Corporate 401(k) and other defined contribution plans would no longer include participant loans as part of investments under a proposal unveiled Wednesday by the Financial Accounting Standards Board.
“These aren't investments a plan can sell to another plan or another investor,” said Michael Gonzales, FASB associate practice fellow on the board's accounting revision project. Such loans are different from true credit, he said.
“Participants are borrowing from their own account,” Mr. Gonzales said. “They own themselves.”
According to the proposal, “If a participant were to default, the participant's account would be reduced by the unpaid balance of the loan, and there would be no effect on the plan's investment returns or any other participant's account balance.”
By excluding the loans from investments, the proposal saves plan sponsors the difficulty of valuing them under required FASB fair-value accounting for investments, he said.
Currently “most participant loans are carried at their unpaid principal balance plus any accrued but unpaid interest, which was considered a good-faith approximation of fair value,” the proposal states. But some stakeholders question whether that measurement conforms to fair-value measure use of “observable and unobservable inputs such as market interest rates, borrower's credit risk, and historical default rates to estimate the fair value of participant loans.”
The proposal would classify the loans as notes receivable from participants, separating them from plan investments and measuring them at their unpaid principal balance plus any accrued but unpaid interest. The loans would continue to be included in total plan assets.
FASB is accepting comments on the proposal through Sept. 7. The board plans to determine the effective date of the change after considering comments it receives.