FASB to Review Proposed Fair Value Reporting of GICs
These investments are primarily offered by stable value funds, and are prominent investment options in defined contribution (401(k)) plans. The funds “provide plan participants with the ability to transact in the fund at book or “contract” value regardless of changes in the fair value of underlying securities” the FASB statement says. 401(k) investors put 22.8 percent of their assets into stable value funds in 2004, the Wall Street Journal reports, a total investment that currently exceeds $355 billion, according to the Stable Value Investment Association (SVIA).
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The FASB project update published on their Web site said that the proposed FSP will explicitly amend the guidance in the AICPA Statement of Position 94-4, Reporting of Investment Contracts Held by Health and Welfare Benefit Plans and Defined Contribution Pension Plans with respect to the definition of fully benefit-responsive and the presentation and disclosure of fully benefit-responsive investment contracts.
Investments and wrapper contracts are to be reported on the balance sheet at fair value with a subtotal for net assets at fair value. The “difference between net assets at fair value and net assets” should also be presented on the balance sheet and calculated as the sum of the amounts necessary to adjust the portion of net assets attributable to all fully benefit-responsive investment contracts in aggregate from fair value to contract value, FASB’s project update says.
The FSP makes a distinction between traditional GICs and the more diversified synthetic GICs offered by stable value funds. Synthetic GICs consist of corporate and government bonds, notes and mortgages, according to the Journal. Their return is guaranteed by the wrap, a type of insurance policy that assures the underlying value of the investments, even if they fall below book value.
Comment letters from the AICPA and SVIA on the proposed FSP both address the issue of reporting assets at real vs. contract value. The AICPA distinguishes between reporting by investment companies and reporting by defined contribution plans. In their comment letter published on the FASB site, the Planning Subcommittee of the AICPA says that “Information that is useful to plan participants includes the amount they would receive currently if they were to withdraw or borrow funds from or transfer funds within the plan. For fully benefit-responsive investment contracts, that is contract value.” The letter further recommends that some of the asset information “would be more understandable to the users of the plan’s financial statements if shown in the notes to the financial statements.”
The SVIA supports the issuance of the FSP, but finds the language of the FASB position on asset reporting ambiguous. The FSP says in the introduction “All investments (including derivative contracts) held by an investment company should be reported at fair value in accordance with the AICPA Investment Companies Guide. However, contract value is a relevant measurement attribute for that portion of the net assets of an investment company attributable to fully benefit-responsive investment contracts” under certain specific circumstances. The SVIA says in their letter, “we believe the wording should be enhanced to clarify that for stable value contracts . . . contract value is the appropriate and relevant measure.”