FASB issues statement 133 implementation guidance for employee benefit plan contracts. (accounting & auditing news).

According to the Financial Accounting Standards Board, questions have been raised regarding proper accounting for such contracts as insurance contracts, guaranteed investment contracts and synthetic GICs since issuance of its Statement No. 133 (Accounting for Derivative Instruments and Hedging Activities). Statement 110, Reporting by Defined Benefit Pension Plans of Investment Contracts, amends Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans, to require defined benefit plans to report insurance contracts "in the same manner as specified in the annual report filed by the plan with certain governmental agencies pursuant to ERISA" (i.e., at either fair value or contract value). AICPA Statement of Position 94-4, Reporting of Investment Contracts Held by Health and Welfare Benefit Plans and Defined-Contribution Pension Plans, indicates that a fully benefit-responsive investment contract should be reported at contract value and provides an example of a fully benefit-responsive synthetic GIC as an investment contract that is subject to SOP 94-4.

A potential conflict with Statement 133 arises because for some insurance contracts with embedded derivatives, Statement 133 requires that the insurance contract be bifurcated and the embedded derivative be accounted for separately (i.e., at fair value). In addition, Statement 133 Implementation Issue No. A16, "Synthetic Guaranteed Investment Contracts" which was cleared in Mar. 2001, concludes that synthetic GICs meet Statement 133's definition of a derivative instrument from the perspective of the issuer. Since Statement 133's definition applies to the terms of the contract, that conclusion also implies that synthetic GICs meet the definition of a derivative from the viewpoint of the holder. A potential conflict arises because Statement 133 does not contain an exception for synthetic GICs held by reporting entities subject to SOP 94-4.

To address this issue, the FASB issued Statement 133 Implementation Issue No. C19, "Contracts Subject to Statement 35, Statement 110, or Statement of Position 94-4," last Oct. This guidance provides that contracts accounted for under either Statement 110 or Statement 35, as amended by Statement 110, are not subject to Statement 133. Similarly, a contract that is accounted for under SOP 94-4 is not subject to Statement 133. However, this scope exception does not apply to the contract's counterparty that does not account for the contract under Statement 35, Statement 110 or SOP 94-4.

This guidance is tentative until it is formally cleared by the FASB and incorporated in a FASB staff implementation guide, which is contingent upon an amendment of Statement 133 being issued. At press time, the board intended to issue in Dec. 2001 an exposure draft proposing an amendment of Statement 133. More information relating to this issue can be found on FASB's Web site at www.fasb.org/tech/index.html.