GUIDANCE ON CHANGES TO AUDITS OF PENSION PLANS - Participant Notes Receivable

By Shawn Williams, CPA - Senior Manager

ASU 2010-25, Reporting Loans to Participants by Defined Contribution Plans, was issued to provide guidance in the classification and measurement of participant loans. These changes are applicable to any defined contribution plan that allows participant loans and is effective for fiscal years ending after December 15, 2010 with early implementation permitted.

Previously participant loans were classified and reported as plan investments on the Statement of Net Assets Available for Benefits and in accordance with Fair Value Measurements (ASU 820). The changes will now require the participant loans to be shown as Participant Notes Receivable, measured at their unpaid principal balance plus any accrued but unpaid interest. With these receivables being reported outside of investments, fair value financial statement footnotes will exclude participant notes receivable for prior and future years.

ASU 2010-25 does not amend the Statement of Changes in Net Assets Available for Plan Benefits to reflect the new guidance; however interest income from participant notes receivable should be presented separately from investment income.

The Department of Labor (DOL) still considers participant loans to be classified as an investment for purposes of the Form 5500 and related schedules. Participant notes receivable should be considered for the following: i) reconciliation between audited financial statements and the Form 5500, ii) reporting appropriate disclosures on Schedule H, line 4i – Schedule of Assets (Held at End of Year), and iii) existence of certification allowing for the limited scope exemption.

The ASU can be found by clicking here to access the FASB website. (Note: You will need to register for a free 'Basic' account to view the Standards Update).