The difference between actual and expected return is only a problem in USGAAP. It does not affect pension obligation (gross liability). It does not even impact the fair value of plan assets. So all actuarial gains and losses as defined by IFRS affect the funded status.
The extra source of acturial gains and losses (under US GAAP) does not affect the funded status.
Thank you cgottuso8190 
I was forced to edit my initial post to avoid further mixups. This is a job for Sup… ehm S2000magician 
I think it’s useful to see where the actuarial gains/losses is coming from.
The Liabilty (i.e PBO) at any point in time is made up of Current Cost + Interest Expense + Actuarial Gains/Losses
The Fund’s assets at any point in time is made up of Returns + Actuarial Gains/Losses.
For actuarial gains/losses coming from remeasurement by adjusting the discount rate, this will directly increase/decrease the pension fund’s Liability (PBO)
For actuarial gains/Losses coming from the difference between Actual return and expected return, this is an asset related item and will not have any effect on the PBO.
The difference will however have an effect on the net periodic pension expense.
I hope you read my latest post…
This actually looks like a plausible scenario but I haven’t seen this confirmed anywhere yet. Could you possibly back it up with CFAi text?
I couldnt understand pensions from CFAI… I doubt anyone could
Huh?
Yeah that’s not correct.
Yes it is. Under US GAAP, the difference between Actual return on plan assets and expected return on plan asset is an Acturial item relating to the fund’s asset. These acturial item is commonly recorded in OCI and then amortized into PnL using the corridor approach.
Recall that the equation for net periodic pension cost = Changes in Fund Liabilities - Changes in Fund’s Asset - Employer Contribution.
Under US GAAP
The Liability changes with Current Cost, Interest Expense and Remeasurement from acturial assumptions.
The Asset Changes with Expected Returns, and acturials from the difference between Actual retrun and Expected return.
I keep saying that we need a bat signal.
PBO is not affected by expected returns. It’s the present value of the liability, which has nothing – _ nothing! _ – to do with the assets. It’s affected by the average life of the employees, and the salary growth rate, and the discount rate, and so on. But it’s a liability, not an asset; what happens to the assets doesn’t affect it.
PV(assets) isn’t affected by expected returns; it’s affected by actual returns. You don’t guess how much you have in assets, you look at your portfolio.
Funded status (= PV(assets) – PBO) isn’t affected by expected returns. I leave this one to you.
So . . . what _ is _ affected by expected returns? _ Something must be _, otherwise we wouldn’t bother with them.
Two things: pension expense, and OCI. We use expected returns (instead of actual returns) in pension expense to smooth out our expenses. (We don’t have to – we could use actual returns if we wanted to – but everyone does.) And the difference between actual returns and expected returns is tossed into OCI and amortized – through . . . you guessed it! . . . pension expense, over the remaining service life of our employees (or something like that; I don’t recall if that’s the correct time period, but I think so).
Ignore, sorry.
Bloodline you appear very confident about this topic but as much as I am trying to verify what you are saying I can’t. Based on Schweser, Elan, Investopedia and CFAi all I can find is all I already knew : Assets = Contributions - Benefits Paid + Actual Returns.
I really don’t see how an actuarial assumption can change the fair value of the assets. The actuarial assumption as far as I understand is nothing more than a statistical expectation that we use to reconcile our liabilities before the realization of whatever we are measuring. When the statistical models change or the realized value deviates from our estimates (see expected vs actual return) we correct our liabilities. That part is straightforward.
Furthermore: The equation you are using for net periodic cost is incorrect. It is ΔLiabilities - ΔAssets + Contributions.
To derive recognize that:
Ending Liabilities (PBO) = Interest cost + Service Costs +/- Actuarials - Benefits Paid + Beggining Liabilities or ΔLiabilities = Interest cost + Service Cost +/- Actuarials - Benefits Paid
Ending Assets (Fair Value of Plan Assets) = Actual Return - Benefits Paid + Contributions + Beggining Assets or Δ Αssets = Actual Return - Benefits Paid + Contributions
so that ΔLiabilities - ΔAssets = Interest cost + Service Cost +/- Actuarials - Actual Return - Contributions. (1)
From (1) you can see that if your equation held true then we would have Net P Cost = -2*Contributions +ΔLiabilities - ΔAssets.
Additionally, it only makes sense that the cost would be +Contributions (money we gave) - Change in Funded status (Money we received)
S2000Magician thank you for the contribution. I feel that what I knew perfectly agrees with your explanation which is a good sign for me!
However I am still confused about the fact that Elan calls the expected return on plan asset an actuarial gain/loss. Now, of course an actuarial model is involved when trying to forecast expected returns, but as you said, assets play absolutely no role in reconciling PBO.
That leaves us with the only plausible explanation being Cinderella’s, where we just have two kinds of actuarial gains and losses under US GAAP and we shouldnt be mixing between the two as implied by Elan’s Guide. This would make perfect sense to me but can you please verify?
My apologies if i may have confused you. I may have developed a certain way of looking at these items seperately, so while my explanations may sound different from yours, it is actually just because we are looking at different angles.
The equation for Assets is correct as Contributions - Benefits Paid + Actual Returns.
But because Liabilities technically also include the amounts of benefits that come due in a certain period, so Liabilities also contain an element of +Benefits Paid. These two will normally net each other and are often not included in the calculations. But of course, this will depend on the question type.
My reference to Acturial Items is not actually as a cash item but an accounting item. It is an unrealized item and does not actually increase or decrease the physical amount of assets you have in place to fund your future liability.
The Liability have an acturial item and so does the asset. The Liabilities actuarial come from changes in discount rates, rates of compensation increase etc…The asset’s actuarial come from remeasurement due to changes in discount rate, and under GAAP, the difference between Actual and Expected return.
My Equation for net periodic pension cost was meant to be written as Change in Liability - [Change in Assets + Employers contribution] I am probably used to writing the equation the wrong way because i practised with these using spreadsheets.
Again, it’s probably best you ignore my explanations totally.
You’re welcome.
Glad to put your mind (somewhat) at ease.
I have no idea what Elan is saying, because I haven’t their materials.
The difference between the actual return and the expected return gives rise to an actuarial gain/loss, because what we’ve reported in pension expense (expected return) is different from what really happened (actual return), and what is reported in our asset balance. We reconcile that difference by stuffing it in OCI and amortizing it (i.e., running it through our income statement) over a period of time to smooth it out.
Bloodline you did confuse me, but it helped me understand periodic costs better so your contribution is much appreciated! Make sure you also correct the sign on your dumbed down version or you might have Pierre appear at your home in the middle of the night mid-July asking for explanations!
Now if anyone can confirm that the actuarial assumptions related to assets under US GAAP are just not to be confused with the actuarial assumptions used in PBO so that I can get some sleep…
Sorry bud. My search for simplicity on Pension Expense took me far beyond the norm and now i just confuse everyone who even bothers to listen me. My pal at the office actually told me he’s understands CFAI text more than me, i must be really terrible at explanations then.
Erhm, as for your second question, I’d take a stab at it, hopefully you get more confused and don’t get some sleep as I’m not getting any here.
Acturial Items under IFRS
Actuarial items under GAAP
Acturial gains or losses from changes in assumptions
Actuarial gains or losses from Actual return - Expected return.
Just Looking at this again and i think your calculation here is a bit wrong.
ΔLiabilities = Interest cost + Service Cost +/- Actuarials - Benefits Paid
Δ Αssets = Actual Return - Benefits Paid + Contributions
ΔLiabilities - Δ Αssets
= [Interest cost + Service Cost +/- Actuarials - Benefits Paid] - [Actual Return - Benefits Paid + Contributions]
= Interest cost + Service Cost +/- Actuarials - Benefits Paid - Actual Return + Benefits Paid - Contributions
= Interest cost + Service Cost +/- Actuarials - Actual Return - Contributions
I am sorry but I can’t see what you changed 
You arrive at the same results, that is ΔLiabilities - ΔAssets = Interest cpst + Service Cost +/- Actuarials - Actual - Contributions.
As I said, if your expression [ΔL - ΔA - Contributions] was correct, you would get (from the expression above) ΔL - ΔΑ - 2*Contributions.
EDIT : Well… this is embarassing. We are both saying the same thing, you are just using minus net periodic costs. Somehow I thought you were altering the original equation from Contributions - Δfunded status to -Contributions - Δfunded status. I am sorry for the mess.
Not your fault at all. It wouldn’t be fun without these things.