July 24, 2014
Which Actuarial Report Do I Use?
Actuarial reports can be used for different reasons in regards to Defined Employee Benefit Plans. They may be used to determine the pension obligation and expense for the Plan Sponsor’s financial statements or to determine the pension obligation in the Plan’s financial statements. These various reports employ different assumptions, result in different valuations and affect the financial statement results and disclosures.
When determining which actuarial report to use it is important to understand the purpose of each report. Two reports are primarily used for Defined Employee Benefit Plans:
- Plan Accounting-Defined Benefit Pension Plans – FASB ASC 960
- Compensation Retirement Benefits – FASB ASC 715
ASC 960 Report
These reports are used for the annual financial statements of the Plan which report accumulated plan benefits and assets and base assumptions on plan provisions and estimates.
ASC 715 Report
These reports are used by the Plan Sponsor of the Defined Employee Benefit Plan. This report measures the funded status of the Plan as the difference between assets at fair value and the projected benefit obligations, calculates the annual pension expense, reports changes affecting comprehensive income and evaluates assumptions determined by the Plan Sponsor.
Assumptions that are similar between the ASC 960 and ASC 715 valuations include:
- Rate of return on plan assets
- Retirement age
- Mortality rate
Assumptions that are different between the ASC 960 and ASC 715 valuations include:
- Discount/interest rate
- Projected salary increase
The discount/interest rate is the rate used to bring future projected benefit payments to present value at the measurement date. ASC 960 provides two methods for this assumption including: (1) basing the rate of return expected on current plan assets, which is the most commonly used method or (2) using a rate that reflects the settlement of future benefit payments. ASC 715 prescribes one method for this assumption and bases the discount rate on bonds yields at the measurement date, typically, high-quality rated corporate bonds are used.