Reviewed by Aug 27, 2020| Updated on
Asset/liability management is a procedure to handle the usage of assets and cash inflows in order to decrease the company's probability of loss due to not paying liabilities on time. Excellently managed liabilities and assets will enhance the profits of businesses.
The assets and liabilities management processes are generally used in pension plans and bank loan portfolios. Furthermore, it includes the equity's economic value.
Breaking Down Asset/Liability Management
The idea of asset/liability management targets on the timing of inflow of cash as the firm's managers and directors should be able to plan for the payments towards the firm's liabilities. The procedure will make sure that assets are there in order to make payments for the debt as they keep coming due and that capital assets or revenues may be transformed into cash.
The asset and liability management process is applicable to various categories of capital assets in the company's balance sheet.
Defined Benefit Pension Plan
Defined benefit plans offer a fixed, pre-defined established pension benefit for individuals once they retire, and the employer will carry the risk of those assets that are invested in being a part of the pension plan, not being enough to pay the proclaimed benefits.
Organisations will have to forecast the worth of the available assets in order to make payments for the benefits needed in a defined benefit plan.
Consider the example of a group of individuals should receive an overall sum of Rs 1.5 crore in pension payments, which will begin in a timeframe of ten years. Then, the organisation will have to approximate a rate of returns on the amount invested in the pension plan and then calculate the company's contribution every year prior to the beginning of the payout over a period of ten years.