Actuarial Gain Or Loss

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Actuarial Gain or Loss

Definition

An actuarial gain or loss is the change in a pension plan’s projected benefit obligation (PBO) caused by updates to the actuarial assumptions used to value the plan. These assumptions include economic factors (discount rate, expected return on plan assets, salary growth) and demographic factors (life expectancy, retirement age, employee turnover).

What Causes Actuarial Gains and Losses

  • Economic assumptions:
  • Discount rate — a lower rate increases the present value of future benefits (an actuarial loss); a higher rate reduces it (an actuarial gain).
  • Expected return on plan assets — changes affect expected funded status.
  • Expected salary increases — higher salary growth raises future benefit payments.
  • Demographic assumptions:
  • Longevity — longer life expectancy increases liabilities.
  • Retirement and turnover patterns — later retirements or lower turnover raise obligations.

Example: If the PBO calculated using a 5% discount rate is $10.0 million, lowering the discount rate to 4% might raise the PBO to $10.8 million, producing an $0.8 million actuarial loss.

Accounting and Reporting

  • Funded status = plan assets − projected benefit obligation. A positive number indicates a surplus; a negative number indicates a deficit.
  • Under U.S. GAAP:
  • Actuarial gains and losses are recognized in other comprehensive income (OCI), not immediately in net income, and are generally amortized into the income statement over time. This reduces volatility in reported earnings.
  • Pension assets and liabilities are disclosed on the balance sheet per applicable standards.
  • Under IFRS:
  • Actuarial gains and losses (often called remeasurements) are recognized in OCI and are not subsequently recycled through profit or loss.
  • Detailed footnote disclosures are required; they explain the key assumptions used, period-to-period movements, and the sensitivity of obligations to assumption changes.

Impact on Financial Statements

  • Actuarial assumption changes can materially affect the PBO and thus the funded status, which influences the balance sheet and shareholders’ equity.
  • Recording these changes through OCI (rather than immediately in profit or loss) helps prevent large swings in reported net income from one period to the next.
  • Investors and analysts use disclosures to assess a company’s pension-related risks and the comparability of results across companies and periods.

Best Practices for Users of Financial Statements

  • Review pension footnotes for the discount rate, expected return, and demographic assumptions.
  • Check sensitivity analyses showing how changes in key assumptions affect the PBO.
  • Consider the funded status trend over multiple periods, not just a single reporting date.

Key Takeaways

  • Actuarial gains and losses arise when assumptions used to value pension obligations change.
  • They affect the projected benefit obligation and funded status, creating potential volatility in reported pension costs.
  • Accounting frameworks typically recognize these changes in other comprehensive income, with different treatments for subsequent amortization under U.S. GAAP versus IFRS.
  • Footnote disclosures are essential for understanding the impact and drivers of actuarial gains and losses.