Defined benefit pension plan liabilities can be valued by increasing or decreasing the actuarial gain or loss. The discount rate used to compute the current value of benefit payments, and the projected return on plan assets directly impacts the actuarial assumptions of a pension plan. Reporting of pension fund funding status is mandated by the Financial Accounting Standards Board's SFAS No. 158. This implies that the plan's pension liabilities, fund performance, and financial health are reviewed regularly.
Understanding Actuarial Profit or Loss
The best way to understand actuarial profits and losses is in the context of pension accounting. Except as specified otherwise, this concept refers to the accounting for pension benefits by generally accepted accounting standards in the United States. There are significant discrepancies in the accounting of actuarial profits and losses in the income statement between US GAAP and IFRS, despite their identical concepts for evaluating pension benefit liabilities.
The gap between the value of plan assets and the plan's projected benefit obligation is what the term "funded status" refers to when discussing a company's defined benefit plans. Using actuarial estimates is not necessary for valuing the investments set aside to support the plan's benefits; instead, one must apply discretion.
Actuarial Gains and Losses Cause Volatility
The PBO can grow or drop significantly from one period to the next if an actuarial assumption, notably the discount rate, changes. These adjustments may impair the comparability of financial results if they are recorded on the income statement. Because of this, these adjustments are recorded in shareholders' equity as other comprehensive income and are amortized over time.
Footnote Disclosures Contain Actuarial Assumptions
Disclosure of pension assets and liabilities, including period-to-period activities and critical assumptions used to evaluate funded status, is required by accounting regulations. Users of financial statements can see how a company's pension plans influence its financial situation and results of operations in comparison to earlier periods and other firms by looking at these disclosures.
To Defer or Not to Defer
The Canadian public sector is divided on whether or not actuarial profits and losses should be delayed and amortized in the future.
Non-Deferral Risks
Actuarial profits and losses will be included in the annual surplus/deficit, which has many people concerned about the possible ramifications. In recent years, the media has drawn attention to the disparity in pay between public and private sector workers, mainly due to the guarantee of a defined benefit pension. Because of this, public sector organizations may have to declare more enormous pension liabilities and costs during lean years, which might cause their financial results to fluctuate more.
Arguments In Favor Of Postponing
According to some, governments' authority to tax suggests that there is less need to reflect all changes as they emerge. There are long-term consequences to pension obligations and long-term investments in pension plans. Many of the alterations are still in their infancy. In the future, gains and losses can be reversed or neutralized. It may lead to excessive expectations and pressure for increased investment in good years and poor judgments in bad years if they are reflected as "real."
Anti-Deferral Arguments
Others argue that allowing actuarial gains and losses to be spread out over an extended period obscures information regarding the cost of defined benefit pensions and the long-term viability of public sector employment for the general public.
Public sector employers face the same issues as private sector employers. They all operate in the same economic and social climate, with historically low-interest rates, volatile markets, rising life expectancy, and an aging population. A clear picture of the costs and risks of the benefit given to public sector workers is provided by promptly disclosing any changes in volatility.
Deferral Debate Focused On Components
PSAB used component-based analysis of actuarial gains and losses to encourage an evidence-based debate on this highly contentious issue. Actuarial gains and losses are made up of modifications to the underlying assumptions and adjustments to reflect actual outcomes. Invited Comment analyses each actuarial gain or loss and the reasons for their adjustments in the Invitation to Comment. The goal is to facilitate a meaningful debate about whether the deferral and amortization treatment for each component of the actuarial profits and losses is still appropriate and justified.
Stable Assumptions
Inevitably, actual outcomes diverge from predictions because of the speculative character of forecasts. However, other than the discount rate assumption, demographic and other economic assumptions often do not change considerably yearly, save for the discount rate assumption. People are living longer as a result of advances in medicine. Assumptions about mortality are often made based on historical patterns. There is more consistency in other staff behaviors. Only when an organization proposes modifications in the eligibility for early retirement may an employee's retirement pattern alter.
