Actuarial Cost Method


DEFINITION of 'Actuarial Cost Method'

A method used by actuaries to calculate the amount a company must pay periodically to cover its pension expenses. The two main methods used are the cost approach and the benefit approach.

The cost approach calculates total final benefits based on several assumptions, including the rate of wage increases and when employees will retire. The amount of funding that will be needed to meet those future benefits is then determined. The benefit approach finds the present value of future benefits by discounting them.

Also known as an actuarial funding method.

BREAKING DOWN 'Actuarial Cost Method'

When reviewing a company's financial statements, it is important to look closely at the accounting for pension liabilities. This is an area with a lot of assumptions that can be manipulated. The company must make assumptions regarding the rate at which to discount future pension costs, the future rate of return on pension-plan assets, at what age the average worker will retire and the rate of future salary raises. When reviewing these assumptions, investors should note whether the company is being aggressive or conservative.

  1. Actuarial Valuation

    An actuarial valuation is a type of appraisal which requires ...
  2. Actuarial Equity

    The calculation of an insurance premium based on crucial factors ...
  3. Commissioners Standard Ordinary ...

    An actuarial table used to compute the minimum nonforfeiture ...
  4. Pension Fund

    A fund established by an employer to facilitate and organize ...
  5. Pension Shortfall

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

    The examination of risk by a highly educated and certified professional ...
Related Articles
  1. Personal Finance

    Insure Your Future with a Career as an Actuary

    If you've got excellent math skills, they can add up to a lucrative career as an actuary.
  2. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  3. 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.
  4. Retirement

    The Pension Bill: A Wolf In Sheep's Clothing

    Find out why the 2006 act may not be all it's cracked up to be.
  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. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  7. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  8. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  9. Markets

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  10. Investing Basics

    How To Efficiently Read An Annual Report

    Annual reports are clearly prepared without any intent to deceive or mislead investors. Still, investors should read them with a dose of skepticism.
  1. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  2. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  3. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  4. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  5. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  6. What can working capital be used for?

    Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center