Posts Tagged ‘taxes’

Tax considerations are important for several reasons. First, in the United States, certain institutional investors such as pen- sion funds, endowments, and foundations are exempt from federal income taxation. Consequently, the assets in which they invest will not be those that are tax-advantaged investments. Second, there are tax factors that must be incorporated into the investment policy. For example, while a pension fund might be tax-exempt, there may be certain assets or the use of some investment vehicles in which it invests whose earnings may be taxed.
Generally accepted accounting principles (GAAP) and regulatory accounting principles (RAP) are important considerations in developing investment policies. An excellent example is a defined benefit plan for a corporation. GAAP specifies that a corporate pension fund’s surplus is equal to the difference between the market value of the assets and the present value of the liabilities. If the surplus is negative, the corporate sponsor must record the negative balance as a liability on its balance sheet. Consequently, in establishing its investment policies, recognition must be given to the volatility of the market value of the fund’s portfolio relative to the volatility of the present value of the liabilities.