For defined contribution pension plans that allow participant loans, changes were made to the classification of these loans on financial statements for years ending after December 15, 2010. Until now, participant loans were classified as investments. Most investments held by a plan are required to be presented at fair value. In practice, most participant loans are carried at their unpaid principal balance plus any accrued interest, which was considered to approximate fair value. However, questions have arisen about whether this is a reasonable fair value measurement, and whether it is useful to the users of these financial statements.
With the Financial Accounting Standards Board’s (FASB) Accounting Standards Update 2010-25, FASB amended current guidance to require that participant loans of defined contribution pension plans be classified as notes receivable from participants, rather than investments on the Statement of Net Assets Available for Benefits. These loans are to be measured at their unpaid principal balance plus accrued unpaid interest. All prior periods presented will need to be reclassified to conform to this update.
Participant loans will not need to be measured at fair value, and the fair value disclosures will no longer apply.
These changes will not affect ERISA reporting purposes. Participant loans will continue to be considered investments on the Schedule of Assets (Held at End of Year) and Form 5500, Schedule H.
Please contact Mara Bruce, with any questions on this topic.
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