and note disclosure. This determination cannot be outsourced. Here is a summary of the inputs and investment types that might fall within each level of the hierarchy: 1. Level 1 These represent quoted prices in active markets for identical assets that a market participant can access at the measurement date. Exchange- listed equity securities or exchange-traded mutual fund shares are the best example of a Level 1 input. 2. Level 2 These are inputs that are observable either directly or indirectly. Examples here would include matrix pricing used to value fixed-income securities or prices obtained for unregistered funds that do not trade in a public market. 3. Level 3 These are inputs that are not observable. These would reflect the reporting entity’s own judgment about assumptions used by market participants to value the investment. For example, contract values of investment contracts or real estate holdings valued using appraisal information could be examples of Level 3 inputs. FOR INSTITUTIONAL INVESTOR USE ONLY. Not for use with or distribution to the general public. | April 2015 1
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For Institutional Investor Use Only. Not for Use With or Distribution to the Public.
Accounting Standards Codification Topic 820Fair value measurements and disclosures
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures must be considered in the preparation of an ERISA plan’s financial statements. ASC 820 is required to be followed for any entity’s financial statements prepared in compliance with generally accepted accounting principles (GAAP) for reporting periods beginning on or after November 15, 2007. The Employee Retirement Income Security Act (ERISA) requires that financial statements for employee benefit plans subject to Title I of ERISA be prepared in conformity with GAAP. ASC 820 may also affect the reporting for non-ERISA plans if the assets are reported on the financial statements of the plan sponsor.
ASC 820 fundamentally changes the definition of value from an entry concept (value at which the asset is purchased) to an exit concept (expected proceeds realized from the sale of the asset). Prior to the effective date of ASC 820, purchase price was used as the reporting measurement, whereas ASC 820 requires exit value. As such, there is a shift of emphasis from purchase price to selling price.
ASC 820 clarifies that the exit price is the price in an orderly transaction between market participants to sell the asset in the principal market where the reporting entity would transact for the asset or its most advantageous market. For ERISA plans, the focus of ASC 820 is on valuation and categorization of the valuation within a prescribed hierarchy. ASC 820 stipulates that measurements should be based on the assumptions that market participants would use in pricing individual investments. Thus, it establishes a hierarchy on a scale of 1 to 3, with 1 representing the most observable market inputs and 3 representing the least.
Plan management is responsible for financial reporting. This includes the determination of proper reporting of asset valuations, level assignments and note disclosure. This determination cannot be outsourced.
Here is a summary of the inputs and investment types that might fall within each level of the hierarchy:
1. Level 1 These represent quoted prices in active markets for identical assets that a market participant can access at the measurement date. Exchange-listed equity securities or exchange-traded mutual fund shares are the best example of a Level 1 input.
2. Level 2 These are inputs that are observable either directly or indirectly. Examples here would include matrix pricing used to value fixed-income securities or prices obtained for unregistered funds that do not trade in a public market.
3. Level 3 These are inputs that are not observable. These would reflect the reporting entity’s own judgment about assumptions used by market participants to value the investment. For example, contract values of investment contracts or real estate holdings valued using appraisal information could be examples of Level 3 inputs.
FOR INSTITUTIONAL INVESTOR USE ONLY. Not for use with or distribution to the general public. | April 2015 1
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Accounting standards codification Topic 820—fair value measurements and disclosures
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Financial statement disclosureASC 820 expands the disclosures required for the reporting entity’s investment holdings. Such disclosures (presented by asset class) include:
W a description of valuation methodologies utilized for the assets in Levels 2 and 3 (e.g., pricing sources, internal models, appraisals);
W disaggregation of assets and liabilities by nature and risk type. The level within the hierarchy in which each asset type falls as well as transfers between Levels 1 and Level 2;
W the plan’s policy for transfers between levels in the risk hierarchy and amount/reason for material transfers during/between the reporting period(s);
W for those fair value measurements using Level 3 inputs, a reconciliation of the beginning and ending balances for the asset including changes within the period due to transfers, purchases and sales, and gross gain/loss activity; and
W additional disclosures may be appropriate for the plan based upon its portfolio of asset holdings.
Important note: Your responsibility for valuing investments and establishing internal controlsThe Employee Benefit Plan Audit Quality Center of the American Institute of Certified Public Accountants (AICPA) states:
“Plan management is responsible for investment valuations and financial statement disclosures. Even if you use outside investment custodians, asset or fund managers or other service providers to assist in determining the value of investments reported in your plan’s financial statements and on Form 5500, the DOL holds plan management responsible for the proper reporting of plan investments. This responsibility cannot be outsourced or assigned to a party other than plan management. While you may look to the valuation service provider for the mechanics of the valuation, you need to have sufficient information to evaluate and independently challenge the valuation. Therefore, it is important that you become familiar with the assets in which your plan invests and the methods and significant assumptions used to value them, especially for investments for which readily determinable market values do not exist.”
Source: Plan Advisory – Valuing and Reporting Plan Investments
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TIAA Traditional Annuity Product TypeThe TIAA Traditional Annuity is a fixed rate annuity contract that is fully and unconditionally guaranteed and backed by the claims-paying ability by Teachers Insurance and Annuity Association of America (TIAA), a New York domiciled nonprofit legal reserve life insurance company. During the accumulation phase, the TIAA Traditional Annuity provides a guarantee of principal, a guaranteed minimum rate of interest between 1% and 3% and the potential for additional interest, if declared by TIAA. Additional interest, when declared, remains in effect for the “declaration year,” which begins each March 1. Additional interest is not guaranteed for future years. When the contract value accumulation (plan asset) of TIAA Traditional is converted to an annuity (plan withdrawal) based on life expectancy, the present value of the stream of payments is equal to the accumulation. For additional information about the TIAA Traditional Annuity, review TIAA Traditional Annuity: Adding Safety and Stability to Retirement Portfolios.
TIAA currently holds high ratings from all four leading insurance company ratings agencies for its financial strength and claims-paying ability.*
Valuation MethodologyThe TIAA Traditional Annuity is reported at contract value. The contract value of the TIAA Traditional Annuity equals the accumulated cash contributions, interest credited to the plan’s contracts, and transfers, if any, less any withdrawals and transfers, if any.
The TIAA Traditional Annuity is not available for sale or transfer on any securities exchange. Accordingly, transactions in similar investment instruments are not observable. While transactions involving the purchases/sales of individual TIAA Traditional contracts are not observable in a public marketplace, contract value may provide a good approximation of fair value as supported by the following:
W New contributions represent current transactions between willing buyers and sellers as prescribed in the relevant GAAP guidance. Participants have the option to allocate their contributions between the TIAA Traditional Annuity and a number of investment choices for which fair values are readily observable.
W Participants typically allocate contributions between several investment choices and all transactions are executed at current market value with the assumption being that objective, unbiased transactions regularly occur and participants deem the value of the TIAA Traditional Annuity contract to be no less than the participant’s accumulation balance and that each investment purchase is made at fair value since these purchases are not distressed and are conducted between willing buyers and sellers in open market conditions where a participant has a variety of investment choices.
W When participants change employers, they oftentimes enroll in a new plan with very similar investment options, including the TIAA Traditional Annuity. Because these transactions continue to occur with continued participant contributions at current stated contract values, the market-observable presumption is that the
contract value of current funding represents a good approximation of fair value based on the willingness of the participant to continue to contribute. For each contribution, TIAA continues to record a contractual liability for the current contribution and does not consider such liability to have any embedded gain or loss.
W Upon a distributable event, the participant surrenders the future accumulation benefits in exchange for a cash payout based on the contract value, demonstrating the contract value can be monetized when a distributable event occurs.
W The crediting rate is supported by the investment performance of a large, diversified portfolio (TIAA’s General Account), is correlated with the highest quality debt security yields, and is adjusted for contract liquidity. A twenty-year analysis of crediting rates for TIAA Traditional Annuity contracts suggests a rate of return that is representative of a risk-adjusted market rate for this type of product; thus application of observed rates would yield a discounted cash flow which approximates contract value.
Plan Types: Available only to participating plans under annuity contracts, and only during the accumulation phase.
Investment Restrictions: TIAA issues various types of contracts as funding vehicles for retirement plans. Certain contract types contain liquidity restrictions on the redemption of TIAA Traditional Annuity accumulations, which could impact the value realized upon exiting the contract.
Transaction Fees: One contract type provides for a 2.5% withdrawal fee if a participant separates from service and elects to withdraw accumulations within 120 days of separation. The impact of such an occurrence on the value of a plan’s investment in TIAA Traditional Annuities would be minimal.
Suggested Valuation Input Level: 3
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Plan Types: Available only to participating plans under annuity contracts.
Investment Restrictions: Direct transfers to competing funds in a plan’s investment lineup are prohibited (industry standard “equity wash”). Transfers may be made to a competing fund following a 90-day waiting period after being transferred to a noncompeting fund.
In addition, transfers into TIAA Stable Return Annuity may not be made for 90 days following a transfer out.
Plan sponsors choosing to terminate a plan’s investment in the TIAA Stable Return Annuity will receive contract value in two years.
Transaction Fees: N/A
Suggested Valuation Input Level: 3
Plan Types: Available only to participating plans under annuity contracts.
Investment Restrictions: Direct transfers to competing funds in a plan’s investment lineup are prohibited (industry standard “equity wash”). Transfers may be made to a competing fund following a 90-day waiting period after being transferred to a noncompeting fund.
In addition, transfers into TIAA Stable Value may not be made for 30 days following a transfer out.
Plan sponsors choosing to terminate a plan’s investment in the TIAA Stable Value contract will receive contract value in, at most, two years. If the two-year payout applies, a discontinuance fee will be assessed which has the effect of reducing the interest credited during the two-year period by, at most, seventy-five basis points.
Transaction Fees: N/A
Suggested Valuation Input Level: 3
TIAA Stable Return Annuity Product TypeThe TIAA Stable Return Annuity is a fixed-rate annuity contract backed by the assets of TIAA’s General Account. The TIAA Stable Return Annuity provides for a guaranteed interest crediting rate that floats between 1% and 3%, with opportunities to receive additional amounts of interest in excess of the guaranteed rate.
All guarantees are based upon TIAA’s claims-paying ability.
Valuation MethodologyThe TIAA Stable Return Annuity is reported at contract value. The contract value of the TIAA Stable Return Annuity equals the accumulated cash contributions, interest credited, and transfers, if any, less any withdrawals and transfers, if any. The valuation considerations for the TIAA Stable Return Annuity are similar to those discussed above for the TIAA Traditional Annuity.
TIAA Stable Value Product TypeThe TIAA Stable Value is a fixed rate group annuity contract issued by TIAA. Contributions are deposited into a non-unitized separate account. The contract provides a guaranteed minimum rate of interest of between 1% and 3%. Although the liability to provide contract guarantees and accumulations is backed by the assets in the separate account, any amount to be credited above the minimum guaranteed rate is determined by TIAA. Contract holders and plan participants do not participate in, and do not receive the earnings of, the assets in the separate account.
All guarantees are based upon TIAA’s claims-paying ability.
Valuation MethodologyTIAA Stable Value is reported at contract value. The contract value of TIAA Stable Value equals the accumulated cash contributions, interest credited, and transfers, if any, less any withdrawals and transfers, if any. The valuation considerations for the TIAA Stable Value are similar to those discussed above for the TIAA Traditional Annuity.
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Plan Types: Generally available to all plan types.
Investment Restrictions: Shares of TIAA-CREF Funds are available for transactions at the closing net asset value on any day the New York Stock Exchange (NYSE) is open for business. In an effort to reduce market timing and excessive trading, shareholders will be locked out of a fund for 90 days if a purchase, sale and repurchase within that fund is made within a 60-day period, other than for the TIAA-CREF Money Market Fund or TIAA-CREF Short-Term Bond Fund.
Transaction Fees: Certain funds charge a 2% redemption fee on redemptions of shares occurring within 60 days of the initial purchase date to defray commissions, market impact or other costs.
Suggested Valuation Input Level: 1
Plan Types: VA-3 is available only to participating plans under variable annuity contracts.
Investment Restrictions: N/A
Transaction Fees: N/A
Suggested Valuation Input Level: 1
TIAA-CREF Funds Product TypeTIAA-CREF Funds is a Delaware statutory trust that was organized on April 15, 1999, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as an open-end management investment company. Current offerings include domestic and international equities, fixed income, real estate securities, asset allocation and money market funds. Audited financial statements are available.
Valuation MethodologyThe funds invest principally in equity securities, fixed-income instruments, other mutual funds and short-term instruments in accordance with each fund’s investment objectives. Fund holdings are generally valued using market quotations or prices obtained from independent pricing services, except those held by the TIAA-CREF Money Market Fund, whose holdings are valued at amortized cost. Each fund determines its share price or net asset value (NAV) each day calculated generally as of 4 p.m. (ET). The TIAA-CREF Money Market Fund is managed to maintain a constant value, though not guaranteed, of $1 per share.
TIAA Access Annuity Product TypeTIAA Access is a variable annuity product that is funded through TIAA Separate Account VA-3 (VA-3), a separate investment account of TIAA registered under the Investment Company Act of 1940. VA-3 invests in proprietary and nonproprietary mutual funds through various subaccounts. Audited financial statements for VA-3 are available.
Valuation MethodologySubaccount unit values are calculated daily and are available on the TIAA-CREF website, tiaa-cref.org. The underlying investments are generally valued using market quotations obtained from independent pricing services.
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Plan Types: Available only to participating plans under variable annuity contracts.
Investment Restrictions: Accumulation units in CREF Accounts are available for transactions at the closing accumulation unit value on any day the NYSE is open for business. In an effort to reduce market timing and excessive trading, shareholders will not be permitted to make electronic transfers (i.e., transfers over the Internet, by telephone or by fax) back into that same Account through a purchase or exchange for 90 calendar days, if a purchase, sale and repurchase within that account is made within a sixty-day period, other than for the CREF Money Market Account.
Transaction Fees: N/A
Suggested Valuation Input Level: 1
Plan Types: Available only to participating plans under variable annuity contracts.
Investment Restrictions: Accumulation units in the REA are available for transactions at the closing accumulation unit value on any day the NYSE is open for business. Transfers out of the REA are limited to one per calendar quarter.
Although the underlying assets of the REA cannot be quickly sold and converted to liquid assets, the TIAA General Account provides the REA with a liquidity guarantee—i.e., TIAA ensures that the REA has funds available to meet participant redemption, transfer or cash withdrawal requests executed at quoted unit values.
Transaction Fees: N/A
Suggested Valuation Input Level: 1
CREF AccountsProduct TypeCollege Retirement Equities Fund (CREF) is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as an open-end management investment company. It is also supervised by the New York State Insurance Department and is registered as an insurance company in several states. It consists of eight investment portfolios: the Stock, Global Equities, Growth, Equity Index, Bond Market, Inflation-Linked Bond, Social Choice and Money Market Accounts (individually referred to as the “Account” or collectively referred to as the “Accounts”). The CREF Accounts, as investment options available and permitted under the governing plan, fund variable annuity contracts issued by CREF. Audited financial statements are available.
Valuation MethodologyThe Accounts invest principally in equity securities, fixed-income instruments and short-term investments in accordance with each portfolio’s investment objectives. Account investments are primarily valued using market quotations or prices obtained from independent pricing sources who may employ various pricing methods to value the investments including matrix pricing. CREF Money Market Account holdings are generally valued at amortized cost. Each Account determines its unit value each day. Unit values are available at tiaa-cref.org.
TIAA Real Estate AccountProduct Type
The TIAA Real Estate Account (REA) is an insurance company separate account of TIAA investing mainly in real estate and real estate-related investments. The REA, as an investment option available and permitted under the governing plan, funds variable annuity contracts issued by TIAA. Audited financial statements are available.
Valuation MethodologyThe REA generally invests in real estate properties and real estate-related investments. The REA’s value is principally derived from the market value of the underlying real estate holdings or other real estate-related investments. Real estate holdings are valued principally using external appraisals, which are estimates of property values based on a professional’s opinion. The REA sometimes holds securities as well. These are generally priced using values obtained from independent pricing sources. Unit values are calculated each day and are posted at tiaa-cref.org.
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* For its stability, claims-paying ability and overall financial strength, TIAA is one of only three insurance groups in the United States to currently hold the highest possible rating from three of the four leading insurance company rating agencies: A.M. Best (A++ as of 9/14), Fitch (AAA as of 10/14) and Standard & Poor’s (AA+ as of 10/14). It currently holds the second highest possible rating from Moody’s Investors Service (Aa1 as of 10/14). Per S&P criteria, the downgrade of U.S. long-term government debt limits the highest rating of U.S. insurers to AA+ (the second-highest rating available). There is no guarantee that current ratings will be maintained. Ratings represent a company’s ability to meet policyholders’ obligations and do not apply to variable annuities, mutual funds or any other product or service not fully backed by TIAA’s claims-paying ability.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not bank deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit tiaa-cref.org for details.
You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877 518-9161 or log on to tiaa-cref.org for underlying product and fund prospectuses that contain this and other information. Please read the prospectuses carefully before investing.TIAA-CREF does not provide accounting, legal or tax advice. Matters pertaining to the preparation of a retirement plan’s financial statements should be discussed with the plan’s accounting, tax or legal advisor.
An investment in the TIAA-CREF Money Market Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other U.S. government agency. The fund will attempt to maintain a stable net asset value of $1.00 per share, but it is possible to lose money by investing in the fund. An investment in the CREF Money Market Account is not a deposit of any bank and is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other U.S. government agency.TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products. Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association of America (TIAA) and College Retirement Equities Fund (CREF), New York, NY.
©2015 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY 10017
FOR INSTITUTIONAL INVESTOR USE ONLY. Not for use with or distribution to the general public.
Additional resources: W The AICPA’s Plan Advisory, Valuing and Reporting Plan Investments.
W The AICPA’s Alternative Investments – Audit Considerations: A Practice Aid for Auditors.
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