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SVIA Supports Proposed Exception to SFAS 133 Urges Expeditious Adoption

SVIA recently encouraged the Financial Accounting Standards Board’s Derivatives Implementation Group to expeditiously finalize the “Scope Exceptions:  Contracts Subject to Statement 35, Statement 110, or Statement of Position 94-4” contained in Statement 133 Implementation Issue Number C19. 

The scope exception for synthetic GICs held by defined contribution plans clarifies that book value accounting continues to be the appropriate valuation mechanism for this important asset held in defined contribution plans’ stable value funds.  Book value is the appropriate valuation mechanism because it is the amount that defined contribution plan investors actually receive if they withdraw from the stable value fund of the defined contribution plan. 

SVIA cautioned FASB in its November 19 letter that without this important clarification, some auditors would have applied fair value accounting required in SFAS 133 Implementation Issue A16 for issuers to defined contribution plans with devastating results to these plans and the plan participants who use stable value funds.  This application would have misled and confused plan participants, the principal users of pension plan financial statements.  It could also have provoked expensive legal action as plan participant account balances could have been affected due to the accounting change.  

SVIA stated it is appropriate to make a distinction in the SFAS 133 accounting for synthetic GICs between issuers and defined contribution plans because defined contribution plans and their participants are entitled to receive the book or contract value of their stable value investment while issuers are subject to different payment and valuation risks. 

The exception that FASB has provided for synthetic GICs held by defined contribution pension plans preserves this increasingly important investment option.  In these uncertain and volatile times, the consistent and predictable returns of stable value are more valuable than ever to the thousands of plan sponsors who offer them and the millions of plan participants, beneficiaries and retirees who benefit from stable value.

According to SVIA’s Fifth Annual Investment and Policy Survey for year-end 2000, 23% of defined contribution plan assets were allocated to stable value funds.  The Association’s members manage more than $225 billion in more than 115,000 defined contribution plans.  The survey found that the $225 billion in stable value funds had an asset mix of 5% cash, 40% guaranteed investment contracts (GICs), 51% synthetics GICs, 3% separate accounts, and 1% other. 

Members are encouraged to keep a copy of SVIA’s letter and the proposed FASB exception handy to answer any accounting or audit questions that may arise concerning calendar year-end pension plan audits.  A copy of the letter is available at www.stablevalue.org in “Members Only.”

The scope exception is available by accessing FASB’s website at http://accounting.rutgers.edu. 

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