The actuarial gain or loss arises because of two reasons:
1. Change in the Valuation Assumption(s)
If there is a change in the assumptions from the last valuation to the current valuation, then the change in liability due to a change in assumption(s) is recognized as an Actuarial Gain or Loss.
For example, for the prior valuation the actuary used a discount rate of 6%, whereas the current period the discount rate was adjusted down to 5% (due to a change in the economic conditions in the intervening period). As a result of this 1% change, there will be a change in the liability of the scheme.
2. Due to Experience
This is due to the fact that actual experience of the Scheme, is different from the assumptions made during the last valuation period.
For example, the salary escalation rate was assumed to be 5% for the last valuation, whilst the actual salary escalation awarded to the employees during FY is 7%. Valuing the liability at the end of the period will show an actuarial loss due to the higher than expected salary inflation.
Treatment of the Actuarial Gain or Loss?
Under IAS 19, the Actuarial Gain or Loss is not charged to the P&L but transferred to Other Comprehensive Income.