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:
Below is table of impact of changes in major assumption on actuarial gain/loss over a valuation period.
Change is assumptions | Actuarial Gain/Loss on DBO |
Increase in Salary Growth Rate | Actuarial Loss |
Decrease in Salary Growth Rate | Actuarial Gain |
Increase in Discount Rate | Actuarial Gain |
Decrease in Discount Rate | Actuarial Loss |
Increase in Employee Turnover Rate | Actuarial Gain/Loss May Occur |
Decrease in Employee Turnover Rate | Actuarial Gain/Loss May Occur |
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.
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.
+ Current Service Cost | 10 |
+ Interest Cost | 10 |
(-) Expected Interest Income | (15) |
+ Actuarial (Gain)/Loss on DBO | 15 |
(-) Actuarial Gain/(Loss) on Plan assets | (5) |
Total Expense Recognized in P&L | 15 |
P&L Account under IND AS 19 Accounting Standard.
+ Current Service Cost | 10 |
+ Interest Cost | 10 |
(-) Expected Interest Income | (15) |
Total Expense Recognized in P&L | 5 |
OCI under IND AS 19 Accounting Standard.
(-) Actuarial (Gain)/Loss on DBO | (15) |
+ Actuarial Gain/(Loss) on Plan assets | 5 |
Amoun Recognized in OCI | (10) |