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

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 report plan assets and liabilities at their current values in time for plan administrators to file the 1988 annual reports. Therefore, various financial institutions and other employee benefit service providers that maintain records for plan administrators requested that the DOL not reject, and not issue deficiency notices for, 1988 Form 5500 annual reports solely because the plan administrator determined unrealized and realized gains and losses using the historical-cost approach.

The DOL responded to the concerns raised by commentators by publishing a notice in the Federal Register on Jan. 26, 1990, stating that it would not reject annual reports for the 1988 and 1989 plan years solely because the reports were filed using the historical-cost approach. The DOL also stated that it would not reject 1990 annual reports if the plan administrator was dependent on a financial institution for information necessary to prepare the reports, and the financial institution provided historical-cost information, consistent with the reporting approach used in prior years. However, the DOL will accept only those 1990 annual reports that are accompanied by - a statement from the plan administrator indicating its inability to report realized and unrealized gains and losses in accordance with the current value reporting requirements; and - a statement from the financial institution, providing that it has made a reasonable effort to make the recordkeeping changes in a timely fashion, but was unable to provide the necessary information for the 1990 plan year.

Example 1: Current Value Reporting

Plan X buys 100 of B Corporation stock for $10 a share on June 30 of the current plan year. At December 31, X's year-end, the fair market value (FMV) of the shares is $15. During the next plan year, the B stock is sold for $18 a share. Reporting for the B shares is as follows.

Value of shares recorded on June 30

($10 x 100) $1,000

Value of shares reported on December 31

($15 x 100) 1,500

Unrealized gain reported on December 31

(($15 - $10) x 100) 500

Realized gain on sale of shares during

following plan year (($18 - $15) x 100) 300