Insights on Actuarial gain or loss.

When we perform an actuarial valuation of defined benefit obligation such as gratuity and leave encashment, a movement of liabilities and plan assets is analyzed over a period of valuation. One balancing item of actuarial gain and loss arises in such valuation. The concept of actuarial gain or loss is central to any actuarial valuation but is widely misunderstood, it refers to an increase or a decrease in the projections used to value a corporation’s defined benefit plan obligations over a valuation period. 

Actuarial gain and loss is made up of two parts: actuarial gain loss on the Defined Benefit Obligation (DBO) and actuarial gain loss on Plan Assets.

ACTUARIAL GAIN OR LOSS ON DBO

Actuarial gains and losses can occur due to several factors, such as:

• Demographic assumptions: Changes in employee turnover, retirement age, or mortality rates can lead to actuarial gains or losses. For example, if employees retire later than expected, the company’s defined benefit obligation may decrease, leading to an actuarial gain.

• Financial assumptions: Changes in factors like discount rates, salary growth rates, and inflation can impact the present value of future obligations. For instance, if the discount rate increases, the present value of future obligations will decrease, resulting in an actuarial gain.

• Plan experience: Differences between the actual experience of the plan and the assumptions made in calculating pension obligations can lead to actuarial gains or losses. For example, if the increase in employee’s salary is higher than expected over a valuation period, the liability will be high as compared to previous, leading to an actuarial loss and vice-versa.

Below is table of impact of changes in major assumption on actuarial gain/loss over a valuation period.

ACTUARIAL GAIN OR LOSS ON PLAN ASSETS

Actuarial gain/loss can also arise on the asset side, but here the concept is much simpler compared to the DBO side. Actuarial loss on plan assets is simply the difference between expected return and actual return earned on fund. 

TREATMENT OF ACTUARIAL GAIN LOSS IN FINANCIAL REPORTING.

In financial reporting, actuarial gains and losses are typically recognized as a component of the profit and loss account or that of other comprehensive income (OCI) as per the requirement of the accounting standard. For Instance, in gratuity valuation actuarial gain loss is recognized as a component of profit and loss in AS 15 R and as a component of other comprehensive income (OCI) in IND AS 19. Accounting standard.

Example:

Current Service Cost (CSC):10

Interest Cost: 10

Actuarial (Gain)/Loss on DBO: 15

Actual Interest on plan assets: 20

Expected Interest on Plant assets: 15

Actuarial Gain/(Loss) on Plan assets: (20-15) = 5

P&L Account under AS15 R Accounting Standard.

P&L Account under IND AS 19 Accounting Standard.

OCI under IND AS 19 Accounting Standard.