What is an 'Actuarial Gain Or Loss'

Actuarial gain or loss represents adjustments to actuarial assumptions used to value a corporation’s defined benefit pension plan obligations, a value significantly affected by the discount rate used to calculate the present value of benefit payments and the expected rate of return on plan assets, and for which the funded status is required by Financial Accounting Standards Board (FASB) SFAS No. 158 to be reported on the plan sponsor’s balance sheet. While those accounting rules require pension assets and liabilities to be mark to market on an entity’s balance sheet, they provide actuarial gains and losses, or changes to actuarial assumptions, be amortized through comprehensive income in shareholders' equity rather than flowing directly through the income statement.

BREAKING DOWN 'Actuarial Gain Or Loss'

Actuarial gains and losses are best understood in the context of overall pension accounting. Except where specifically noted, this definition addresses pension accounting under U.S. generally accepted accounting principles (GAAP). While U.S. GAAP and International Financial Reporting Standards (IFRS) prescribe similar principles measuring pension benefit obligations, there are key differences in how the two standards report pension cost in the income statement, particularly the treatment of actuarial gains and losses.

Changes in Actuarial Assumptions Create Actuarial Gains and Losses

Funded status represents the net asset or liability related to a company's defined benefit plans and equals the difference between the value of plan assets and the projected benefit obligation (PBO) for the plan. Valuing plan assets, which are the investments set aside for funding the plan benefits, requires judgment but does not involve the use of actuarial estimates. However, measuring the PBO requires the use of actuarial estimates, and it is these actuarial estimates that give rise to actuarial gains and losses.

There are two primary types of assumptions: economic assumptions that model how market forces affect the plan and demographic assumptions that model how participant behavior is expected to affect the benefits paid. Key economic assumptions include the interest rate used to discount future cash outflows, expected rate of return on plan assets and expected salary increases. Key demographic assumptions include life expectancy, anticipated service periods and expected retirement ages.

Actuarial Gains and Losses Create Volatility in Results

From period to period, a change in an actuarial assumption, particularly the discount rate, can cause a significant increase or decrease in the PBO. If recorded through the income statement, these adjustments potentially distort the comparability of financial results. Therefore, under U.S. GAAP, these adjustments are recorded through other comprehensive income in shareholders’ equity and are amortized into the income statement over time. Under IFRS, these adjustments are recorded through other comprehensive income but are not amortized into the income statement.

Footnote Disclosures Contain Useful Information About Actuarial Assumptions

Accounting rules require detailed disclosures related to pension assets and liabilities, including period-to-period activity in the accounts and the key assumptions used to measure funded status. These disclosures allow financial statement users to understand how a company’s pension plans affect financial position and results of operations in relationship to prior periods and other companies.

  1. Actuarial Cost Method

    Actuarial cost method is used by actuaries to calculate the amount ...
  2. Government Actuary

    An employee of the U.K. government who works for the Government's ...
  3. Canadian Institute Of Actuaries ...

    The Canadian Institute of Actuaries, or CIA, is an organization ...
  4. Actuarial Science

    Actuarial science is a discipline that assesses financial risks ...
  5. Pension Benefit Obligation - PBO

    An accounting term used to describe the amount of money a company ...
  6. Actuarial Deficit

    The difference between future Social Security obligations and ...
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

    A Primer On Defined-Benefit Pension Plans

    Most of us will rely on a pension plan in the future, so it's best to know the details of the various plans before signing up.
  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

    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.
  5. Personal Finance

    Top Paying Math-Related Careers

    These jobs require specialized math skills that intimidate most laymen. But, for those with the wit and work ethic to attain this knowledge, there are many high-paying employment options.
  6. Retirement

    New 401(k) Pension Rollover Rule: Pros and Cons

    Is the new rule allowing participants to roll their 401(k) balances into pensions a good idea?
  7. Retirement

    7 Signs Your Pension Fund Is In Trouble

    Even if you're lucky enough to have a pension plan, you can't assume it'll pay out.
  8. Personal Finance

    A Retirement Savings Lesson from Teachers

    While teachers' incomes tend to be lower than many, they are often able to retire with few financial concerns.
  9. Retirement

    America's Frozen Pension Dilemma

    Unfortunately, there are several factors that have eroded the presence of pension plans in America, and workers need to be prepared to replace that expected income for their retirement years. ...
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center