GAAP and IFRS

Reporting on Guaranteed Investment Contracts

An ambitious undertaking by the Financial Accounting Standards Board, aimed at clarifying the accounting of many employer-sponsored defined-contrib...
Ed ZwirnAugust 15, 2005

Proposed FASB staff position AAG INV-a pertains to stable value funds — investments held as part of an employee benefit package and valued at a set price per share — and amends guidance issued by the American Institute of Certified Public Accountants. The staff position, which is scheduled to take effect beginning with companies’ first annual reporting period starting after December 15, would set standards defining the circumstances in which contract value can be applied to the balance-sheet accounting of the funds.

Under the new guidance, the funds — including those “co-mingled” funds that include guaranteed investment contracts (GICs) covered by a protective “wrap” as part of a mix of assets— would be measured on the balance sheet at contract value. This would align the balance-sheet presentation with the presentation on statements received “by a participant in a defined contribution plan,” said Gina Mitchell, president of the Stable Value Investment Association.

The reporting requirements for the wrap, the instrument in the GIC through which the fund purchases credit protection, usually from a bank, has also been clarified. Current rules allow an exception to the fair value requirements of FAS 133, the standard governing derivatives, allowing the wrap to be recorded at the stated value of the wrap contract itself. The need for this exception has been eliminated by a methodology through which both fair value and contract value are reported as inputs into the total asset value.

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Mitchell, while acknowledging that the new staff position may do little to change current practice, said that it helps her industry “in the sense that FASB is providing certainty.” The board “never opined on this issue before they sent it to the AICPA,” she added. “God gave Moses the Ten Commandments. That’s what FASB’s doing with stable value.”

Another industry expert was a tad less biblical and a great deal more guarded in her reaction. While Vanguard principal Susan Graef expressed satisfaction that the FASB had tackled the issues surrounding stable value funds, she said that so soon after the August 4 release of the staff position, “we have only begun our review of the document.” Graef — whose company managed $19.1 billion of stable value assets as of year-end 2004, including $10 billion in its Vanguard Retirement Savings Master Trust — expects to have further thoughts closer to the board’s September 19 deadline for comments.

Looking ahead to other FASB business, the board has set an agenda for this Wednesday’s meeting that includes the following:

• FAS 123R: The board will consider whether to issue a staff position reflecting its narrow (4-3) May decision to suspend provisions regarding certain unexercised stock options. Specifically, the provisions would have required a company to apply a series of complex tests to determine the accounting treatment for employee stock options that had been granted but that remained unexercised more than 90 days after an employee departed the company. In May, the main reason for the suspension was that the issue would likely be addressed by another FASB project, Phase II Liabilities and Equity.

• Goodwill: The board intends to spend 60 minutes reconsidering parts of FAS 142, Goodwill and Other Intangible Assets, as they relate to the determination of useful life and amortization of intangible assets. The board in April had tentatively decided to exclude from this reconsideration the paragraph 12 criteria relating to the pattern of economic benefit amortization methodology. It was also decided that a renewable intangible asset comprises a single asset.

• The board also will discuss whether to add a project to its agenda to establish standards of accounting for and reporting of events subsequent to the balance sheet date.