<nobr>Aug 30, 2010</nobr>

FASB to Clarify How Loans to Participants Should Be Accounted for by DC Plans

The Financial Accounting Standards Board on August 18 issued an Exposure Draft that would require defined contribution plans to classify participant loans as notes receivable rather than plan investments. The note receivable would be measured at their unpaid principal balance plus any accrued but unpaid interest.

FASB said that most participant loans in practice are carried at their unpaid principal balance plus any accrued but unpaid interest, which was considered a good faith approximation of fair value. However, some stakeholders questioned whether that measurement conforms to Topic 820 (Fair Value Measurements and Disclosures), which 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 board said that classification of participant loans as receivables acknowledges that participant loans are unique from other investments in that a participant taking out such a loan essentially borrows against its own individual vested benefit balance. FASB's task force concluded that it is more meaningful to measure participant loans at their unpaid principal balance plus any accrued but unpaid interest, rather than at fair value.

FASB said the amendments in the proposed Update would be applied retrospectively to all prior periods presented, and the effective date will be determined after the task force considers the feedback on the proposed Update.

FASB requested comments on the Exposure Draft by September 7.

Questions or comments on this issue should be addressed to Kathryn Ricard ( kricard@eric.org ).


Websites:

FASB Exposure Draft

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