FASB Would Drop Fair Value for Pension Plan Loans

FASB this week issued a Proposed Accounting Standards Update (ASU) that is intended to clarify how defined contribution pension plans should classify and measure loans to participants. Under the Proposed ASU, Plan Accounting—Defined Contribution Pension Plans (Topic 962), Reporting Loans to Participants by Defined Contribution Pension Plans (a consensus of the FASB Emerging Issues Task Force), loans to participants would no longer be presented at fair value.


Participant loans are currently classified as an investment in accordance with the defined contribution pension plan guidance in Accounting Standards Codification (ASC) paragraph 962-325-45-10. ASC Subtopic 962-325 requires most investments held by a plan, including participant loans, to be presented at fair value. The amendments in the Proposed ASU 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. The proposed changes would affect any defined contribution pension plan that allows participant loans.


The proposal says that the 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 his or her own individual vested benefit balance. FASB said the 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.


Amendments in the proposal would be applied retrospectively to all prior periods presented. The effective date will be determined after the EITF considers comments. Early adoption would be permitted. The proposal lists specific questions for respondents to consider when submitting comments, which are due Sept. 7.


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