Actuarial gains and losses refer to the changes in the projected benefit obligation (PBO) or the fair value of plan assets in a defined benefit pension plan that result from actuarial assumptions not being realized. These changes are a natural part of the actuarial accounting process and can have a significant impact on the financial statements of a company sponsoring a pension plan.

Here are the key concepts related to actuarial gains and losses:

1. **Defined Benefit Pension Plans:**
– In a defined benefit pension plan, the employer promises to pay retirees a specified pension benefit based on factors such as years of service and salary history. The employer is responsible for funding the plan and assumes the investment and actuarial risks.

2. **Actuarial Assumptions:**
– Actuarial assumptions are estimates used by actuaries to calculate the present value of future pension benefits. These assumptions include factors such as the discount rate, expected rate of return on plan assets, salary growth, mortality rates, and other demographic factors.

3. **Projected Benefit Obligation (PBO):**
– The PBO is the present value of the expected future benefit payments to employees based on the actuarial assumptions. It represents the amount of money that, if invested today, would be sufficient to pay the future pension benefits.

4. **Fair Value of Plan Assets:**
– The fair value of plan assets represents the current market value of the assets held in the pension plan, including stocks, bonds, and other investments.

5. **Actuarial Gains and Losses:**
– Actuarial gains or losses occur when there is a difference between the actual experience and the assumptions used in calculating the PBO or the fair value of plan assets. These can result from changes in economic conditions, changes in mortality rates, or other factors that affect the pension plan.

6. **Recognition of Actuarial Gains and Losses:**
– Actuarial gains and losses are recognized in the employer’s financial statements through a process called “smoothing.” Instead of recognizing the full impact of a gain or loss immediately, it is recognized gradually over future periods, typically over the average remaining service period of active plan participants.

7. **Impact on Pension Expense:**
– Actuarial gains and losses can affect the calculation of pension expense reported in the income statement. The amortization of these gains and losses is included in the net periodic pension cost, which is the cost recognized by the employer for providing pension benefits during a specific period.

8. **Corridor Approach:**
– Some accounting standards, such as the International Financial Reporting Standards (IFRS), require the use of a corridor approach. This approach limits the amount of unrecognized actuarial gains and losses that can be amortized in a given period. If the cumulative amount exceeds a certain threshold, amortization is triggered.

Actuarial gains and losses introduce volatility into a company’s financial statements and can impact the funded status of a pension plan. Employers and their actuaries closely monitor these changes and work to manage the impact on financial reporting and pension funding strategies.