Historically, participant loans in a defined contribution plan have been classified as plan investments and have been subject to the fair value measurement and disclosure requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 Fair Value Measurements and Disclosures. This required the plan sponsor to calculate the fair values of the participant loans as well as disclose the fair values of the loans in accordance with the standard.
A recent Accounting Standards Update (ASU 2010-25), approved by FASB, will now require that participant loans be classified as notes receivable for Generally Accepted Accounting Principles (“GAAP”) purposes and should be measured at the unpaid principal balance plus any accrued but not yet paid interest. The ASU is effective for plan years ending after December 15, 2010, however, early adoption is permitted.
The change in reporting requirements should provide some relief for sponsors of defined contribution plans as they will no longer be required to fair value participant loans. However, it will affect the presentation of the participant loans on the face of the statement of net assets, as the participant loans will now be reclassified from investments to notes receivable. Defined contribution plan sponsors should reflect this reclassification of participant loans on the statement of net assets available for benefits for all years presented in the year of adoption.
The change in presentation required by the new ASU should only be applied to financial statements prepared in accordance with GAAP and will not affect the classification of participant loans on Form 5500. As such, preparation of Form 5500 by plan sponsors and thirdparty administrators should remain unchanged.
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