Fair value of plan assets

[SSRRS]

Hi, A DB plan is invested in numerous annuities. A FASB report was prepared and the fair value of the plan assets used was based on the gross contract value, as opposed to the contract value less the withdrawal charge (surrender value).  1.Is this ok or should the value be the surrender value? 2. If the plan is overfunded either way is this an immaterial issue? Thank you.

[david rigby]

IMHO, the auditor gets to answer both of your questions.  Measurement of Plan Assets appears in ASC 715 at paragraphs 715-35-50 thru 715-35-61.  Reading subparagraph -60 indicates that "gross contract value" might not be appropriate.

[SSRRS]

Thank you . Your vast knowledge and help is much appreciated. Yes, the auditor is questioning why the contract value was used. In.defense, asset smoothing is allowed even though it is not the actual current value. In addition, if the plan is overfunded and faces a possible reversion and excise tax, using the larger contract value actually is a more accurate indication of the potential reversion that the company might face down.the line.

[david rigby]

28 minutes ago, SSRRS said:

Your vast knowledge and help is much appreciated.

To quote the guys from Car Talk, "my knowledge is half-vast".

[Bird]

On 6/7/2019 at 3:49 PM, SSRRS said:

In addition, if the plan is overfunded and faces a possible reversion and excise tax, using the larger contract value actually is a more accurate indication of the potential reversion that the company might face down.the line.

That's more about perception than reality.  True, if you do nothing, the contact(s) will lose the surrender charges and eventually the cash value will equal the accumulated value.  But so what?  The annual gain is not some extraordinary number, and a similar asset (in terms of risk) would appreciate similarly.