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FASB Clarifies and Affirms Stable Value Accounting in Draft Guidance

The Financial Accounting Standards Board (FASB) is poised to take a historic step for the stable value industry in the New Year. FASB will issue guidance on stable value accounting-the foundation for stable value funds.

FASB will formalize previous accounting guidance and practices for stable value funds when it finalizes guidance. The proposed guidance, FSP AAG INV-a or Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide, applies to all stable value funds that issue financial statements, despite the title.

A little about stable value funds

First, let's talk a little about stable value funds. Stable value funds are the largest conservative investment in defined contribution plans, with over $419 billion invested as of December 31, 2004. Stable value funds provide a unique combination of benefits:

• Safety of principal invested, hence the name 'stable value,
• Stability and steady growth of principal and earned income,
• Benefit-responsive liquidity, meaning plan participants transact at contract value.

Stable value funds gain principal protection through the use of benefit responsive investment contracts that allow the plan's participants to withdraw their investment at contract value - principal investment plus accrued income - at any time under the terms of the retirement plan.

Contract value can differ from market value, which is how most other investments are measured, either positively or negatively. Because of this, stable value funds are unique in two ways. They remain 'stable' despite fluctuations in the financial market. Chart 1 illustrates this point. Stable value also has a different accounting treatment that recognizes this difference called contract value. That accounting treatment, which was first formally recognized by the ACIPA, was articulated in SOP 94-4. Plus, there is a long history of accounting compliance that follows the principles outlined in SOP 94-4 for all stable value funds.

Stable value funds are a key element in providing retirement security for plan participants because they are designed to provide safety of principal and relatively high income. According to Hewitt 401(k) Index™, which tracks defined contribution asset allocations, stable value has been one of three core investments for 401(k) investors netting roughly 20% to 25% over the life of the index as Chart 2 shows.

Formalizing Accounting Literature and Practice is Major Achievement

The proposed FSP (Financial Accounting Standards Board Staff Position) is important because it upholds contract value accounting for stable value funds. It builds on SOP 94-4, which provided guidance for defined contribution plans and now provides definitive guidance for all types of stable value funds. FASB provides this guidance by directly addressing commingled or pooled stable value funds and amending guidance for employee benefit plans in SOP 94-4 and, health and welfare plans in SOP 92-6, and repealing a directive under FAS133. The proposed FSP:

• Tweaks SOP 94-4's definition of a fully benefit responsive investment contract,
• Establishes a criteria and the limited circumstances that contract value can be used,
• Requires new financial statement presentation for stable value funds, and
• Enhances qualitative and quantitative disclosures for these funds.

The proposed guidance is also a major achievement because of the times we live in. In the wake of Enron, WorldCom, and the failure of Arthur Anderson, accountants clearly have taken a more conservative and by the book approach to audits. For stable value funds, this resulted in some accounting firms questioning stable value commingled or pooled funds' reliance on SOP 94-4 since this document governed employee benefit plans, not commingled or pooled funds, despite past reliance on SOP 94-4 for commingled funds. Further, the audit guide for investment companies, which covers audit procedures for commingled funds, requires that all commingled funds must carry their investments at market value. The AICPA sought FASB's guidance as to whether the criteria for benefit responsive investment contracts as defined by SOP 94-4 applied, or whether market value accounting as defined by the Investment Company Act of 1940 should be used.

Despite a full and demanding agenda, the FASB took up this project, developed in depth knowledge of the issues underlying stable value investments and reflected that understanding in a relevant document. SVIA supports issuance of the FSP. We believe it is conceptually sound, and will promote relevant and meaningful financial reporting to the investment community. Its issuance will enable investors to continue to receive the important benefits of investing in stable value funds.

Comments on the FSP were due on September 19. The FSP can be viewed on FASB's website, www.fasb.org under "FASB Staff Positions" and all comments on the FSP, including SVIA's are also posted on FASB's website under "Comment Letters." It is anticipated that FASB will review all comments and issue a final FSP in January 2006.

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