How Actuarial Basis of Accounting Works

Actuarial basis accounting uses the earned income and the total contributions to decide the amount to be paid. The basis of the accounting stipulates that the total amount of contributions from the company together with the assumed or proposed investment earnings must be equal to the annual amounts of payments fund to the pensioners. The calculation for the actuarial basis accounting must cut across some basic factors, which include the following:

  • The discount rate applying to future benefit payments
  • The calculated number of years that employees are expected or likely to work
  • The rate at which employee wages/salaries will likely increase in the future
  • The return rate on the plan assets.

Actuarial accountants and or statisticians carry out the cost to fund employees' pension plans. They make use of statistical information formulas in line with the generally accepted principles in accounting. It will help them determine the probability of an actual event risk during a particular time. Their gathered information will help the company take adequate investment steps to keep the account adequately funded and allow the company to be in the right financial state.

Example of Actuarial Basis of Accounting

The actuarial basis of accounting may include the trust fund set up for a public employee retirement plan or the fund for the pension. In suggesting the employee's pension fund, the actuaries will use the three factors to calculate actuarial accounting.

  1. The current ages of the participant's plan
  2. The presumed years of working till retirement
  3. They will look into the projected last salary for the employee

They will also consider increments that may occur, including bonuses and other compensations, and the economic conditions. They will consider the effect of the discount rate. With all the information put together, they will tender the fund amount for the employees' pension fund and the annual pay entitled to the company.

Significance of Actuarial Basis of Accounting

The actuarial basis of accounting has an impact on a company or sector, which includes the following:

  • It helps the company to do proper planning for future employee retirement.
  • It doesn't create an impromptu calculation which may affect other aspects when an employee decides to retire voluntarily before his/her working years.
  • There will be adequate funding for the pension plan of the employees.
  • It helps the company make the right financial standing without being affected by circumstances that may harm its operation.
  • The actuarial basis accounting gives an accurate calculation to benefit both the employees and the employer, thereby cutting off any future imbalance or improperness.

Actuarial Basis of Accounting vs. Accrual Basis of Accounting

The accrual basis of accounting is a form of recording revenue or expenses when a transaction occurs in the company rather than receiving payments. It follows the corresponding principle of recognizing the revenue expenses at the same time. The accrual basis of accounting provides a company with the accurate real-time financial picture available.

While the actuarial basis of accounting is explicitly different, it gives out the statistics that will aid the determination of the contributions that are to be made to the employee pension fund periodically. It will involve some essential factors to do the proper funding for the pension plan.