How are actuarial gains and losses treated in defined benefit plans?

The treatment of actuarial gains and losses in defined benefit plans follows specific guidelines set out in the relevant accounting standards, particularly IAS 19 Employee Benefits. Actuarial gains and losses refer to the changes in the value of the pension obligation or the plan assets due to experience adjustments or changes in actuarial assumptions.

Under IAS 19, these gains and losses are recognized in other comprehensive income (OCI) in the period in which they occur. This means they do not impact the profit or loss of the company immediately. Instead, they are reported in OCI and remain in equity without being reclassified to profit or loss in future periods. This treatment helps to provide a clearer view of a company's financial performance while allowing for the recognition of the long-term nature of pension obligations and related risks.

This method aligns with the conceptual framework of separating realized profits from potentially volatile items that should not affect the net income directly. The option describing this treatment correctly captures the requirement, detailing the correct approach to accounting for actuarial gains and losses within defined benefit pension plans.