Accrued Interest

[Andy the Actuary]

In determining the actuarial value of plan assets, receivable contributions are discounted to the actuarial valuation date at the equivalent interest rate for the prior valuation year. Should the accrued interest receivable reported in the Plan assets on the 5500 be discounted to the actuarial valuation date? If so, would you use the equivalent interest rate for the prior or current valuation year?

[SoCalActuary]

If I understand your question correctly, you are referring to the reporting on the 5500, specifically the receivable contribution.

No discount applies there.

For the actuarial asset on the beginning of the year, you use the receivable contribution from the prior year discounted at last year's effective rate.

[Andy the Actuary]

If I understand your question correctly, you are referring to the reporting on the 5500, specifically the receivable contribution.

No discount applies there.

For the actuarial asset on the beginning of the year, you use the receivable contribution from the prior year discounted at last year's effective rate.

Sorry about the lack of clarity in my question. I (believe I) understand how to reflect accrued contributions both on Schedule H and Schedule SB.

I was asking if you needed to discount accrued interest for determining the actuarial value of plan assets just as you discount accrued contributions?

[Guest Mike Melnick]

It is an interesting question. I would say no, that you do not need to discount the accrued interest, because the accrued interest is already a dynamic quantity, which itself grows over time, (in contrast to the accrued contribution which is a static quantity). If you view the accrued interest as growing exponentially (up until the date that it is actually paid) then in a sense it is already discounted.

However, there is subtlety that is overlooked. If the accrued interest in approximated by simple interest, then theoretically there is a small overstatement. For example on a $100,000 bond paying 3% semi-annually, your accrued interest at 3 months is 1,500 at simple interest versus 1,489 at compound interest. There is an $11 difference that only an actuary could care about.

[Andy the Actuary]

It is an interesting question. I would say no, that you do not need to discount the accrued interest, because the accrued interest is already a dynamic quantity, which itself grows over time, (in contrast to the accrued contribution which is a static quantity). If you view the accrued interest as growing exponentially (up until the date that it is actually paid) then in a sense it is already discounted.

However, there is subtlety that is overlooked. If the accrued interest in approximated by simple interest, then theoretically there is a small overstatement. For example on a $100,000 bond paying 3% semi-annually, your accrued interest at 3 months is 1,500 at simple interest versus 1,489 at compound interest. There is an $11 difference that only an actuary could care about.

M²: Understand your point but would add by example, a dividend has been declared to be paid in January 2011. That dividend has a different time value if received January 2 than if received January 24. Since the income accrual does not affect the pre-funding balance, my inclination is to ignore it, and in practice, I have ignored it because I just thought of this question today!

[david rigby]

As far as I know, there is no statemetn in IRC or in IRS reg that contemplates any discounting for accrued interest, anywhere.

IMHO, it would be a gigantic leap to assume anyone in DC understands time value of money (or money value of time, for that matter).

I'm just sayin'.

[Andy the Actuary]

As far as I know, there is no statemetn in IRC or in IRS reg that contemplates any discounting for accrued interest, anywhere.

IMHO, it would be a gigantic leap to assume anyone in DC understands time value of money (or money value of time, for that matter).

I'm just sayin'.

Sounds more like IMPOO rather than IMHO !!!

Joker

[SoCalActuary]

You don't even have to consider the accrued interest at all. You can prepare 5500 on a cash basis. And you can prepare your valuation using the known assets without any receivable investment return.