Cash vs Accrual Accounting

[Guest TBick]

With the new daily valuation products available, it seems that a lot of services are using cash instead of the “normal” accrual method. The convenience of this is obvious. Is there any support by the DOL or IRS on taking this stance?

[Archimage]

When filing the form 5500, a company can provide financial information by either the cash or accrual basis of accounting. You have to be consistent though from year to year. If you are a large plan (over 100 participants), your audited financial statements will have to be kept on the same method. I personally recommend doing the accrual basis for all plans including daily plans.

[Guest ebpcpa]

I agree 100% with Archimage--the 5500 instructions allow for either basis of accounting. However, as a plan auditor, I have encountered problems when recordkeepers have changed the method of accounting on the 5500 Schedule H to a cash basis, because this became "their policy." Of course, our clients were not notified of the change in basis, and they continued to prepare their financial statements using the accrual basis--the same basis they had reported in previous years. Because the Schedule H must agree to the financial statements, someone had to budge.

It's OK to change the basis of reporting, so long as you remain consistent in the future, as Archimage mentioned. I would just make sure the plan sponsor, the auditor and whomever is responsible for preparing the 5500 Schedule H are all on the same page.

[Guest JimJ]

I disagree, cash basis only for true daily. Report based on the actual date funds are invested. This may require educating the client, but daily means daily. Lastly, it will be tough to compete in the daily world using accrual accounting. Statement process time will be delayed.

[Archimage]

I am referring strictly to your financial statement accounting. You definitely need to keep your participant accounts valued on a daily cash basis. We are referring strictly to your financial statements that are prepared in accordance with GAAP.

[Guest TBick]

I agree and understand financial statement accounting on a cash basis, but what about the testing issues? How can you justify doing tests such as ADP/ACP on a cash basis?

[Archimage]

You would also perform your ADP/ACP test on an accrual basis. The only part that is on a cash basis is your actual allocation report and participant statements. Everything else will be done using the accrual method. That is my recommended method.

[Guest TAG]

So is that the third method, modified cash basis?

[Archimage]

No, it is not. Your actual financial statements (most likely prepared by the client's accounting firm) and 5500 financial information are on the accrual basis. The actual valuation/allocation is done on a cash basis.