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First Audit Cycle under New Accounting Guidance

On December 29, 2005, contract-value accounting was affirmed for stable value funds with the issuance of FASB Staff Position Nos. AAG INV-1 and SOP 94-4-1. Stable value funds and the 401(k) plans that use them are marking another landmark as they go through their first audit under the new standard.

"The audit landscape has changed," Kim McCarrel, a Senior Account Manager with INVESCO Institutional, told attendees at the SVIA's 2007 Spring Seminar in Charleston, South Carolina. "The new guidance has changed the type and amount of information that has to be audited in the course of valuing stable value funds. For those of us who don't have an audit background, it's been a little puzzling why our auditors are now coming back asking for source data for every single piece of information in the stable value financial statements, even though they never asked for that in the past. Well, there's a good reason."

The new FSP requirements took effect at year-end 2006. Betsy Johnson, a Senior Manager with the accounting firm PriceWaterhouseCoopers LLP, warned stable value managers to allow for more time for their audits this year and to anticipate higher audit fees as a result.

The FSP, which generally applies both to stable value funds and the retirement savings plans that use stable value, has some new requirements. The FSP changed the financial statement presentation to require fair value of the underlying assets and an adjustment that when added together equals contract value. The FSP also requires footnote disclosure on the nature of investment contracts and the methodology used for calculating their crediting rate and credit rate sensitivity analysis. As Johnson elaborated, auditors will have to verify these new requirements.

One of the thornier requirements of the new reporting standards involves settling on a methodology for valuing GICs and synthetic GICs. Auditors, Johnson said, will have to test inputs and methodologies used for this work and will have to be able to recalculate reported values. That may require them to have access to information that they have previously not required. They also may need to confirm information with wrap providers and GIC issuers.

Johnson encouraged stable value managers and plan sponsors to discuss with the auditors what they will need early in the auditing process. "It's important to pull in all the appropriate parties and departments, including accounting, financial reporting, and portfolio management," she said. "You'll need to discuss valuation methodologies and approaches with your auditors for each type of investment and have someone document those methodologies and any significant assumptions that were made."

Stable value managers who track the securities in their funds on an accounting system, she noted, may find it easier to supply their auditors with the information they need than managers who track their investments in a portfolio or trading system, since the latter systems may not yield the complete cost records auditors need. The availability, nature, and extent of the records made available to auditors, she concluded, are critical to the audit process. The first year under a new requirement is a learning process for all, concluded Johnson.

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