Actuarially advanced and market-based forecasting method

This article was published in Expert Focus

Fluctuations in the liability in the IFRS financial statements are recognized either in the income statement or in other comprehensive income, depending on the cause. Forecasts of this variability of the obligation could be made realistically and in line with market conditions using stochastic modeling based on historical experience. Results support financial management.

Forecasts of the IFRS financial statements for the next two to three years give company CFOs a deeper quantitative insight into the potential short-term development of all IFRS key figures. It is therefore worthwhile to regularly compare the key figures of the IFRS financial statements with the stochastic forecasts. This gives a deeper insight into the quality of the forecasting process implemented. In addition, the influence of changes in demographic and financial assumptions, personnel policy scenarios and related portfolio mutations on the IFRS key figures can be evaluated.

The implementation of the risk-sharing models 1.0 and 2.0 as well as the asset-ceiling procedures, depending on the coverage ratio during the projection period, can be easily implemented within the stochastic forecasting of IFRS financial statements. Forecasts for financial statements according to IPSAS and US GAAP can be generated with this method.

The preparation of stochastic forecasts is particularly useful in today’s uncertain situation, as market interest rates are extremely volatile and at the same time at a historically low level. On the other hand, changes in staff and deviations from the expected development of pension obligations based on the assumptions of the previous year play a major role. Many market parameters are interlinked and, depending on the timing, can also influence the management of the company. Even in this constellation, the preparation of stochastic forecasts can prove helpful.