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Official releases: FASB No. 132 ... SOP 03-4 ... SOP 03-5.

Statement of Financial Accounting Standards No. 132 (revised 2003)--Employers' Disclosures about Pensions and Other Postretirement Benefits (an amendment of FASB Statements No. 87, 88, and 106)

Space considerations prevent publishing here the appendices to FASB Statement no. 132 (revised 2003). Since the appendices often are important to understanding FASB statements, readers are advised to obtain complete copies. For additional copies of FASB statements and/or information on applicable prices and discount rates, contact the FASB order department, 401 Merritt 7, P. O. Box 5116, Norwalk, Connecticut 06856-5116. Telephone: 800-748-0659.

SUMMARY

This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement of recognition of those plans required by FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans.

Reasons for Issuing This Statement

This Statement was developed in response to concerns expressed by users of financial statements about their need for more information about pension plan assets, obligations, benefit payments, contributions, and net benefit cost. Users of financial statements cited the significance of pensions for many entities and the need for more information about economic resources and obligations related to pension plans as reasons for requesting this additional information. In light of certain similarities between defined benefit pension arrangements and arrangements for other postretirement benefits, this Statement requires similar disclosures about postretirement benefits other than pensions.

Differences between This Statement and Statement 132

This Statement retains the disclosures required by Statement 132, which standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable and required additional information on changes in the benefit obligations and fair values of plan assets. Additional disclosures have been added in response to concerns expressed by users of financial statements; those disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. This Statement retains reduced disclosure requirements for nonpublic entities from Statement 132, and it includes reduced disclosures for certain of the new requirements.

How the Changes in This Statement Improve Financial Reporting and How the Conclusions in This Statement Relate to the Conceptual Framework

FASB Concepts Statement No. 1, Objectives of Financial Reporting by Business Enterprises, states that financial reporting should provide information about economic resources of an enterprise, claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources. This Statement, including the manner of presentation illustrated in Appendix C, results in more complete information about pension and other postretirement benefit plan assets, obligations, cash flows, and net cost and, thereby, assists users of financial statements in assessing the market risk of plan assets, the amount and timing of cash flows, and reported earnings.

FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, identifies relevance and reliability as the characteristics of financial information that make it useful. This Statement enhances disclosures of relevant accounting information by providing more information about the plan assets available to finance benefit payments, the obligations to pay benefits, and an entity's obligation to fund the plan, thus improving the information's predictive value. Reliability of accounting information will be improved by providing more complete and precise information about postretirement benefit resources and obligations.

Benefits and Costs

Entities that prepare financial statements in conformity with generally accepted accounting principles already compile and aggregate information about pension plans and other postretirement benefit plans, including information about plan assets, benefit obligation, and net cost. Information about equity securities, debt securities, real estate, and other assets is likely to be available from asset management records. Reporting of information about pension plans and other postretirement benefit plans required by this Statement may require some additional effort and cost, including amounts that may be paid to entities' auditors and actuaries; however, that information is already essential in complying with Statements 87, 106, and 132 and therefore should be available to, and understood by, preparers of financial statements. Additional costs to compile, analyze, and audit the additional disclosures required by this Statement are believed to be modest in relation to the benefits to be derived by users of financial statements.

Effective Date and Transition

The provisions of Statement 132 remain in effect until the provisions of this Statement are adopted. Except as noted below, this Statement is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this Statement are effective for interim periods beginning after December 15, 2003.

Disclosure of information about foreign plans required by paragraphs 5(d), 5(e), 5(g), and 5(k) of this Statement is effective for fiscal years ending after June 15, 2004.

Disclosure of estimated future benefit payments required by paragraph 5(f) of this Statement is effective for fiscal years ending after June 15, 2004.

Disclosure of information for nonpublic entities required by paragraphs 8(c)-(f) and 8(j) of this Statement is effective for fiscal years ending after June 15, 2004.

Until this Statement is fully adopted, financial statements that exclude foreign plans from (a) the actual allocation of assets, (b) the description of investment strategies, (c) the basis used to determine the expected long-term rate-of-return-on-assets assumption, of (d) the amount of accumulated benefit obligation should include, separately for domestic plans, the total fair value of plan assets as of the measurement date(s) used for the latest statement of financial position presented and the overall expected long-term rate of return on assets for the latest period for which a statement of income is presented.

The disclosures for earlier annual periods presented for comparative purposes should be restated for (a) the percentages of each major category of plan assets held, (i3) the accumulated benefit obligation, and (c) the assumptions used in the accounting for the plans. The disclosures for earlier interim periods presented for comparative purposes should be restated for the components of net benefit cost. However, if obtaining this information relating to earlier periods is not practicable, the notes to the financial statements should include all available information and identify the information not available.

Early application of the disclosure provisions Of this Statement is encouraged.
CONTENTS

Introduction/1-3
Standards of Financial Accounting and
 Reporting:
 Scope/4
 Disclosures about Pension Plans and Other
 Postretirement Benefit Plans/5
 Employers with Two or More Plans/6-7
 Reduced Disclosure Requirements for
 Nonpublic Entities/8
 Disclosures in Interim Financial Reports/
 9-10
 Defined Contribution Plans/11
 Multiemployer Plans/12-13
 Amendments to Existing Pronouncements/
 14-18
 Amendments Made by Statement 132
 Carried Forward in This Statement
 with Minor Changes/16-18
 Effective Date and Transition/19-20
Appendix A: Statement 132(R): Background
 Information and Basis for Conclusions/
 A1-A54
Appendix B: Statement 132: Background
 Information and Basis for Conclusions/
 B1-B45
Appendix C: Illustrations/C1-C5
Appendix D: Impact on Related Literature/
 D1-D2
Appendix E: Glossary/E1


INTRODUCTION

1. The Board added a project on pension disclosures to its technical agenda in March 2003 in response to concerns about insufficient information in employers' financial statements about their defined benefit pension plan assets, obligations, cash flows, and net pension costs. (1) The project's objective was to (a) improve the content and organization of annual disclosures about defined benefit pension plans, (b) determine what, if any, disclosures would be required for interim-period financial reports, and (c) determine whether the disclosures to be required for defined benefit pension plans also would be required for other postretirement benefit plans.

2. Despite extensive disclosure requirements for pension plans and other postretirement benefit plans, many users of financial statements told the Board that the information provided for defined benefit pension plans was not adequate. Users of financial statements requested additional information that would assist them in (a) evaluating plan assets and the expected long term rate of return used in determining net pension cost, (b) evaluating the employer's obligations under pension plans and the effects of those obligations on the employer's future cash flows, and (c) estimating the potential impact of net pension cost on future net income. The Board concluded that disclosures about pensions could be improved to provide information that would better serve users' needs.

3. This Statement incorporates all of the disclosure requirements of FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. This Statement amends APB Opinion No. 28, Interim Financial Reporting, to require interim-period disclosure of the components of net periodic benefit cost and, if significantly different from previously disclosed amounts, the amounts of contributions and projected contributions to fund pension plans and other postretirement benefit plans. Information required to be disclosed about pension plans should not be combined with information required to be disclosed about other postretirement benefit plans except as permitted by paragraph 12 of this Statement. The disclosures that are new of have been changed are identified with an asterisk (*). Appendix A provides background information and the basis for the Board's conclusions in this Statement. Appendix B provides background information and the basis for the Board's conclusions as originally contained in Statement 132. Appendix C provides illustrations of the required disclosures. Appendix D provides information about the impact of this Statement on the consensuses reached on EITF Issues relating to disclosures about pension plans and other postretirement benefit plans. Appendix E provides a glossary of terms that are used in this Statement.

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING

Scope

4. This Statement replaces the disclosure requirements in FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements in Statement 132 and. contains additional requirements. (2) This Statement addresses disclosure only; it does not address measurement of recognition.

Disclosures about Pension Plans and Other Postretirement Benefit Plans

5. Certain terms used in this Statement, such as projected benefit obligation, (3) accumulated benefit obligation, accumulated postretirement benefit obligation, and net pension cost, are defined in Statements 87 and 106. An employer that sponsors one or more defined benefit pension plans or one or more other defined benefit postretirement plans shall provide the following information, separately for pension plans and other postretirement benefit plans. Amounts related to the employer's results of operations shall be disclosed for each period for which a statement of income is presented. Amounts related to the employer's statement of financial position, unless otherwise stated, shall be disclosed as of the measurement date used for each statement of financial position presented.

a. A reconciliation of beginning and ending balances of the benefit obligation (4) showing separately, if applicable, the effects during the period attributable to each of the following: service cost, interest cost, contributions by plan participants, actuarial gains and losses, foreign currency exchange rate changes, (5) benefits paid, plan amendments, business combinations, divestitures, curtailments, settlements, and special termination benefits.

b. A reconciliation of beginning and ending balances of the fair value of plan assets showing separately, if applicable, the effects during the period attributable to each of the following: actual return on plan assets, foreign currency exchange rate changes, (6) contributions by the employer, contributions by plan participants, benefits paid, business combinations, divestitures, and settlements.

c. The funded status of the plans, the amounts not recognized in the statement of financial position, and the amounts recognized in the statement of financial position, including:

(1) The amount of any unamortized prior service cost.

(2) The amount of any unrecognized net gain or loss (including asset gains and losses not yet reflected in market related value).

(3) The amount of any remaining unamortized, unrecognized net obligation or net asset existing at the initial date of application of Statement 87 or Statement 106.

(4) The net pension of other postretirement benefit prepaid assets of accrued liabilities.

(5) Any intangible asset and the amount of accumulated other comprehensive income recognized pursuant to paragraph 37 of Statement 87, as amended.

d. Information about plan assets:

(1) For each major category of plan assets, which shall include, but is not limited to, equity securities, debt securities, real estate, and all other assets, the percentage of the fair value of total plan assets held as of the measurement date used for each statement of financial position presented. *

(2) A narrative description of investment policies and strategies, including target allocation percentages or range of percentages for each major category of plan assets presented on a weighted-average basis as of the measurement date(s) of the latest statement of financial position presented, if applicable, and other factors that are pertinent to an understanding of the policies of strategies such as investment goals, risk management practices, permitted and prohibited investments including the use of derivatives, diversification, and the relationship between plan assets and benefit obligations. *

(3) A narrative description of the basis used to determine the overall expected long-term rate-of-return-on-assets assumption, such as the general approach use& the extent to which the overall rate-of-return-on-assets assumption was based on historical returns, the extent to which adjustments were made to those historical returns in order to reflect expectations of future returns, and how those adjustments were determined. *

(4) Disclosure of additional asset categories and additional information about specific assets within a category is encouraged if that information is expected to be useful in understanding the risks associated with each asset category and the overall expected long term rate of return on assets. *

e. For defined benefit pension plans, the accumulated benefit obligation. *

f. The benefits (as of the date of the latest statement of financial position presented) expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter. The expected benefits should be estimated based on the same assumptions used to measure the company's benefit obligation at the end of the year and should include benefits attributable to estimated future employee service. *

g. The employer's best estimate, as soon as it can reasonably be determined, of contributions expected to be paid to the plan during the next fiscal year beginning after the date of the latest statement of financial position presented. Estimated contributions may be presented in the aggregate combining (1) contributions required by funding regulations or laws, (2) discretionary contributions and (3) noncash contributions. *

h. The amount of net periodic benefit cost recognized, showing separately the service cost component, the interest cost component, the expected return on plan assets for the period, the amortization of the unrecognized transition obligation of transition asset, the amount of recognized gains of losses, the amount of prior service cost recognized, and the amount of gains or losses recognized due to a settlement of curtailment.

i. The amount included within other comprehensive income for the period arising from a change in the additional minimum pension liability recognized pursuant to paragraph 37 of Statement 87, as amended.

j. On a weighted-average basis, the following assumptions used in the accounting for the plans: assumed discount rates, rates of compensation increase (for pay-related plans), and expected longterm rates of return on plan assets specifying, in a tabular format, the assumptions used to determine the benefit obligation and the assumptions used to determine net benefit cost. *

k. The measurement date(s) used to determine pension and other postretirement benefit measurements for the pension plans and other postretirement benefit plans that make up at least the majority of plan assets and benefit obligations. *

l. The assumed health care cost trend rate(s) for the next year used to measure the expected cost of benefits covered by the plan (gross eligible charges), and a general description of the direction and pattern of change in the assumed trend rates thereafter, together with the ultimate trend rate(s) and when that rate is expected to be achieved.

m. The effect of a one-percentage-point increase and the effect of a one-percentage-point decrease in the assumed health care cost trend rates on (1) the aggregate of the service and interest cost components of net periodic postretirement health care benefit costs and (2) the accumulated postretirement benefit obligation for health care benefits. (For purposes of this disclosure, all other assumptions shall be held constant, and the effects shall be measured based on the substantive plan that is the basis for the accounting.)

n. If applicable, the amounts and types of securities of the employer and related parties included in plan assets, the appropriate amount of future annual benefits of plan participants covered by insurance contracts issued by the employer or related parties, and any significant transactions between the employer or related parties and the plan during the period.

o. If applicable, any alternative method used to amortize prior service amounts or unrecognized net gains and losses pursuant to paragraphs 26 and 33 of Statement 87 or paragraphs 53 and 60 of Statement 106.

p. If applicable, any substantive commitment, such as past practice of a history of regular benefit increases, used as the basis for accounting for the benefit obligation.

q. If applicable, the cost of providing special or contractual termination benefits recognized during the period and a description of the nature of the event.

r. An explanation of any significant change in the benefit obligation or plan assets not otherwise apparent in the other disclosures required by this Statement.

Employers with Two or More Plans

6. The disclosures required by this Statement shall be aggregated for all of an employer's defined benefit pension plans and for all of an employer's other defined benefit postretirement plans unless disaggregating in groups is considered to provide useful information or is otherwise required by this paragraph and paragraph 7 of this Statement. Unless otherwise stated, disclosures shall be as of the measurement date for each statement of financial position presented. Disclosure of amounts recognized in the statement of financial position shall present prepaid benefit costs and accrued benefit liabilities separately. Disclosures about pension plans with assets in excess of the accumulated benefit obligation generally may be aggregated with disclosures about pension plans with accumulated benefit obligations in excess of assets. The same aggregation is permitted for other postretirement benefit plans, If aggregate disclosures are presented, an employer shall disclose:

a. The aggregate benefit obligation and aggregate fair value of plan assets for plans with benefit obligations in excess of plan assets as of the measurement date of each statement of financial position presented.

b. The aggregate pension accumulated benefit obligation and aggregate fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets.

7. A U.S. reporting entity may combine disclosures about pension plans or other postretirement benefit plans outside the United States with those for U.S. plans unless the benefit obligations of the plans outside the United States are significant relative to the total benefit obligation and those plans use significantly different assumptions, A foreign reporting entity that prepares financial statements in conformity with U.S. generally accepted accounting principles (GAAP) shall apply the preceding guidance to its domestic and foreign plans.

Reduced Disclosure Requirements for Nonpublic Entities

8. A nonpublic entity is not required to disclose the information required by paragraphs 5(a)-(c), 5(h), 5(m), and 5(o)-(r) of this Statement. A nonpublic entity that sponsors one or more defined benefit pension plans or one or more other defined benefit postretirement plans shall provide the following information, separately for pension plans and other postretirement benefit plans. Amounts related to the employer's results of operations shall be disclosed for each period for which a statement of income is presented. Amounts related to the employer's statement of financial position shall be disclosed as of the measurement date used for each statement of financial position presented.

a. The benefit obligation, fair value of plan as sets, and funded status of the plan.

b. Employer contributions, participant contributions, and benefits paid.

c. Information about plan assets:

(1) For each major category of plan assets which shall include, but is not limited to, equity securities, debt securities, real estate, and all other assets, the percentage of the fair value of total plan assets held as of the measurement date used for each statement of financial position presented. *

(2) A narrative description of investment policies and strategies, including target allocation percentages of range of percentages for each major category of plan assets presented on a weighted-average basis as of the measurement date(s) of the latest statement of financial position presented, if applicable, and other factors that are pertinent to an understanding of the policies of strategies such as investment goals, risk management practices, permitted and prohibited investments including the use of derivatives, diversification, and the relationship between plan assets and benefit obligations. *

(3) A narrative description of the basis used to determine the overall expected long-term rate of-return-on-assets assumption, such as the general approach used, the extent to which the overall rate-of-return-on-assets assumption was based on historical returns, the extent to which adjustments were made to those historical returns in order to reflect expectations of future returns, and how those adjustments were determined. *

(4) Disclosure of additional asset categories and additional information about specific assets without a category is encouraged if that information is expected to be useful in understanding the risks associated with each asset category and the overall expected long-term rate of return on assets. *

d. For defined benefit pension plans, the accumulated benefit obligation. *

e. The benefits (as of the date of the latest statement of financial position presented) expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years expected benefits should be estimated based on the same assumptions used to measure the company's benefit obligation at the end of the year and should include benefits attributable to estimated future employee service. *

f. The employer's best estimate, as soon as it can reasonably be determined, of contributions expected to be paid to the plan during the next fiscal year beginning after the date of the latest statement of financial position presented. Estimated contributions may be presented in the aggregate combining (1) contributions required by funding regulations or laws, (2) discretionary contributions, and (3) noncash contributions. *

g. The amounts recognized in the statements of financial position, including net pension and other postretirement benefit prepaid assets of accrued liabilities and any intangible asset and the amount of accumulated other comprehensive income recognized pursuant to paragraph 37 of Statement 87, as amended.

h. The amount of net periodic benefit cost recognized and the amount included within other comprehensive income arising from a change in the minimum pension liability recognized pursuant to paragraph 37 of Statement 87, as amended.

i. On a weighted-average basis, the following assumptions used in the accounting for the plans: assumed discount rates, rates of compensation increase (for pay-related plans), and expected long-term rates of return on plan assets specifying, in a tabular format, the assumptions used to determine the benefit obligation and the assumptions used to determine net benefit cost. *

j. The measurement date(s) used to determine and other postretirement benefit measurements for the pension plans and other postretirement benefit plans that make up at least the majority of plan assets and benefit obligations. *

k. The assumed health care cost trend rate(s) for the next year used to measure the expected cost of benefits covered by the plan (gross eligible charges), and a general description of the direction and pattern of change in the assumed trend rates thereafter, together with the ultimate trend rate(s) and when that rate is expected to be achieved.

l. If applicable, the amounts and types of securities of the employer and related parties included in plan assets, the approximate amount of future annual benefits of plan participants covered by insurance contracts issued by the employer or related parties, and any significant transactions between the employer of related parties and the plan during the period.

m. The nature and effect of' significant nonroutine events, such as amendments, combinations, divestitures, curtailments, and settlements.

Disclosures in Interim Financial Reports

9. A publicly traded entity shall disclose the following information for its interim financial statements that include a statement of income:

a. The amount of net periodic benefit cost recognized, for each period for which a statement of income is presented, showing separately the service cost component, the interest cost component, the expected return on plan assets for the period, the amortization of the unrecognized transition obligation or transition asset, the amount of recognized gains or losses, the amount of prior service cost recognized, and the amount of gain or loss recognized due to a settlement or curtailment. *

b. The total amount of the employer's contributions paid, and expected to be paid, during the current fiscal year, if significantly different from amounts previously disclosed pursuant to paragraph 5(g) of this Statement. Estimated contributions may be presented in the aggregate combining (1) contributions required by funding regulations or laws, (2) discretionary contributions, and (3) noncash contributions. *

10. A nonpublic entity shall disclose in interim periods, for which a complete set of financial statements is presented, the total amount of the employer's contributions paid, and expected to be paid, during the current fiscal year, if significantly different from amounts previously disclosed pursuant to paragraph 8(t) of this Statement. Estimated contributions may be presented in the aggregate combining (a) contributions required by funding regulations or laws, (b) discretionary contributions, and (c) noncash contributions. *

Defined Contribution Plans

11. An employer shall disclose the amount of cost recognized for defined contribution pension plans and for other defined contribution postretirement benefit plans for all periods presented separately from the amount of cost recognized for defined benefit plans. The disclosures shall include a description of the nature and effect of any significant changes during the period affecting comparability, such as a change in the rate of employer contributions, a business combination, or a divestiture.

Multiemployer Plans

12. An employer shall disclose the amount of contributions to multiemployer plans for each annual period for which a statement of income is presented. An employer may disclose total contributions to multiemployer plans without disaggregating the amounts attributable to pension plans and other postretirement benefit plans. The disclosures shall include a description of the nature and effect of any changes affecting comparability, such as a change in the rate of employer contributions, a business combination, or a divestiture.

13. In some situations, withdrawal from a multiemployer plan may result in an employer having an obligation to the plan for a portion of the unfunded benefit obligation of the pension plans and other postretirement benefit plans. If withdrawal under circumstances that would give rise to an obligation is either probable of reasonably possible, the provisions of FASB Statement No. 5, Accounting for Contingencies, shall apply (Statement 87, paragraph 70). If it is either probable or reasonably possible that (a) an employer would withdraw from the plan under circumstances that would give rise to an obligation or (b) an employer's contribution to the fund would be increased during the remainder of the contract period to make up a shortfall in the funds necessary to maintain the negotiated level of benefit coverage (a "maintenance of benefits" clause), the employer shall apply the provisions of Statement 5 (Statement 106. paragraph 83).

Amendments to Existing Pronouncements

14. Statement 132 is superseded by this Statement.

15. The following is added to the list of disclosures in paragraph 30 of Opinion 28:

k. The following information about defined benefit pension plans and other defined benefit postretirement benefit plans, disclosed for all periods presented pursuant to the provisions of FASB Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits:

(1) The amount of net periodic benefit cost recognized, for each period for which a statement of income is presented, showing separately the service cost component, the interest cost component, the expected return on plan assets for the period, the amortization of the unrecognized transition obligation or transition asset, the amount of recognized gains of losses, the amount of prior service cost recognized, and the amount of gain or loss recognized due to a settlement or curtailment. *

(2) The total amount of the employer's contributions paid, and expected to be paid, during the current fiscal year, if significantly different from amounts previously disclosed pursuant to paragraph 5(g) of Statement 132(K). Estimated contributions may be presented in the aggregate combining (a) contributions required by funding regulations of laws, (b) discretionary contributions, and (c) noncash contributions. *

Amendments Made by Statement 132 Carried Forward in This Statement with Minor Changes 16. Statement 87 is amended as follows:

a. Paragraph 54 is replaced by the following:

Refer to paragraphs 5 and 8 of FASB Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits.

b. Paragraph 56 is replaced by the following:

Refer to paragraphs 6 and 7 of Statement 132(R.).

c. Paragraph 65 is replaced by the following:

Refer to paragraph 11 of Statement 132(R).

d. Paragraph 69 is replaced by the following:

Refer to paragraph 12 of Statement 132(R).

17. Paragraph 17 of Statement 88 is replaced by the following:

Refer to paragraphs 5(a), 5(b), 5(h), 5(q), and 8(m) of FASB Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits.

18. Statement 106 is amended as follows:

e. Paragraph 74 is replaced by the following:

Refer to paragraphs 5 and 8 of FASB Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits.

b. Paragraphs 77 and 78 are replaced by the following:

Refer to paragraphs 6 and 7 of Statement 132(R).

c. Paragraph 82 is replaced by the following: Refer to paragraph 12 of Statement 1320K).

d. Paragraph 106 is replaced by the following:

Refer to paragraph 11 of Statement 132(R).

Effective Date and Transition

19. The provisions of Statement 132 remain in effect until the provisions of this Statement are adopted. Except as noted below, this Statement shall be effective for fiscal years ending after December 15, 2003, The interim-period disclosures required by this Statement shall be effective for interim periods beginning after December 15, 2003.

a. Disclosure of information about foreign plans required by paragraphs 5(d), 5(e), 5(g), and 5(k) of this Statement shall be effective for fiscal years ending after June 15, 2004.

b. Estimated future benefit payments required by paragraph 5(f) of this Statement shall be effective for fiscal years ending after June 15, 2004.

c. Disclosure of information for nonpublic entities required by paragraphs 8(c)-(f) and 8(j) of this Statement shall be effective for fiscal years ending after June 15, 2004.

Until this Statement is fully adopted, financial statements that exclude foreign plans from (a) the actual allocation of assets, (b) the description of investment strategies, (c) the basis used to determine the expected long-term rate of-return-on-assets assumption, or (d) the amount of accumulated benefit obligation shall include, separately for domestic plans, the total fair value of plan assets as of the measurement date(s) used for the latest statement of financial position presented and the overall expected long-term rate of return on assets for the latest period for which a statement of income is presented.

20. The disclosures for earlier annual periods presented for comparative purposes shall be restated for (a) the percentages of each major category of plan assets held, (b) the accumulated benefit obligation, and (c) the assumptions used in the accounting for the plans. The disclosures for earlier interim periods presented for comparative purposes shall be restated for the components of net benefit cost. However, if obtaining this information relating to earlier periods is not practicable, the notes to the financial statements shall include all available information and identify the information not available. Early application of the disclosure provisions of this Statement is encouraged.

The provisions of this Statement need not be applied to immaterial items.

This Statement was adopted by the unanimous vote of the seven members of the Financial Accounting Standards Board:

Robert H. Herz, Chairman George J. Batavick G. Michael Crooch Gary S. Schieneman Katherine Schipper Leslie F. Seidman Edward W. Trott

APPENDIX E

GLOSSARY

E1. This appendix contains definitions of certain terms used in this Statement.

Accumulated benefit obligation. The actuarial present value of pension benefits (whether vested or unvested) attributed to employee service rendered before a specified date and based on employee service and compensation (if applicable) prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. For plans with flat-benefit or non-pay-related pension benefit formulas, the accumulated benefit obligation and the projected benefit obligation are the same.

Accumulated postretirement benefit obligation. The actuarial present value of benefits attributed to employee service rendered to a particular date. Prior to an employee's full eligibility date, the accumulated postretirement benefit obligation as of a particular date for an employee is the portion of the expected postretirement benefit obligation attributed to that employee's service rendered to that date; on and after the full eligibility date, the accumulated and expected postretirement benefit obligations for an employee are the same.

Debt security. Any security representing a creditor relationship with an enterprise. It also includes (a) preferred stock that by its terms either must be redeemed by the issuing enterprise of is redeemable at the option of the investor and (b) a collateralized mortgage obligation (CMO) (or other instrument) that is issued in equity form but is required to be accounted for as a nonequity instrument regardless of how that instrument is classified (that is, whether equity or debt in the issuer's statement of financial position. However, it excludes option contracts, financial futures contracts, forward contracts, and lease contracts. Thus, the term debt security includes, among other items, U.S. Treasury securities, ELS. government agency securities, municipal securities, corporate bonds, convertible debt, commercial paper, all securitized debt instruments, such as CMOs and real estate mortgage investment conduits (REMICs), and interest-only and principal-only strips. Trade accounts receivable arising from sales on credit by industrial of commercial enterprises and loans receivable arising from consumer, commercial, and real estate lending activities of financial institutions are examples of receivables that do not meet the definition of security; thus, those receivables are not debt securities (unless they have been securitized, in which case they would meet the definition).

Equity security. Any security representing an ownership interest in an enterprise for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, and call options) or dispose of (for example, put options) an ownership interest in an enterprise at fixed or determinable prices. However, the term does not include convertible debt or preferred stock that by its terms either must be redeemed by the issuing enterprise or is redeemable at the option of the investor. Nonpublic entity. Any entity other than one (a) whose debt of equity securities trade in a public market either on a stock exchange (domestic or foreign) or in the over the counter market, including securities quoted only locally or regional]y, (b) that makes a filing with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market, or (c) that is controlled by an entity covered by (a) or (b).

Projected benefit obligation. The actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date. The projected benefit obligation is measured using assumptions as to future compensation levels if the pension benefit formula is based on those future compensation levels (pay-related, final-pay, final-average-pay, or career-average-pay plans).

Publicly traded entity. Any entity that docs not meet the definition of a nonpublic entity.

SOP 03 4 Reporting Financial Highlights and Schedule of Investments by Nonregistered Investment Partnerships: An Amendment to the Audit and Accounting Guide Audits of Investment Companies and AICPA Statement of Position 95-2, Financial Reporting by Nonpublic Investment Partnerships (Issued by the Accounting Standards Executive Committee)

Space consideration prevent publishing here the appendices to SOP 03-4. Since the appendices often are important to understanding SOPs, readers are advised to obtain complete copies. To obtain a copy of SOP 03-4 (product no. 014939), contact the AICPA order department at 888-777-7077.

NOTE

Statements of Position on accounting issues present the conclusions of at least two-thirds of the Accounting Standards Executive Committee, which is the senior technical body of the Institute authorized to speak for the Institute in the areas of financial accounting and reporting. Statement on Auditing Standards No. 69, '1he Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, identifies AICPA Statements of Position that have been cleared by the Financial Accounting Standards Board as sources of established accounting principles in category b of the hierarchy of generally accepted accounting principles that it establishes. AICPA members should consider the accounting principles in this Statement of Position if a different accounting treatment of a transaction or event is not specified by a pronouncement covered by Rule 203 of the AICPA Code of Professional Conduct. In such circumstances, the accounting treatment specified by the Statement of Position should be used, or the member should be prepared to justify a conclusion that another treatment better presents the substance of the transaction in the circumstances.

TABLE OF CONTENTS

Summary/4 Foreword/7 Introduction and Background/9 Applicability and Scope/11 Conclusions/11 Effective Date and Transition/28

SUMMARY

This Statement of Position (SOP) provides guidance on the application of certain provisions of the AICPA Audit and Accounting Guide Audits of Investment Companies (the Guide) and AICPA SOP 95-2, Financial Reporting by Nonpublic Investment Partnerships, that are directed to the reporting by nonregistered investment partnerships of financial highlights and the schedule of investments. It amends certain provisions of the Guide and SOP 95-2 by adapting those provisions to nonregistered investment partnerships based on their differences in organizational and operational structures from registered investment companies. This SOP provides that:

* Nonregistered investment partnerships should disclose the range of expiration or maturity dates and fair values of derivative instruments in the condensed schedule of investments based on whether the fair value of a specific type of derivative and underlying (for example, equity index of a particular stock exchange, U.S. Treasury Bond, or natural gas) exceeds 5 percent of net assets, regardless of counterparty. For open futures contracts of a particular underlying, the disclosure should be based on appreciation (depreciation) rather than fair value and include the number of contracts outstanding.

* Funds-of funds partnerships should provide certain qualitative disclosures (the investment objective and restrictions on redemption) in addition to the name of the investment for each investment in a nonregistered investment partnership for which the fair value exceeds 5 percent of net assets.

* Nonregistered investment partnerships should calculate average net assets (ANA) by using the fund's weighted ANA (as measured at each accounting period or periodic valuation) adjusting for capital contributions or withdrawals occurring between accounting periods.

* Nonregistered investment partnerships should calculate the denominator of their expense and net investment income ratios based on ANA.

* Nonregistered investment partnerships in which the majority of the expenses are based on committed capital should provide additional disclosures in the financial statements of the total committed capital of the partnership, the year of formation of the partnership, and the ratio of the total contributed capital to committed capital.

* Funds-of-funds and master-feeder funds should calculate net investment income and expense ratios based on the net investment income and expenses reported in the statement of operations.

* Nonregistered investment partnerships, other than those that meet certain criteria as indicated in the next bullet, should calculate and disclose as a financial highlight an annual total rate of return based on a geometric linking of performance for each discrete period within a year for which invested capital is constant.

* Nonregistered investment partnerships that meet the criteria by the terms of their offering document, as indicated in the next sentence, should calculate and disclose as a financial highlight an internal rate of return since inception for the current and prior accounting period. The partnership criteria are that the partnerships (1) have limited lives, (2) do not continuously raise capital and are not required to redeem their interests upon investor request, (3) have as a predominant operating strategy the return of the proceeds from disposition of investments to investors, (4) have limited opportunities, if any, for investors to withdraw prior to termination of partnership, and (5) do not routinely acquire (directly or indirectly) market traded securities or derivatives as part of their investment strategy.

This SOP is effective for annual financial statements issued for fiscal years ending after December 15, 2003, and for interim financial statements issued after initial application, except for the provisions to require certain nonregistered investment partnerships to compute and disclose internal rate of return from inception (IRR). The provisions to require certain nonregistered investment partnerships to compute and disclose IRR are effective for annual financial statements issued for fiscal years beginning after December 15, 2003, with early application encouraged. Presentation of previously issued financial highlights is not required; however, if comparative financial highlights are presented, the presentation should be on a comparable basis.

FOREWORD

The accounting guidance contained in this document has been cleared by the Financial Accounting Standards Board (FASB). The procedure for clearing accounting guidance in documents issued by the Accounting Standards Executive Committee (AcSEC) involves the FASB reviewing and discussing in public board meetings (1) a prospectus for a project to develop a document, (2) a proposed exposure draft that has been approved by at least 10 of AcSEC's 15 members, and (3) a proposed final document that has been approved by at least 10 of AcSEC's 15 members. The document is cleared if at least four of the seven FASB members do not object to AcSEC undertaking the project, issuing the proposed exposure draft, or, after considering the input received by AcSEC as a result of the issuance of the exposure draft, issuing a final document

The criteria applied by the FASB in its review of proposed projects and proposed documents include the following:

1. The proposal does not conflict with current or proposed accounting requirements, unless it is a limited circumstance, usually in specialized industry accounting, and the proposal adequately justifies the departure.

2. The proposal will result in an improvement in practice.

3. The AICPA demonstrates the need for the proposal.

4. The benefits of the proposal are expected to exceed the costs of applying it.

In many situations, prior to clearance, the FASB will propose suggestions, many of which are included in the documents.

INTRODUCTION AND BACKGROUND

1. Historically, the guidance in the AICPA Audit and Accounting Guide Audits of Investment Companies (the Guide) has been related principally to investment companies registered under the Investment Company Act of 1940 (the 1940 Act) and similar entities. The most recent comprehensive review and revision of the Guide, completed in November 2000, made substantial changes to clarify the differences in accounting and reporting by registered investment companies and nonregistered investment partnerships (for example, explicitly distinguishing the extent of financial statement disclosures required under generally accepted accounting principles (GAAP) and Securities and Exchange Commission (SEC) requirements).

2. Nonregistered investment partnerships, nonetheless, continue to raise questions as to the application of certain provisions of the Guide, principally because of the differences between the operating structures of nonregistered investment partnerships and registered investment companies.

3. In particular, those questions relate to paragraphs 7.65 and 7.68 of the Guide, which address the presentation of financial highlights.

4. In January 2002, AICPA issued Technical Practice Aids (TPAs) (1) to assist practitioners on a timely basis in computing and presenting financial highlights in accordance with the Guide's requirements. The TPAs were limited to clarifying the application of the provisions of the Guide to nonregistered investment partnerships rather than modifying the requirements of the Guide.

5. However, implementation of the TPAs revealed issues, particularly for limited-life, non-registered investment partnerships, regarding the relevance of the expense and total return ratios. The industry asserted that the methods required to calculate certain financial highlights were not well suited for these partnerships due to their operational structure, and that the implementation of the provisions of the Guide may have resulted in disclosing information that is either irrelevant or in a format that investors cannot easily understand. In particular, some have asserted that the geometric linking method of computing total return (as required by paragraph 7.68(c) of the Guide and discussed in TPA Section 6910.10) at times can produce what are viewed as misleading results for those funds.

6. Paragraph 7.12 of the Guide requires disclosure of derivative positions exceeding 5 percent of net assets based on their fair value. Questions have been raised as to whether the fair value of a derivative position is always the best determinant of whether information about that position should be presented in the schedule of investments, or whether other determinants, such as notional amounts, for certain kinds of derivative positions would result in more useful reported information. Questions also have been raised as to whether derivatives with the same underlying but different counterparties or expiration or delivery dates should be aggregated.

7. Furthermore, AcSEC believes that disclosing only the names of other nonregistered investment partnerships in which the reporting partnership has invested provides little, if any, meaningful information to the financial statement user and thus believes that a qualitative description of the investee's principal investment objectives (including any particular specialization) should provide information that would allow for a better understanding of the nature of the investment.

8. The purpose of this Statement of Position (SOP) is to provide guidance to clarify the application of certain provisions of the Guide to nonregistered investment partnerships.

APPLICABILITY AND SCOPE

9. This SOP applies only to nonregistered investment partnerships that are within the scope of the Guide. Footnote 13 to paragraph 7.12 of the Guide is amended as follows to clarify that only certain brokers and dealers in securities under the Securities Exchange Actor 1934 (the Exchange Act) are excluded from the requirement of paragraph 7.12. Inserts are shown in italics and underlined; deletions are shown with strikethrough.
 Included are hedge funds, limited liability
 companies, limited liability partnerships, limited
 duration companies, and offshore investment
 companies with similar characteristics,
 and commodity pools subject to regulation
 under the Commodity Exchange Act of
 1974. Excluded are investment partnerships
 [begin strikethrough]that are[end strikethrough]
 regulated as brokers and dealers in securities
 [begin strikethrough]subject to regulation[end strikethrough]
 under the Securities
 Exchange Act of 1934 (registered broker-dealers)
 [begin strikethrough]and[end strikethrough] that
 manage funds only for
 those who are officers, directors, or employees
 of the general partner.


CONCLUSIONS

10. Paragraph 7.12 of the Guide and paragraph 11 of SOP 95-2, Financial Reporting by Nonpublic Investment Partnerships (as amended by SOP 01-1, Amendment to Scope of Statement of Position 95-2, Financial Reporting by Nonpublic Investment partnerships, to Include Commodity Pools) (refer to Appendix B, "Effect on Other Pronouncements," for the changes to SOP 95-2), which provide guidance relative to the condensed schedule of investments, are amended by adding the guidance shown in italics and underlined.

Schedule of Investments

7.12 Investment partnerships (13) that are exempt from SEC registration under the Investment Company Act of 1940 (the 1940 Act) should:

a. Categorize investments by the following:

1. Type (such as common stocks, preferred stocks, convertible securities, fixed-income securities, government securities, options purchased, options written, warrants, futures, loan participations, short sales, other investment companies, and so forth.

2. Country or geographic region.

3. Industry.

Report the percent of net assets that each such category represents and the total value and cost for each category in (a)(1) and (a)(2). Derivatives for which the underlying is not a security should be categorized by broad category of underlying for example, grains and feeds, fibers and textiles, foreign currency, or equity indices) in place of categories (a)(2) and (a)(3).

b. Disclose the name, shares or principal amount, value, and type of the following:

1. Each investment (including short sales), constituting mote than 5 percent of net assets, except for derivative instruments as discussed in items (d) and (e) below.

2. All investments in any one issuer aggregating more than 5 percent of net assets, except for derivative instruments as discussed in items (d) and (e) below.

In applying the 5-percent test, total long and total short position in any one issuer should be considered separately.

c. Aggregate other investments (each of which is 5 percent or less of net assets) without specifically identifying the issuers of such investments and categorize them as required by item (al above.

d. Disclose the number of contracts, range of expiration dates, and cumulative appreciation (depreciation) for open futures contracts of a particular underlying (such as wheat, cotton, specified equity index, or US. Treasury Bonds), regardless of exchange, delivery location, or delivery date, if cumulative appreciation (depreciation) on the open contracts exceeds 5 percent of net assets.

In applying the 5-percent test, total long and total short positions in any one issuer should be considered separately.

e. Disclose the range of expiration dates and fair value for all other derivatives (such as forwards, swaps [such as interest rate and currency swaps], and options) of a particular underlying (such as foreign currency, wheat, specified equity index, of U.S. Treasury Bonds), regardless of counterparty, exchange, of delivery date, if fair value exceeds 5 percent of net assets.

In applying the 5-percent test, total long and total short positions in any one issuer should be considered separately.

f. Provide the following additional qualitative description for each investment in another nonregistered investment partnership) whose fair value constitutes more than 5 percent of net assets:

* The investment objective.

* Restrictions on redemption (that is, liquidity provisions).

11. Paragraph 7.65 of the Guide, which requires disclosure of financial highlights, is amended by adding the guidance shown in italics and underlined to clarify how nonregistered investment partnerships should interpret the terms classes, units, and theoretical investment when reporting financial highlights. Additionally, the paragraph is amended to indicate that nonregistered investment partnerships should disclose financial highlights of each class of common shares of nonmanaging investors in the general-purpose financial statements.

Financial Highlights

7.65 Financial highlights (see paragraph 7.01) should be presented either as a separate schedule of within the notes to the financial statements for each class of common shares outstanding. Per share amounts presented are based on a share outstanding throughout each period presented. Investment companies with multiple classes of shares may present financial highlights only for those classes of shares that are included in reports to such shareholders. In such cases, the investment company should include appropriate disclosures related to all classes so as to ensure that the financial statements are complete (for example, detail of capital share activity in the statement of changes in net assets of notes to financial statements).

Nonregistered investment partnerships should disclose per share data for all common classes in general-purpose financial statements. However, it is permissible for financial highlights to be presented only for those classes of shares that are included in reports to those classes.

Nonregistered investment partnerships, when disclosure financial highlights, should interpret the terms classes, units, and theoretical investments as follows: a. Classes. Only the classes related to the nonmanaging investors (that is, classes investors that do not consist exclusively of managing investor interests) are considered to be the common interests requiring financial highlight disclosure. Nonregistered investment funds typically have two classes of ownership interest, with one class being the management interest in the fund and the other being the investment interest. For unitized funds (that is, funds with units specifically called for in the governing underlying legal of offering documents), the management interest usually is a voting, class and the investment interest is a nonvoting class. Temporary series of shares (that is shares that are intended at the time of issuance to be consolidated are later date with another specified series of shares that remains outstanding indefinitely) are not considered separate classes. Permanent series of a class of share should be the basis for which that share's financial highlights are determined and presented. For nonunitized funds, the management interest usually is the general partner class and the investment interest usually is the limited partner class. Generally, a class has certain rights as governed by underlying legal documents or offering documents and local law. Rights to certain investments that do not otherwise affect the rights available under the underlying legal documents and local law do not ordinarily represent a separate share class. For example, rights to income and gains from a specific investment attributed solely to investors at the date the investment is made (side-pocket investments) are not considered to give rise to a share class. Similarly, a temporary series of shares is not considered a share class.

b. Units. Only funds with units specifically called for in the governing underlying, legal or offering documents should be considered unitized. Some funds may employ units for convenience in making allocations to investors for internal accounting or bookkeeping purposes, but the units are not required of specified by legal of offering documents, and for all other purposes operate like nonunitized investment partnerships. For per share operating performance, those funds are not considered unitized. If a fund is not unitized, only investment returns (either total return of internal rate of return) and net investment income and expense ratios are required to be disclosed as indicated in paragraphs 7.67 and 7.68.

c. Theoretical investment. The term theoretical investment in paragraph 7.68(c) should be considered as the actual aggregate amount of capital invested by each reporting class of investor as of the beginning of the fiscal reporting period, adjusted for cash flows related to capital contributions or withdrawals during the period.

12. Paragraph 7.66 of the Guide, which requires per share information to be disclosed as financial highlights, is amended by adding the guidance shown in italics and underlined below. (2)

7.66 The following per share information should be presented for registered investment companies and for investment companies that compute unitized net asset value (a more detailed discussion of calculation methods for registered investment companies may be found in the instructions for preparation of registration statements on Forms N-1A and N-2). Nonregistered investment partnerships that compute unitized net asset value should disclose in formation for each reporting share class related to nonmanaging investors. The information should be disclosed for each major category affecting net asset value per share (as shown in the statement of operations and statement of changes in net assets q(the fund). The caption descriptions in the per share data should be the same captions used in the statement of operations and statement of changes in net assets to allow the reader to determine which components of operations are included in or excluded from various per share data.

a. Net asset value at the beginning of the period.

b. Per share net investment income or loss, which, for registered investment companies, is calculated in accordance with the requirements of Form N-1A or N-2. Other methods, such as dividing net investment income by the average or weighted average number of shares outstanding during the period, are acceptable. If used by a registered investment company, the method employed must be disclosed in a note to the table in conformity with SEC requirements.

c. Realized and unrealized gains and losses per share, which are balancing amounts necessary to reconcile the change in net asset value per share with the other per share information presented. The amount shown in this caption might not agree with the change in aggregate gains and losses for the period. If such is the case, the reasons should be disclosed.

d. Total from investment operations, which represents the sum of net investment income or loss and realized and unrealized gain or loss.

e. Distributions to shareholders should be disclosed as a single line item except that tax return of capital distributions should be disclosed separately. Details of distributions should conform to those shown in the statement of changes in net assets.

f. Purchase premiums, redemption fees, or other capital items.

g. Payments by affiliates (paragraphs 7.49 through 7.51).

h. Net asset value at the end of the period.

i. Market value at the end of the period (Form N-2 registrants only).

13. Paragraph 7.67 of the Guide, which provides guidance as to the disclosure of the expense and net investment income ratios, is amended by adding the guidance shown in italics and underlined:

7.67 Ratios of expenses and net investment income to average net assets are generally annualized for periods less than a year. The ratio of expenses to average net assets should be increased by brokerage service and expense offset arrangements (see paragraphs 7.40 and 7.41).

a. When determining expense and net investment income ratios, nonregistered investment partnerships should calculate average net assets [ANA) by using the fund's (or class's) weighted-average net assets as measured at each accounting period or periodic valuation (for example, daily, weekly, monthly, quarterly), adjusting for capital contributions of withdrawals from the fund occurring between accounting periods or valuations. (This provision is not intended to requite any additional interim accounting period or periods valuation date beyond that which may be provided in offering or organizational documents of the partnership.)

The expense and net investment income ratios should be calculated by nonregistered investment partnership# based on the expenses allocated to each common of investor class (for example, the limited partner class) prior to the effects of any incentive allocation. Adequate disclosure should be made to indicate that the net investment income ratio does not reflect the effects of any incentive allocation. Expenses directly related to the total return of the fund, such as incentive fees, and nonrecurring expenses, such as organizational costs, should not be annualized when determining the expense ratio. Disclosure should be made of the expenses that have not been annualized.

Generally, the determination q(expenses for computing, those ratios should follow the presentation of expenses in the fund's statement of operations. Accordingly, if the manager's or general partner's incentive is structured as a lee rather than an allocation of profits, the incentive fee would be factored into the computation of an expense ratio. Because an incentive allocation of profits is not presented as an expense, it should not be considered part of the expense ratio. However, to avoid potentially significant inconsistencies in ratio presentations based solely on the structuring of incentives as fees of allocations, all incentives should be reflected in the disclosure of financial highlights. See paragraph 7.87 for an example of that disclosure.

Additionally, for the expense ratio, disclosure should be made of the effect of any agreement to waive or reimburse fees and expenses to each reporting class as a whole, as described in paragraph 7.38, and of expense offsets, as described in paragraphs 7.40 and 7.41. Agreements to waive a portion of all of certain fees to a specific investor which do not relate to the share class as a whole, do not require disclosure in the financial highlights. However, as ratios are calculated for each common class taken as a whole, the financial statements should disclose that an individual investor's ratio may vary from those ratios.

b. Investment companies that obtain capital commitments from investors and periodically call capital under those commitments to make investments (principally limited-life, nonregistered investment partnerships) should disclose in the financial highlights or in a note to the financial statements the total committed capital of the partnership (including general partner), the year of formation of the entity, and the ratio of total contributed capital to total committed capital.

c. Funds-of-funds should compute the expense and net investment income ratios using the expenses presented in the fund's statement of operations. Therefore, funds-of-funds typically should compute these ratios based on the net investment income and expense items at the fund-of-funds level only. Adequate disclosure should be made so that it is clear to users that the ratios do not reflect the funds-of-funds' proportionate share of income and expenses of the underlying investee funds. In a master-feeder structure, the feeder should include its proportionate share of the income and expenses of the master when computing the ratios at the feeder level. If, in a master-feeder structure, an incentive is levied as an allocation at the master level, the feeder should present its share of the incentive allocation as a separate line item in the statement of operations.

14. Paragraph 7.68 of the Guide, which provides guidance relative to total return disclosure in the financial highlights, is amended by adding the guidance shown in italics and underlined,

7.68 Total return is required to be presented for all investment companies (for interim periods, the disclosure should include whether or not total return is annualized), and should be computed as follows:

a. For nonregistered investment companies organized in a manner utilizing unitized net asset value and for N-1A registrants, based on the change in the net asset value per share during the period, and assuming that all dividends are reinvested.

b. For Form N-2 registrants, based on change in market value of the fund's shares taking into account dividends reinvested in accordance with the terms of the dividend reinvestment plan of, lacking such a plan, at the lesser of net asset value or market price on the dividend distribution date (Total investment return computed based on net asset value per share may also be presented if the difference in results between the two calculations is explained.)

c. For investment companies not utilizing unitized net asset value, including investment partnerships, based on the change in value during the period of a theoretical investment made at the beginning of the period. The change in value of a theoretical investment is measured by comparing the aggregate ending value of each class of investor with the aggregate beginning value of each such class, adjusted for cash flows related to capital contributions or withdrawals during the period.

If capital cash flows occur during the reporting period, returns are geometrically linked based on capital cash flow dates. In general, geometrically linking requires the computation of performance for each discrete period within a year in which invested capital is constant (that is, for each period between investor cash flow dates), then multiplying those performance computations together to obtain the total return for a constant investment outstanding for the entire year.

Because incentive allocations or fees may vary among investors within a class, total return for reporting classes subject to an incentive allocation or fee should report total return before and after the incentive allocation or fee for each reporting class taken as a whole. The effect of incentive allocations on total return is computed on a weighted-average aggregate capital basis. That results in an incentive computation less than the maximum if, for example, certain partners had loss carryovers at the beginning of the period. See paragraph 7.89 for an example of that total return calculation and related disclosures.

d. Investment companies, as defined in paragraphs 1.03 through 1.06, that by the terms of their offering documents (1) have limited lives. (2) do not continuously raise capital and are not required to redeem their interests upon investor request (obtaining initial capital commitments from investors at time of organization and subsequently drawing on those commitments to make investments is not considered "continuous" for this purpose), (3) have as a predominant operating strategy the return of the proceeds from disposition of investments to investors. (4) have limited opportunities, if any, for investors to withdraw prior to termination of the entity, and do not routinely acquire (directly of indirectly) as part of their investment strategy market-traded securities and derivatives (as described in paragraphs 2.30 through 2.33). should, instead of disclosing annual total returns before and after incentive allocations and fees, disclose the internal rate of return (IRR) since inception of the investment company's cash flows and ending net assets at the end of the period (residual values) as presented in the financial statements, net of all incentive allocations or fees, to each investor class, as of the beginning and end of the period. A footnote to the financial highlights should disclose that the IRR is net of all incentives. The IRR should be based on a consistent assumption, no less frequently than quarterly, as to the timing of cash inflows and outflows (for example, on actual cash-flow dates or cash inflows at the beginning of each month or quarter and cash outflows at the end of each month or quarter). All significant assumptions should be disclosed in the footnotes to the financial highlights. See paragraph 7.88 for an example of an IRR calculation and related disclosures.

15. Paragraphs 7.87 through 7.89 are added to provide illustrative examples for calculating and disclosing certain financial highlights by non registered investment partnerships:

Illustrations of Calculations and Disclosures When Reporting Expense and Net Investment Income Ratios

7.87 The following are illustrations of average net assets (ANA) computations related to determining expense and net investment income ratios, in which there are various capital flows, assuming a single class of investment interest. Other ANA computation methods (for example, summing and averaging monthly net assets, including the beginning and ending net assets for the year, or a method that also weights ending net assets) are also appropriate if the result is reasonable and consistently applied.
Example 1: Computation of average net assets in a nonregistered
investment partnership that allows quarterly contributions and
distributions and as quarterly accounting periods (that is capital
can flow in and out only at these times):

Net assets at the beginning
of the period: $100,000,000 x 3/12 = $25,000,000

Valuation adjustment of
$10 million and capital
contribution of $25 million
at April 1, 2002: $135,000,000 x 3/12 = $33,750,000

Valuation adjustment of $(5)
million, capital contribution
of $10 million, and capital
withdrawals of $30 trillion
at July 1, 2002: $110,000,000 x 3/12 = $27,500,000

Valuation adjustment of
$20 million, capital contribution
of $15 million, and capital
withdrawal of $25 million at
October 1, 2002: $120,000,000 x 3/12 = $30,000,000

Average net assets $116,250,000

Example 2: Computation of average net assets in a nonregistered
investment partnership that does not have predetermined
accounting periods (that is, capital can be called and
distributed at any time), with significant write-up in fair
value during the year:

Net assets at the beginning
of the period: $100,000,000 x 2/12 = $16,666,667

$25m Capital call at
February 28, 2002: $125,000,000 x 1/12 = $10,416,667

$20m Write-up at
March 31, 2002: $145,000,000 x 6/12 = $72,500,000

$55m Capital call at
September 30, 2002: $200,000,000 x 1/12 = $16,666,667

$25m Distribution at
October 31, 2002: $175,000,000 x 2/12 = $29,166,667

Average net assets $145,416,668

Disclosure for Incentive and Allocation Fees

For incentive fee:
Operating (and interest/short dividends) expense 2.25%
Incentive fee 7.35%
Total expenses 9.60%

For incentive allocations:
Operating (and interest/short dividends) expense 2.25%
Incentive allocation 7.35%

Total expenses and incentive allocation 9.60%

The expense ratio (expertise and incentive allocation ratio) is
calculated for each common class taken as a whole. The computation
of such ratios based on the amount of expenses and incentive fee or
incentive allocation assessed to an individual investor's capital
may vary from these ratios based on different management fee and
incentive arrangements (as applicable) and the timing of capital
transactions.


Illustration of Calculation and Disclosure When Reporting the Total Return Ratio

7.88 The following is an illustration of how to compute Internal Rate of Return since inception (IRR) for nonregistered investment partnerships that meet the criteria described in paragraph 7.68(d). Other nonregistered investment partnerships should calculate a total rate of return as described in paragraph 7.68(c) and illustrated in paragraph 7.89.

The following illustrates how an IRR is computed by a limited-life nonregistered investment partnership, from the perspective of the investor, at the end of its first and second years of operations. The formula used to compute the IRR is 0 = C[F.sub.0] + (C[F.sub.1]/(I+IRR)) + (C[F.sub.2]/[(1+IRR).sup.2]) + ... + (C[F.sub.T]/[(1+IRR).sup.T]).

Assume that Year 01 activity includes an initial investment (capital contribution) on January 1 of $1,000,000, $50,000 of appreciation (profit) reported on March 31, an additional capital contribution of $1,000,000 on April 1, additional appreciation of $80,000 reported on June 30, a distribution of $500,000 on July 1, and depreciation (loss) of $30,000 reported on December 31, resulting in a residual value on December 31, 01 of $1,600,000. The "residual value" the ending net assets at the end of the period and considered a theoretical distribution, is calculated as follows: $1,000,000 (initial capital contribution) plus $1,000,000 (additional capital contribution) minus $500,000 (cash distribution) plus the net gain of $100,000 (50,000 + 80,000 - 30,000) equals $1,600,000.

Assume that Year 02 activity includes: $150,000 of appreciation (profit) reported on March 31, a capital contribution of $500,000 on April 1, $350,000 of additional appreciation (profit) reported on June 30, $150,000 of additional appreciation (profit) reported on September 30, a distribution of $300,000 on December 14, and $150,0110 of depreciation (loss) reported on December 31, resulting in a residual value on December 31, 02 of $2,300,000 (calculated the same way as in Year 01).
 Capital Cash Residual
Date Description Call Distribution Value

1-Jan-01 Initial 1,000,000
 contribution

1-Apr-01 Additional capital
 contribution 1,000,000

1-Jul-01 Cash distribution 500,000

31-Dec-01 Residual Value 1,600,000

1-Apr-02 Additional capital
 contribution 500,000

14-Dec-02 Distribution 300,000

31-Dec-02 Residual Value 2,300,000

 IRR Cash Flows

 Through Through
Description 12/31/01 12/31/02

Initial (1,000,000) (1,000,000)
contribution

Additional capital
contribution (1,000,000) (1,000,000)

Cash distribution 500,000 500,000

Residual Value 1,600,000 N/A

Additional capital
contribution (500,000)

Distribution 300,000

Residual Value 2,300,00

IRR through
 December 31. '01 6.69%
IRR through
 December 31. '02 16.68%


The following illustrates the note disclosure of the IRR by the limited-life nonregistered investment partnership at the end of the second year of operations based on the assumptions outlined above.

Note X--Financial Highlights The Internal Rate of Return since inception (IRR) of the Limited Partners, net of all fees and profit allocations (carried interest) to the manager (general partner), is 6.7% through December 31, 01 and 16.7% through December 31, 02.

The IRR was computed based on the actual dates of the cash inflows (capital contributions), outflows (cash and stock distributions), and the ending net assets at the end of the period (residual value) of the limited Partners' capital account as of each measurement date.

7.89 The following are illustrations of how to compute the total return ratio for nonregistered investment partnerships as required by 7.68(c):
Example 1: The following are illustrations of how a geometrically
linked cash flow is computed assuming a beginning of $4,000,000,
a capital contribution of $1,000,000 on April 1, and a capital
withdrawal of $500,000 on July 1:

 Cash Beginning Period Finding
Period Flows Equity Return Equity

1/1-3/31 1,000,000 50,000 1,050,000
4/1-6/30 1,000,000 2,050,000 80,000 2,130,000
7/1-13/31 ('500,000) 1,630,000 (30,000) 1,600,000

 Percent Return

 Year to Year to Date
Period Period Date Formula

1/1-3/31 5.00% 5.00% (1+.05)-1
4/1-6/30 3.90% 9.10% [(1+0.05)*(1+0.0390)]-1
7/1-13/31 (1.84)% 7.09% [(1+0.0910)*(1-0.0184)]-1

Example 2: The following is an illustration of a presentation of total
return considering an incentive allocation or fee:

 Limited Partner or
 Common Class

Total return before incentive allocation/fee 7.09%
Incentive allocation ice -1.60%
Total return after incentive allocation/fee 5.49%

Total return is calculated for each common class taken as a whole. An
individual investor's return may vary from these returns based on
participation in hot issues, private investments, different management
fee and incentive arrangements (as applicable) and the timing capital
transactions.


16. Paragraph 7.90 is added to provide an illustrative example of the condensed schedule of investments:

7.90 The following is an illustration of a condensed schedule of investment. Net assets are assumed to be $50,000,000.
Condemed Schedule of Investment (3)
December 31, 20XX

Principal
Amount,
Shares or No. Fair
of Contracts Description Value

 COMMON STOCKS (54.6%)
 United States (33.5%)
 Airlines (7.2%)
53,125 Flight Airlines,Inc. $1,811,297
 Other (3.6%) 1,819,074
 3,630,371

 Banks (1.9%) 937,099
 Financial Services (2.8%) 1,433,210
 Foods (7.1%)
106,607 Andrews Midlands Co. 2,825,078
 Other (1.4%) 702,824
 3,527,902

 Hospital Supplies and Services (5.6%)
100,404 Chelsea Clinics Inc. 2,811,297
 Technology (4.0%) 2,039,578
 Utilities (4.9%) 2,480,556
 Total United States (cost $16,850,954) 16,860,013

 Hong Kong (5.7%)
 Drugs (0.6%) 330,741
 Retail (4.0%) 1,984,445
 Utility Telephone (1.1%) 552,235
 Total Hong Kong (cost $2,756,959) 2,867,421

 Italy (5.6%)
 Airlines (0.2%) 110,247
 Financial Services (1.8%) 881,975
 Leisure Related (3.5%) 1,763,951
 Office Supplies (0.1%) 55,123
 Total Italy (cost $2,912,465) 2,811,296

 Spain (5.4%)
 Banks (2.4%) 1,212,716
 Oil (1.7%) 826,852
 Railroads (1.3%) 661,482
 Total Spain (cost $2,643,197) 2,701,050

 United Kingdom (4.4%)
 Financial
 Services (2.3%) 1,157,593
 Technology (2.1%) 1,047,346
 Total United Kingdom
 (cost $2,145,246) 2,204,939
 TOTAL COMMON STOCKS
 (cost $27,308,821) 27,444,719

 DEBT SECURITIES (41.2%)
 United States (21.4%)
 Airlines (2.0%)
$1,000,000 Flight Airlines Inc.12%, 7/15/05 1,000,000
 Government (19.4%)
$3,000,000 U.S. Treasury Bond, 4.50%,
 11/15/07 3,031,791
 U.S. Treasury Bonds, 3.00%-4.75%,
 1/30/05-7/15/07 6,686,175
 9,717,966

 Total United States
 (cost $15,015,2011) 10,717,966
 Mexico (19.8%)
 Government
 United Mexican States,
 8.625%-9.125%
 3/12/08-12/7/09
 (cost $10,000,000) 9,922,224
 TOTAL DEBT SECURITIES
 (cost $25,015,200) 20,640,190
 LONG PUT AND
 CALL OPTIONS (2.4%)
 United States
 Telecommunications
 (cost $1,225,800) 1,212,716

 INTEREST IN INVESTMENT
 PARTNERSHIP (10.0%)
 (cost $4,000,000) 5,000,000
 XYZ Hedge Fund LP
 (35% owned) (XYZ
 Hedge Fund LP owns
 6,000 shares, valued at
 $9,000,000 of Leisure
 Cruises Inc., which is a
 United States Company
 in the travel Industry.
 The partnership's share
 of this investment
 is valued at $3,150,000
 as of December 31, 20XX.

 TOTAL INVESTMENTS (108.8%)
 (cost $59,125,068) $54,597,625

 SECURITIES SOLD SHORT (5.7%)
 COMMON STOCKS (5.7%)
 United States
 Energy
100,000 ABC Resources Co.
 (proceed, $2,715,000) $2,825,075

(3) This schedule does not include the disclosures, relative to the
investment objective and restrictions on redemption, required by
amended paragraph 7.12(t) of the Guide (paragraph 10 of this SOP)
because it is presumed that those disclosures are presented in
notes to the financial statements.

Principal
Amount,
Shares
or No. of Fair
Contracts Description Value

 DEBT SECURITIES
 (3.7%)
 Canada (3.7%)
 Telecommunica-
 tions
 (proceeds
 $1,950,000) 1,867,000

 WRITTEN OPTIONS
 (0.2%)
 United States
 (0.2%)
 Manufacturing
 (proceeds
 $130,000) 127,309

 TOTAL SECURITIES
 SOLD
 SHORT
 (proceeds
 $4,795,000) $4,819,387

 Expiration No. of
 dates contracts

 FUTURES CONTRACTS
 (12.5%)
 Financial (5.2%)
 Eurodollar
 (5.2%) $2,611,825 Feb-Apr 200X 122
 Indices (5.6%)
 S&P 500 (5.6%) 2,788,000 Mar-May 200X 89
 Metals (1.7%) 840,000
 TOTAL FUTURES
 CONTRACTS $6,239,825

 FORWARDS (11.5%)
 Argentinean Peso
 (5.8%) $2,910,000 Oct-Nov 200X
 Other currencies
 (7.7%) 2,876,315
 TOTAL FORWARDS $5,786,315

 SWAPS (13.4%)
 Interest rate
 swaps (5.7%) $2,875,000
 Currency swaps
 (7.7%)
 Yen/U.S.
 Dollar swaps
 (6.0%) 2,999,016 Jan-Feb 200X
 Other (1.7%) 868,000
 TOTAL SWAPS $6,742,016

The accompanying notes are an integral part of these financial
statements


EFFECTIVE DATE AND TRANSITION

17. The provisions of this SOP, except for the provisions to require certain nonregistered investment partnerships to compute and disclose IRR, are effective for annual financial statements issued for fiscal years ending after December 15, 2003, and for interim financial statements issued after initial application. The provisions to require certain nonregistered investment partnerships to compute and disclose IRR are effective for annual financial statements issued for fiscal years beginning after December 15, 2003, with early application encouraged. Nonregistered investment partnerships that do not early adopt the disclosure of IRR should disclose a total rate of return. Presentation of previously issued financial highlights is not required; however, if comparative financial highlights are presented, the presentation should be on a comparable basis.

The provisions of this Statement need not be applied to immaterial items.

Accounting Standards Executive Committee (2003-2004)

Mark M. Bielstein, Chair John M. Althoff Val R. Bitton Karin A. French Richard R. Jones Carl Kampel Peter H. Knutson Robert J. Laux Andrew M. Mintzer Holly L. Nelson Benjamin S. Neuhausen Coleman D. Ross Brent A. Woodford

Reporting Financial Highlights and Schedule of Investments by Nonregistered Investment Partnerships Task Force

Richard H. Grueter, Chair Howard Altman Ronald A. Carletta Ross A. Ellberg Peter E. Finn Brian J. Gallagher Claudia A. Holz Michael P. Maher Arthur Tully

AICPA Staff

Daniel J. Noll Director Accounting Standards

Fabiola Ferrer Technical Manager Acounting Standards

SOP 03-5--Financial Highlights of Separate Accounts: An Amendment to the Audit and Accounting Guide Audits of Investment Companies

(Issued by the Accounting Standards Executive Committee)

Space considerations prevent publishing here the appendices to SOP 03-5. Since the appendices often are important to understanding SOPs, readers are advised to obtain complete copies. To obtain a copy of SOP 03-5 (product no. 014940), contact the AICPA order department at 888-777-7077.

NOTE

Statements of Position on accounting issues present the conclusions of at least two-thirds of the Accounting Standards Executive Committee, which is the senior technical body of the Institute authorized to speak for the Institute in the areas of financial accounting and reporting. Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, identifies AICPA Statements of Position that have been cleared by the Financial Accounting Standards Board as sources of established accounting principles in category b of the hierarchy of generally accepted accounting principles that it establishes. AICPA members should consider the accounting principles in this Statement of Position if a different accounting treatment of a transaction of event is not specified by a pronouncement covered by Rule 203 of the AICPA Code of Professional Conduct. In such circumstances, the accounting treatment specified by the Statement of Position should be use& or the member should be prepared to justify a conclusion that another treatment better presents the substance of the transaction in the circumstances.

TABLE OF CONTENTS

Summary/4 Foreword/7 Introduction and Background/9 Applicability and Scope/10 Conclusions/10 Effective Date and Transition/17

SUMMARY

This Statement of Position (SOP) provides guidance on reporting financial highlights by separate accounts of insurance enterprises. This SOP requires, among other things, the following:

* Disclosure of ranges. Separate accounts with more than two levels of contract charges or net unit values per subaccount may elect to present the required financial highlights for contract expense levels that bad units issued or outstanding during the reporting period (including the number of units, unit fair value, net assets, expense ratio, investment income ratio, and total return) for either:

1. Each contract expense level that results in a distinct net unit value and for which units were issued or outstanding during each reporting period; or

2. The range of the lowest and highest level of expense ratio and the related total returns, and unit fair values during each reporting period.

The financial highlights table in the separate account's financial statements should state clearly that the expense ratio considers only the expenses borne directly by the separate account and excludes expense incurred indirectly by the underlying funds or charged through the redemption of units. The disclosure should include ranges of all lees that are charged by the separate account and whether those lees are assessed as direct reductions in unit values or through the redemption of units.

* Expense ratio. The expense ratio represents the annualized contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. This ratio includes only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the under lying fund are excluded. The financial highlights note should also provide disclosure of the ranges of all charges assessed to the separate account, including discussion of the manner in which the charges are assessed.

* Total return ratio. The total return ratio represents the total return for the periods indicated, including changes in the value of the underlying fund, which reflects the reduction of unit value for expenses assessed. This ratio does not include any expenses assessed through the redemption of units. The total return is calculated for each period indicated or from the effective (fund inception) date through the end of the reporting period.

* Investment income ratio. The investment income ratio represents the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. This ratio excludes those expenses, such as mortality and expense charges, that result in direct reductions to contract owner accounts either through reductions in the unit values or the redemption of units. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund(s) in which the subaccount invests.

This SOP is effective for annual financial statements issued for fiscal years ending after December 15, 2003, and for interim financial statements issued after initial application. Presentation of previously issued financial highlights on a comparable basis is permitted, but not required. The provisions of this SOP should be applied prospectively from the beginning of the year of adoption. However, if adopting this SOP results in presentation different from prior periods, companies should explain the effects of adoption on their financial highlights calculations.

FOREWORD

The accounting guidance contained in this document has been cleared by the Financial Accounting Standards Board (FASB). The procedure for clearing accounting guidance in documents issued by the Accounting Standards Executive Committee (AcSEC) involves the FASB reviewing and discussing in public board meetings (1) a prospectus for a project to develop a document, (2) a proposed exposure draft that has been approved by at least 10 of AcSEC's 15 members, and (3) a proposed final document that has been approved by at least 10 of AcSEC's 15 members. The document is cleared if at least four of the seven FASB members do not object to AcSEC undertaking the project, issuing the proposed exposure draft or, after considering the in put received by AcSEC as a result of the issuance of the exposure draft, issuing the final document.

The criteria applied by the FASB in its review of proposed projects and proposed documents include the following:

1. The proposal does not conflict with current or proposed accounting requirements, unless it is a limited circumstance, usually in specialized industry accounting, and the proposal adequately justifies the departure.

2. The proposal will result in an improvement in practice.

3. The AICPA demonstrates the need for the proposal.

4. The benefits of the proposal are expected to exceed the costs of applying it.

In many situations, prior to clearance, the FASB will propose suggestions, many of which are included in the documents.

INTRODUCTION AND BACKGROUND

1. In December 2000, the AICPA issued a revised Audit and Accounting Guide Audits of Investment Companies (the Guide), that required financial highlights to be disclosed for separate accounts including net assets, unit fair value, and expenses ratio, investment income ratio, and total return ratio as a percentage of average net assets. Constituents raised a number of questions and implementation issues in applying the original guidance in the Guide to separate accounts.

2. Separate accounts often have multiple accumulation unit values that arise from having different product designs and lee structures on the underlying variable contracts. One of the causes of this proliferation in the number of distinct unit values is that a new series of units i5 often established within each separate account for each new product and combination of optional riders elected by customers. Paragraph 10.54 of the Guide states:

Certain disclosures required of registered investment companies for compliance with SEC rules and regulations are not presented in the following illustrative financial statements because they are not otherwise required by generally accepted accounting principles. In addition, certain disclosures are impractical due to the characteristics of the separate account.

In recent years, there has been significant growth in (a) the number of subaccounts (or investment portfolios) offered to variable contract customers, particularly for wraparound annuities in which assets are invested in mutual funds; (b) the number of different products in which supporting assets reside in a single separate account (for example, both variable annuities and variable life insurance contracts); and (0 the number of optional riders that may be chosen by variable contract customers, either individually or singularly or in various combinations, with contract charges that vary depending on customer elections.

3. In January 2002, in response to the implementation questions, the AICPA issued a series of Technical Practice Aids (TPAs) (Sections 6910.11-.15) (1) to address whether the requirement for presentation of financial highlights as noted in the Guide applies to separate accounts, and if so, what information should be presented. Questions still remained after the issuance of the TPAs about the application of the required financial highlight disclosures.

APPLICABILITY AND SCOPE

4. This Statement of Position (SOP) applies to all entities that are separate accounts within the scope of the Guide.

CONCLUSIONS

5. Paragraph 7.66 of the Guide, which requires per share information to be disclosed as financial highlights, is amended by adding the underlined text as follows. (2)

7.66 The following per share information should be presented for registered investment companies, and for investment companies that compute unitized net asset value (a more detailed discussion of calculation methods for registered investment companies may be found in the instructions for preparation of registration statements on Forms N-1A and N-2):

a. Net asset value at the beginning of the period.

b. Per share net investment income or loss, which, for registered investment companies, is calculated in accordance with the requirements of Form N-1A or N-2. Other methods, such as dividing net investment income by the average or weighted average number of shares outstanding during the period, are acceptable. If used by a registered investment company, the method employed must be disclosed in a note to the table in conformity with SEC requirements.

c. Realized and unrealized gains and losses per share, which are balancing amounts necessary to reconcile the change in net asset value per share with the other per share information presented. The amount shown in this caption might not agree with the change in aggregate gains and losses for the period. If such is the case, the reasons should be disclosed.

d. Total from investment operations, which represents the sum of net investment income of loss and realized and unrealized gain or loss.

e. Distributions to shareholders should be disclosed as a single line item except that tax return of capital distributions should be disclosed separately. Details of distributions should conform to those shown in the statement of changes in net assets.

f. Purchase premiums, redemption fees, of other capital items.

g. Payments by affiliates (paragraphs 7.49 through 7.51).

h. Net asset value at the end of the period.

i. Market value at the end of the period (Form N-2 registrants only):

The information required in items b though g above is not required for separate accounts that represent an ownership interest in the underlying separate account portfolios of mutual funds. Refer to paragraphs 10.53 through 10.58 of the Guide for information regarding financial highlights for separate accounts and illustration. financial statements.

6. Paragraph 10.54 of the Guide, including related footnotes, is amended by adding the underlined text as follows.

10.54 Certain disclosures required of registered investment companies for compliance with SEC rules and regulations are not presented in the following illustrative financial statements because they are not otherwise required by generally accepted accounting principles. In addition, certain disclosures are impractical due to the characteristics of the separate account. These disclosures include the following:

* The total cost, for federal income tax purposes, of the portfolio of investments according to rule 12-12 of Regulation S-X.

* The components of net assets presented as a separate schedule of in the notes to the financial statements according to rule 6-05.5 of Regulation S-X. However, the net asset values per unit at the beginning and end of each period and the total net assets at the end of the period are to be provided for the most recent five years,

Separate accounts with more than two levels of contract charges or net unit values per subaccount may elect to present the required financial highlights for contract expense levels that bad units issued of outstanding during the reporting period (including number of units, unit fair value, net assets, expense ratio, investment income ratio, and total return), for either:

a. Each contract expense level that results in a distinct net unit value and for which units were issued of outstanding during each reporting period; or

b. The range of the lowest and highest level of expense ratio and the related total return and unit fair values during each reporting period. (5)

The Form S-6 (*6) expense table requires the presentation, under separate cap-dons, of the expense ratio of each separate account and the underlying fund(s) in which it may invest, as well as a combined expense ratio. The financial highlights table in the separate account's financial statements need not aggregate these ratios; however, the table should state clearly that the expense ratio considers only the expenses borne directly by the separate account and excludes expenses incurred directly by the underlying funds of charged through the redemption of units. If the ranges of expense ratios, total returns, and unit fair values are presented, the insurance enterprise should disclose instances in which individual contract values do not fall within the ranges presented (for example, if a new product is introduced late in a reporting period and the total return does not fall within the range). The expense disclosure should also include ranges of all lees that are charged by the separate account and a description of those fees, including whether they are assessed as direct reductions in unit values of through the redemption of units for all policies contained within the separate account.

7. Paragraph 10 58(6) of the Guide, which presents illustrative footnotes, is amended by adding the underlined text and deleting the crossed out text as follows.

10.58 6. Unit Values (08) A summary of unit values and units outstanding for variable annuity contracts, net assets, net investment income ratios, total return ratios, and the expense ratios, excluding expenses of the underlying funds and expenses charged through the redemption of units, for each of the five years in the period ended December 31, 20X3, follows.

a. The following format should be presented if the insurance enterprise chooses to disclose each contract expense level that results in a distinct net unit value and for which units were issued of outstanding during each of the five years ended December 31, 20X3.
 [begin
 [begin strike-
 strikethrough] through]
 Net Expenses
 Investment as a % of
 Income as a Average
 % of Average Net
 Net Assets Assets **
 [begin [begin
 strikethrough] strike-
 Unit Investment through] Total
 Fair Income Expense Return
Units Value (000s) Ratio (9) Ratio (10) (11)

Money Market Investment Division
December 31
20X3
4,136,795 $13.83 $57,232 5.25% 1.11% 5.30%
20X2
5,028,360 13.13 66,042 5.02 1.00 5.07
20X1
5,873,517 12.50 73,398 8.46 1.00 8.54
20X0
2,058,353 11.52 23,705 8.23 1.00 8.31
20W9
967,550 10.63 10,291 6.24 *** 1.00 *** 6.30
7/1/W9
500,000 10.00 5,000

Equity Index Division
December 31
20X3
19,674,291 $17.83 $350,752 2.23% 1.00% 12.68%
20X2
8,412,134 15.82 133,110 2.35 1.00 24.16
20X1
3,140,024 12.74 40,009 3.12 1.00 (9.50)
20X0
3,879,972 14.08 54,630 3.24 1.00 11.94
20W9
2,162,080 12.58 27,195 3.98 1.00 6.20

[begin strikethrough]* Commenced operations.[end strikethrough]

[begin strikethrough]** For the year ended December 31, excluding the
effect of the expenses of the underlying fund portfolios
and charges made directly to contract holder accounts
through the redemption of units.[end strikethrough]

[begin strikethrough]*** Annualized.[end strikethrough]

(9) These amounts represent the dividends, excluding
distributions of capital gains, received by the subaccount
from the underlying mutual fund, net of management
fees assessed by the fund manager, divided by
the average net assets. These ratios exclude those expenses,
such as mortality and expense charges, that are
assessed against contract owner accounts either through
reductions in the unit values of the redemption of
units The recognition of investment income by the
subaccount is affected by the timing of the declaration
of dividends by the underlying fund in which the subaccount
invests.

(10) These amounts represent the annualized contract expenses
of the separate account, consisting primarily of
mortality and expense charges, for each period indicated.
These ratios include only those expenses that result
in a direct reduction to unit values. Charges made directly
to contract owner accounts through the redemption
of units and expenses of the underlying fund have
been excluded.

(11) These amounts represent the total return for the periods
indicated, including chances in the value of the underlying
fund, and expenses assessed through the reduction
of unit values. These ratios do not include any
expenses assessed through the redemption of units. Investment
options with a date notation indicate the effective
date of that investment option in the variable account.
The total return is calculated for each period
indicated or from the effective date through the end of
the reporting period.


b. The following format should be presented if the insurance enterprise chooses to present the range of the lowest to highest level of expense ratio and the related total return and unit fair values during each of the five years ended December 31, 20X3. Certain of the information is presented as a range of minimum to maximum values, based on the product grouping representing the minimum and maximum expense ratio amounts.
 At December 13

 Unit Fair
 Value Net
 Units Lowest to Assets
 (000s) Highest (000s)

Money Market Investment Division
20X3 4,137 $10.51 to $14.06 $57,232
20X2 5,028 10.00 to 13.20 66,042
20X1 5,874 9.37 to 13.21 73,398
20X0 2,058 8.72 to 12.23 23,705
20W9 968 8.25 to 12.50 14,291

Equity Index Division
20X3 19,674 $10.51 to $19.06 $350,752
20X2 8,412 10.00 to 20.20 133,110
20X1 3,140 9.37 to 14.21 40,009
20X0 3,880 8.72 to 15.23 54,630
20W9 2,162 8.25 to 13.50 27,195

 For the Year Ended December 31

 Investment Expense Total
 (12) Ratio (13) Return (14)
 Income Lowest to Lowest to
 Ratio Highest Highest

Money Market Investment Division
20X3 5.25% 1.00% to 2.65% 4.10% to 5.30%
20X2 5.02 1.00 to 2.60 4.01 to 5.07
20X1 8.46 1.00 to 2.60 7.45 to 8.54
20X0 8.23 1.00 to 2.55 5.65 to 8.31
20W9 6.24 1.00 to 2.45 5.25 to 6.30

Equity Index Division
20X3 2.23% 1.00% to 2.65% 5.10% to 12.18%
20X2 2.35 1.00 to 2.60 6.80 to 24.16
20X1 3.12 1.00 to 2.60 (9.50) to 9.10
20X0 3.24 1.00 to 2.55 5.65 to 11.94
20W9 3.98 1.00 to 2.45 5.25 to 6.20

(12) These amounts represent the dividends, excluding distributions of
capital grains, received by the subaccount from the underlying mutual
fund, net of management fees assessed by the fund manager, divided by
the average net assets. These ratios exclude those expenses, such as
mortality and expense charges, that are assessed against contract
owner accounts either through reductions in the unit values or the
redemption of units. The recognition of investment income by the
subaccount is affected by the timing of the declaration of dividends
by the underlying fund in which the subaccount invests.

(13) These amounts represent the annualized contract expenses of the
separate account, consisting primarily of mortality and expense
charges, for each period indicated. The ratios include only those
expenses that result in a direct reduction to unit values. Charges
made directly to contract owner accounts through the redemption of
units and expenses of the underlying fund have been excluded.

(14) These amounts represent the total return for the periods
indicated, including changes in the value of the underlying fund, and
expenses assessed through the reduction of unit values. These ratios
do not include any expenses assessed through the redemption of units.
Investment options with a date notation indicate the effective date of
that investment option in the variable account. The total return is
calculated for each period indicated or from the effective date
through the end of the reporting period. As the total return is
presented as a range of minimum to maximum values, based on the
product grouping representing the minimum and maximum, expense ratio
amounts, some individual contract total returns are not within the
ranges presented.


c. An insurance enterprise may choose to present all expenses that are charged by the separate account in either a table or narrative format. The disclosure should list all lees that are charged by the separate account and a description of those fees, including whether they are assessed as direct reductions in unit values or through the redemption of units for all policies contained within the separate account. For this example, expenses disclosed are based on the ranges of all products within the separate account: the expenses may also be listed in more detail (for example, individual charges broken out by products within the separate account) in either table of narrative format.

Alternatively, the expense ratio represents the annualized contract expenses of ABC Variable Annuity Separate Account I for the period indicated and includes only those expenses that are charged through a reduction of the unit value. Included in this category are mortality and expense charges, and the cost of any riders the policy holder has elected. These fees range between 1.00 percent and 2.65 percent, depending on the product and options selected. Expenses of the underlying fund portfolios and charges made directly to contract owner accounts through the redemption of units are excluded. For this separate account, charges made through the redemption of units ranged from $10 to $30 per policy annually.
ABC Variable Annuity Separate Account I

Mortality and Expense Charge

Basic charges are assessed through reduction of unit
values. 1.00%-1.70%

Death Benefit Options

The option are assessed through reduction in unit
values:

* Ratchet Option--Equal to the highest account balance
among prior specified anniversary dates adjusted for
deposits less partial withdrawals since the specified
anniversary date 0.15%-0.20%

* Roll Up Option--Equal to the total of deposits made
to the contract less an adjustment for partial
withdrawals, accumulated at a specified interest rate 0.20%-0.40%

Guaranteed Minimum Income Benefits

These benefits are assessed through reduction in unit
values and provide that the periodic annuity benefits
will:

* Not fall below a contractually specified level. 0.20%-0.55%

* Be based on the higher of actual account values at
the date the policy owner elects to annuitize or a
contractually specified amount. 0.30%-0.40%

Administrative Charge

This charge is assessed through the redemption of Years 1-5:$30
units. Years 6+:$10


EFFECTIVE DATE AND TRANSITION

8. The provisions of this SOP are effective for annual financial statements issued for fiscal years ending after December 15, 2003, and for interim financial statements issued after initial application. Presentation of previously issued financial highlights on a comparable basis is permitted, but not required. The provisions of this SOP should be applied prospectively from the beginning of the year of adoption. However, if adopting this SOP results in presentation different from prior periods, companies should explain the effects of adoption on their financial highlight calculations.

The provisions of this Statement need not be applied to immaterial items.

Accounting Standards Executive Committee (2003-2004)

Mark M. Bielstein, Chair Val R. Bitton John M. Althoff Karin A. French Richard R. Jones Carl Kampel Peter H. Knutson Robert J. Laux Andrew M. Mintzer Holly L. Nelson Benjamin S. Neuhausen Coleman D. Ross Brent A. Woodford

Separate Account Financial Highlights Task Force

John C. Pintozzi, Chair Rosemarie Albrizio Christopher E. Anderson Gary Berndt Lisa G. Boy Thomas M. Daugherty Kevin P. Guckian Scott R. Lindquist Darlene M. Martin

AICPA Staff

Daniel J. Noll Director Accounting Standards

Kim Kushmerick Hekker Technical Manager Accounting Standards

AcSEC gratefully acknowledges the contributions of Daniel McLaughlin and Kim Orton.

(1) The terms net pension cost, net benefit cost, net cot, or other similar terms include net pension income and other postretirement benefit income.

(2) Disclosures required by paragraphs 5-11 of Statement 132 are carried forward and included with the new disclosure requirements in paragraphs 5-8 and 11-13 of this Statement.

(3) Terms defined in Appendix E are set in boldface type the first time they appear.

(4) For defined benefit pension plans, the benefit obligation is the projected benefit obligation. For defined benefit postretirement plans, the benefit obligation is the accumulated postretirement benefit obligation.

(5) The effects of foreign currency exchange rate changes that are to be disclosed are those applicable to plans of a foreign operation whose functional currency is not the reporting currency pursuant to FASB Statement No. 52, Foreign Currency Translation.

(6) Refer to footnote 5.

(1) TPAs No. 6910.04 through 6910.10 are rescinded upon the effective date of this Statement of Position (SOP).

(13) Included are hedge funds, limited liability companies, limited liability partnerships, limited duration companies, and offshore investment companies with similar characteristics, commodity pools subject to regulation under the Commodity Exchange Act of 1974. Excluded are investment partnerships [begin strikethrough]that are[end strikethrough] regulated as brokers and dealers in securities [begin strikethrough]subject to regulation[end strikethrough] under the Securities Exchange Act of 1934 (registered broker-dealers) [begin strikethrough]and[end strikethrough] that manage funds only for those who are officers, directors, of employees of the general partner.

(2) SOP 03-5, Financial Highlights of Separate Accounts: An Amendment to the Audit and Accounting Guide Audits of Investment Companies, also amends paragraph 7.66 of the Guide.

(1) TPAs Section 6910.11 through 6910.15 are rescinded upon the effective date of this SOP.

(2) The Statement of Position 03-6, Reporting Financial Highlights and Schedule of Investments by Nonregistered Investment Partnerships, An Amendment to the Audit and Accounting Guide Audits of Investment Companies and AICPA Statement of Position 95-2, Financial Reporting by Nonpublic Investment Partnerships, will also amend paragraph 7.66 of the AICPA Audit and Accounting Guide Audits of Investment Companies.

(5) The calculation of the ranges for the total return ratio and unit fair values should correspond to the groupings that produced the lowest and highest expense ratios.

(*6) In April 2002, the SEC adopted a new Form N-6 to replace Forms N-8B-2 and S-6 (Release No. 33-8088), with the objectives of improving disclosure and streamlining the registration process by introducing a single form tailored directly to variable life products. See paragraph 10.30 for effective date information.

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Publication:Journal of Accountancy
Date:Mar 1, 2004
Words:17845
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