Actuarial Basis Of Accounting

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Casualty Actuarial Society - CAS

    The Casualty Actuarial Society (CAS) is a professional society ...
  2. Commissioners Standard Ordinary ...

    An actuarial table used to compute the minimum nonforfeiture ...
  3. Securities And Exchange Commission ...

    A government commission created by Congress to regulate the securities ...
  4. Savings Account

    A deposit account held at a bank or other financial institution ...
  5. Pension Shortfall

    A situation in which a company offering employees a defined benefit ...
  6. Liability

    A company's legal debts or obligations that arise during the ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Retirement

    The Investing Risk Of Underfunded Pension Plans

    Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan.
  2. Mutual Funds & ETFs

    10 Retirement-Wrecking Moves

    Don't let these common mistakes put a crack your nest egg.
  3. Investing

    How To Evaluate Pension Risk By Analyzing Annual Costs

    Learn how to assess whether a company's pension plan is posing more risks than what the footnotes indicate.
  4. Options & Futures

    20 Tools For Building Up Your Portfolio

    The only real difference between you and Warren Buffett is a few well-chosen stocks, and the billion-dollar fortune is the result.
  5. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.
  6. Stock Analysis

    Why Should You Invest In Stratasys Today?

    When Stratasys pre-announced its fourth-quarter earnings, management highlighted that its MakerBot acquisition was underperforming expectations.
  7. Investing

    What's a Debit Note?

    A debit note is a document used by a seller to inform a purchaser of a dollar amount owed. As the name indicates, it is a note from the seller that a debit has been made to the purchaser’s account. ...
  8. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.
  9. Fundamental Analysis

    The Best 5 Online Accounting Systems For Small Business

    Running a small business can be difficult, but thanks to these online accounting services, taking care of payroll doesn't have to be.
  10. Investing

    Understanding Cost Accounting

    Cost accounting is the method of financially allocating expenses to goods that are manufactured for resale. Cost accounting is also referred to as managerial accounting, because managers use ...

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center