Realized and unrealized gains or losses on plan assets for form 5500 reporting purposes.

• Author: Amoroso, Vincent

The Department of Labor (DOL) has informally stated that any inventory valuation method consistent with generally accepted accounting principles (GAAP), consistently applied, can be used to calculate realized and unrealized gains or losses on plan assets for current value reporting purposes.

Current value

reporting requirement

The instructions to Form 5500, Annual Return/Report of Employee Benefit Plan (with 100 or more participants), require that benefit plan administrators calculate realized and unrealized gains and losses on plan assets using current asset and liability values. More specifically, assets and liabilities must be reported at their values at plan year-end, rather than at historical cost. Any increase or decrease in value between valuation dates is reported as an unrealized gain or loss. Example 1 on the right illustrates the mechanics of current value reporting.

Financial institutions have begun to comply with the current value reporting requirements by reprogramming computer software to report assets and liabilities at current values. During the reprogramming process, questions have arisen as to an acceptable way of reporting sales of assets and the recognition of gains or losses.

The problem

Questions arise, for example, when a plan has two lots of the same stock, purchased in two different plan years, and some of those shares are sold. Which shares and what cost basis should the plan administrator use in calculating the gain or loss on the sale? In an effort to answer this question, DOL officials were asked to comment on the following situation.

Example 2: Plan X owned 10 shares of A stock with an FMV of $100 a share at the beginning of the plan year. During the year, X bought an additional five shares at $110 a share. Later in the year, X sold seven shares. The administrator calculated the realized gain or loss using a weighted-average market value as the adjusted basis of the seven shares.

The DOL official stated that this method of calculating the gain or loss would be acceptable. The official went on to say that any inventory valuation method, such as FIFO, LIFO or the weighted-average method (used in the example), that was consistent with GAAP could be used.

Relief for 1988, 1989

and 1990 plan years

Many financial institutions holding plan assets used the historical-cost valuation approach for plan years before 1988 - and many of those institutions were unable to change their computerized recordkeeping systems to...