It seems like we just finished the 2009 401(k) audits, but already we have changes that will affect the 2010 401(k) financial statements. In September, 2010, FASB issued Accounting Standards Update (ASU) 2010-25 that will change how participant loans are reported.
Prior to this update, participant loans were accounted for as investments. The issue that this caused was because investments were required to be reported at fair value. Plans typically accounted for participant loans based on the amortization schedules that reflected the payment schedules for the loans. Fair value reporting (as required under FASB ASC 850) is based on the concept of the price that would be paid between a buyer and a seller in an open market. Since no open market exists of participant loans in a 401k plan, plans were technically required to estimate fair value based on market interest rates, credit risks and other assumptions. As most plan administrators can tell you, this type of fair value analysis was rarely done.
By changing the reporting of participant loans from investments to receivables, ASU 2010-25 will now be reported based on their outstanding principal amount plus accrued by unpaid interest. Additionally, unlike other receivables, there will not be any consideration of valuation reserves. Practically speaking, this will probably not change the value of the participant loans as they are reported on the financial statements, since it was typically assumed that “fair value approximated amortized cost”. However it will significantly reduce the amount of hoops the financial statement preparer will have to go through to assure that the amount as reported is correct.
ASU 2010-25 is effective for fiscal years ending after December 15, 2010 and early implementation is permitted. Also, you will be required to apply these new reporting standards to the prior periods included in these financial statements.
Kim Lubbers, CPA