What is the Actuarial Basis of Accounting?

The actuarial basis of accounting is the method used to calculate the amount of ongoing, periodic contributions to be made into a pension fund. This basis of accounting mandates that the amount of contributions plus the assumed investment earnings must at least equal the amount of payments made by the fund to pensioners. This calculation includes a number of factors, including the following:

The discount rate applied to future benefit payments
The estimated number of years that employees will continue to work
The rate at which employee wages will increase in the future
The rate of return on plan assets

When you are reviewing the financial statements of a business that discloses information about its pension plans, be sure to examine whether the entity is using conservative or aggressive estimates in this area. If the estimates are conservative, it is more likely that the business making reasonable amounts of contributions to its pension fund. When this is not the case, the business will probably need to increase its contributions in the future.