If you have any association with accounting or finance, you might have heard of the term actuarial gain and loss before. These gains and losses significantly affect a company's financial statement. But have you any familiarization of how it affects? Also, what is the importance of actuarial losses and gains and how they arise?

In this writing, you will have the understanding of all the above in detail. By thoroughly reading the article, you will get the complete overview of this crucial financial concept. Whether you are a professional or a beginner, this guide will help you. It will help you to gain a deeper understanding of actuarial gains and losses and its relevance.

So, let's dive into the article and discover the real meaning of actuarial gains and losses. Also, you will explore how it affects the financial statement and the method to calculate it for insurance policies.

Comprehending The Term Actuarial Gain And Loss

Actuarial gain and loss refer to the change in the company's pension value or other post-employment benefits plan. It can be due to the difference between the actual and expected payments of the plan. As a part of the compensation package, the companies typically offer these plans to their employees. It is to give them income during their retirement years. It is essential for the company to adjust its financial statements when actuarial gains or losses occur. The reason behind this is to reflect the change in the value of its pension or other post-employment benefits plan.

There can be various reasons for actuarial gains and losses, such as changes in the expected life span of plan participants, interest rates, the investment performance of plan assets, the discount rate used to calculate future benefit payment's present value, etc. The above factors cause the change in the value of the company's pension or post-employment benefits plan. And also result in the actuarial gain or loss.

The company views actuarial gains and losses as the measure of the financial health of its pension and benefits plan. If there are consistent actuarial gains in a plan, it indicates that the plan is overfunded, and vice versa. If there is a loss in the plan, it will show that it is underfunded.

How Do Actuarial Gain And Losses Affect Financial Statements Of A Company?

Actuarial gains and losses have a compelling outcome on the company’s or organization’s financial statements. Whenever a company experiences an actuarial gain or loss, it should adjust its financial statements to reflect the changes in the values of its pension and post-employment benefit plan. The company typically makes this adjustment by recognizing the gain or loss in OCI, i.e., Other Comprehensive Income.

There can be a substantial effect of the actuarial gains and losses on a company's financial statement. For example, if there is an immense actuarial loss in the company, then the company needs to make additional contributions to its post-employment benefits and pension plan. It is to get assurance that they do not remain unprofitable. This might also result in a reduction in the company's earnings and cash flow. And can negatively impact the financial performance of the company.

How Does A Company Do Accounting For Actuarial Gains And Losses?

When you know how actuarial losses and gains affect financial statements, it is also necessary for you to comprehend how a company does the accounting for this. Accounting for actuarial gains and losses is somehow a complex process that needs the consideration of numerous factors. IFRS, i.e., International Financial Reporting Standards and GAAP, i.e., Generally Accepted Accounting Principles administer the accounting treatment of actuarial gains and losses.

Under IFRS and GAAP, a company recognizes its actuarial gains and losses in OCI, i.e., Other Comprehensive Income. An OCI is a component of the company's equity that includes the gains and losses which the company does not realize in its income statement. When a company experiences an actuarial gain or loss, it should adjust its financial statements to reflect the changes in the value of its pension and other post-employment benefits plan.

Calculating Actuarial Gain And Losses For Insurance Policies

In the insurance industry also, actuarial gains and losses may arise. When we talk of the insurance industry, actuarial gains and losses refer to the change in the value of the insurance company's liabilities due to the changes in the expected value of future claims.

Calculating actuarial gains and losses for insurance policies is an intricate process in which you should carefully contemplate several factors, such as changes in the interest rates, the expected value of future claims, and the discount rate that is employed to calculate the present value of future claims.

Best Practices to Manage Actuarial Gains As Well As Losses

It is requisite to have cautious planning and execution in order to manage actuarial gains and losses. Some best practices for managing actuarial losses along with gains include:-

• Reviewing the funding status of the pension and post-employment benefit plan on a regular basis.
• Formulating different strategies to minimize the consequence of actuarial losses and gains on the financial statements.
• Communicating the impact of the actuarial gains and losses to the stakeholders.
• Regularly reviewing their assumptions about the interest rates, investment performance, life expectancies, etc., to ensure that they are up-to-date and accurate.

FAQs

What are actuarial adjustments?

Actuarial adjustment is a revision that a company makes to its capital reserves, premiums, benefit payments, or other values the company determines based on one or more changes to actuarial assumptions.

How to compute actuarial gain or loss?

Actuarial gains and losses are concerned with the difference between the expected amount and the actual payment that a company makes. If a company has an actual payment of more than the expected amount, then it is an actuarial loss, and vice versa if the actual payment is less.

How to calculate actuarial gains and losses for insurance policies?

By considering different factors, you can calculate actuarial gains and losses for insurance policies. The factors include the change in:-

• Interest rates
• The expected value of the future claim
• The discount rate for figuring out the current values of future claims, etc.

Conclusion

By reading the article and comprehending different aspects of actuarial gains and losses, such as how actuarial gains and losses affect financial statements, accounting of actuarial gains and losses, etc., you have got the idea of how complex a financial concept it is. It can lay a consequential impact on the company's financial statements. To effectively manage their pension and post-employment benefits plan, it is crucial for the companies to understand its cause and implications. By following the best practices for managing actuarial gains and losses, they can minimize its impact on their financial statement and ensure the long-term financial health of their pension and post-employment benefits plan.