Actuarial Gain Or Loss: What Is It?

A rise or a reduction in the predictions used to evaluate the liabilities of a corporation’s defined benefit pension plans is an actuarial gain or loss. The discount rate used to determine the current value of benefit payments and the anticipated rate of return on plan assets directly impact the actuarial assumptions of a pension plan. The funding status of pension funds must be shown on the sponsor of the plan’s balance statement by FASB SFAS No. 158. This indicates that the plan’s financial health, fund performance, and pension liabilities are periodically updated.

The pension plan may see an actuarial gain or loss in its anticipated benefit obligation depending on plan participation rates, market performance, and other reasons.

These accounting standards permit actuarial gains and losses, or changes to actuarial assumptions, to be amortized through comprehensive income in shareholders’ equity rather than flowing directly through the income statement, even though they require pension assets and liabilities to be marked to market on an entity’s balance sheet.

Learning About Actuarial Gain Or Loss

The easiest way to comprehend actuarial profits and losses is in the context of comprehensive pension accounting. This term refers to pension accounting by U.S. generally accepted accounting standards (GAAP) unless otherwise stated. The measurement of pension benefit obligations under U.S. GAAP and International Financial Reporting Standards (IFRS) is based on comparable concepts. Still, there are important discrepancies in the two standards’ reporting of pension costs in the income statement, notably in how they handle actuarial gains and losses.

The difference between the value of the plan assets and the projected benefit obligation (PBO) for the plan is the funded status, which describes the net asset or liability associated with a company’s defined benefit plans. Plan assets, or the investments put aside for supporting plan benefits, must be valued, but doing so does not necessitate using actuarial projections. But to measure the PBO, actuarial assumptions must be used, and these actuarial estimates result in actuarial profits and losses.

There are mainly two categories of assumptions:

Demographic assumptions model how participant behavior is anticipated to impact the benefits received, and economic assumptions model how market forces affect the plan. Some important economic hypotheses are the interest rate used to discount future cash outflows, the anticipated rate of return on plan assets, and anticipated wage increases. Important demographic presumptions include life expectancy, estimated service times, and anticipated retirement ages.

Results are volatile as a result of actuarial gains and losses. The PBO may significantly rise or fall from period to period depending on how an actuarial assumption, notably the discount rate, changes. These adjustments may make it difficult to compare financial performance if they are included in the income statement. As a result, by U.S. GAAP, these adjustments are recorded in shareholders’ equity as other comprehensive income and gradually added to the income statement. These changes are not amortized into the income statement under IFRS; instead, they are recognized via other comprehensive income.

Footnote Disclosures Describe Actuarial Assumptions and Provide Helpful Information

The primary assumptions utilized to calculate funded status and period-to-period activity in the accounts must be disclosed in full by accounting requirements. Users of financial statements may learn from these disclosures how a company’s pension plans influence its financial situation and operating outcomes compared to previous periods and comparable businesses.

Conclusion

• When the underlying assumptions supporting a company’s estimated benefit obligation alter, actuarial gains and losses are produced.
• Accounting regulations require companies to show the liabilities (pension obligations) and the assets intended to satisfy them. Investors may see from this how the pension fund is doing overall.
• Periodic actuarial gains or losses will be seen in all defined benefit pension plans when new key demographic or key economic assumptions are added to the model.