News & Information

 

FEATURED PRODUCT

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

Learn More »

CCH® PENSION — 09/09/10

FASB proposes reporting participant loans as notes receivable rather than an investment

The Financial Accounting Standards Board (FASB) has issued a Proposed Accounting Standards Update to clarify how loans to participants should be classified and measured by defined contribution plans. The FASB issued the proposal at its August 18, 2010, meeting and is asking for public comments on the proposal to be submitted by September 7, 2010. Participant loans are currently classified as an investment that is presented at fair market value.

In practice, the FASB notes that "most participant loans are carried at their unpaid principal balance plus any accrued but unpaid interest, which was considered a good faith approximation of fair value." Questions have been raised about how the fair value of a loan can be measured since a fair market valuation "requires the use of observable and unobservable inputs such as market interest rates, borrower's credit risk, and historical default rates to estimate the fair value of participant loans." The amendments to Subtopic 962-325 would require that participant loans be classified as "notes receivable" from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest.

Under Subtopic 962-325-35-2, for example, mortgages and other loans would now exclude loans to participants of 401(k) plans instead of including them in the calculation. The FASB said that this measurement would be more meaningful because participant loans cannot be sold by the plan. "Furthermore, if a participant were to default, the participant's account would be reduced by the unpaid balance of the loan, and there would be no effect on the plan's investment returns or any other participant's account balance."

The effective date of the proposed change will be determined after the FASB considers feedback from the public. Comments must be received by the FASB by September 7, 2010. They can be emailed to director@fasb.org, using the File Reference No. EITF100C. Comments can also be delivered via paper to Technical Director, File Reference No. EITF100C, FASB, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116. Comments cannot be faxed.

Source: FASB Exposure Draft, August 18, 2010.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.