Actuarial Gains or Losses Details

Actuarial Gains or Losses are the actual amount of money a company pays on employee pensions compared to what the company has estimated it would pay. The term reflects a decrease or an increase of an organization’s forecasted employee benefit obligation, hence in the organization’s liabilities. Actuarial gain occurs when the employer’s payment is lower, and actuarial loss when the employer’s payment is higher than expected.

The Financial Accounting Standards, which govern the accounting of economic transactions, require companies to disclose pension obligations at the end of each accounting period. An actuary, or the expert who estimates the financial risk, determines the projected benefit obligation by evaluating factors like a salary increase, inflation, mortality rate, and others. The actuaries reevaluate their assumptions each year.

If, for example, the employee life expectancy or the early retirements increase, the company’s projected benefit obligation will also increase. Alternately, if the mortality rate and the delays in retirement increase, the firm’s projected benefit obligation will decrease.

Example of Actuarial Gains or Losses

The company ABC assumes a 15% salary increase in their business plan. However, the company records only a 7% salary increase per actuals. Here, you can see that an actuarial gain due to experience has occurred.

Another situation when an actuarial gain would follow would be if the plan assets grossed 14% for the year, while their assumed rate of return used in the valuation was only 9%.

Companies describe changes in the Defined Benefit Obligation (DOB) section of their employee benefit plans. Adjustments may also include the following:

  • Actuarial Gains or Losses because of Demographic Assumptions Changes (e.g., mortality, disability, and termination).
  • Actuarial Gains or Losses because of Financial Assumption Changes (e.g., general business expenses and sales volumes).
  • Return on Plan Assets greater or less than the Discount Rate.

Significance of Actuarial Gains or Losses

Actuarial Gains and Losses are a complex issue for accountants. If they do not defer to the balance sheet, the company’s pension liability might grow. Others argue pensions resolve over a long period, so there’s no need to record the changes on the accounting statements as soon as they arise.

Most agree on the amortization of actuarial gains and losses (spreading out values over a specific interval of time). Accountants prefer amortization because it provides consistency across the statements. However, under the International Financial Reporting Standards (IFRS), the increase and the decrease in the projected benefit obligation aren’t amortized into the income statement.

Reporting Actuarial Gains and Losses promptly is crucial to the transparency of the cost and the risk involved in the accumulation of benefits promised to the employees. When performing the valuation of the employee benefit plan, financial experts conduct a movement analysis of the liability by considering its opening present value and its closing present value.