Plan Loans to be Reported as Notes Receivable

The FASB’s proposed accounting standards update would require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. The International Foundation of Employee Benefit Plans (IFEBP) explained in a regulatory update that participant loans are currently classified as an investment in accordance with existing DC plan guidance, and most investments held by a plan, including participant loans, are required to be presented at fair value.   

In practice, 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.   

In comments which were accepted until September 7, some stakeholders questioned whether that measurement conforms to guidance, which requires the 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. Other stakeholders have questioned whether the use of those assumptions would result in information that is useful.