Actuarial Basis Of Accounting

DEFINITION of 'Actuarial Basis Of Accounting'

A method used in computing the periodic payments that a company must make to fund its employee pension benefits. The actuarial basis stipulates that total contributions from the company plus investment returns on pension assets must match the required annual contribution from the pension fund. Assumptions must be made for the length of workers' careers, the rate of return on plan assets, the rate of salary increases and the discount rate used for future benefits.

BREAKING DOWN 'Actuarial Basis Of Accounting'

This method follows the basic premise of any actuarial process in that costs and benefits must be equal. Accounting for pensions involves assumptions on both sides of the equation. When reviewing a company's financial statements investors should note whether the company is being aggressive or conservative in these assumptions. For example, if a company uses a very high rate of return on its plan assets, this will reduce the current costs to fund its pension plan.

Information on pension contributions and assets can be found in company's quarterly and annual reports to the Securities and Exchange Commission.

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